This summer has hardly been a relaxing one for the global economy. Growth has been stagnant and stock markets have plummeted amidst fears of another global recession. Emblematic of a new crisis is the decision by credit rating agency Standard and Poor’s to downgrade the USA’s credit rating from AAA to AA+. The long-awaited global recovery feels a lot like another crisis.

In fact, the crisis of 2008 has continued to burn under the blankets with which politicians smothered the flames of the global banking crash. It now manifests itself in a sovereign debt crisis which the debtors have little chance of tempering on their own. And this is what has been truly revealing over the summer: the power of unelected supranational institutions to affect the destinies of even the most powerful nations.

Rating agencies are a case in point. It’s doubtful that the average American has heard of Deven Sharma, president of S&P, yet he has Barack Obama’s ear. No American could vote for him and few know what his values are; most probably couldn’t say where he was from. Yet he and the heads of agencies like his have more influence over American policy-making than any elected official in the country, arguably even President Obama himself.

The rating agency claimed that the main reason for the downgrade was “the gulf between the political parties” of the Republicans and Democrats in Congress. Similarly, Chinese rating agencies asserted that downgrades were inevitable due to “the negative nature of the US political system”. They seem to assert that the democratic process stymies economic flexibility; the core argument is that the Republicans appear to be a group of fundamentalist nutbags who, with their majority in Congress, can happily block any legislation from the Democrats or the president. Universal healthcare springs to mind for us; more relevant for Mr Sharma is their procrastination over a deficit reduction plan.

However, America’s representative democracy remains the best of its kind, due to the balance of power between branches of government. It is far more receptive to the desires of its citizens than Britain’s system, for example, where parliament has been continually marginalised and is now little more than a talking shop. However it is this democratic ideal, the rating agencies claim, is strangling America’s, and therefore the global, recovery.

It was not always the case that democracy was a burden to western economies. In fact quite the opposite is true. The second half of the 20th century ushered in disproportionate rates of growth for developed democracies. The enfranchisement of citizens gradually provoked a rise in living standards that turned almost every citizen into a consumer. Domestic demand flourished and growth accelerated rapidly.

Having the best democracy in the world, however, could not prevent the superpower from falling to its knees at the hands of S&P. In fact, it was said to be the cause. There is a new paradox facing the USA that could mark the end of American hegemony in the future. American fervency for free market economics seems inappropriate as they begin to emasculate rather than fortify democratic processes all over the world. Over time, globalisation has eaten away at the power of the sovereign state. National governments can no longer make economic decisions without risking the nation’s competitiveness - banker’s bonuses and the pandering that surrounds them is one such example. Political power cannot be easily exercised at a national level while economic power transcends it on a global level.

This conflict between markets and democracy is the cause of much political difficulty for almost all developed western nations. The obvious example of a country free from such a dilemma is China, whose National People’s Congress meets just once a year for two weeks. While China will eventually have to relax controls over its citizens to boost domestic demand, it is currently the best placed economy for future growth. Everything in China is controlled by the government, with one exception: the free market.

For the rest of us, America’s downgrade is a warning bell, foretelling a bleak economic future for western democracies. Whether it’s the rising importance of unelected institutions such as credit rating agencies or the robustness of autocratic nations such as China, democracy appears to be very much out of fashion in the 21st century. For America it could mark more than the end of her risk-free debt: the summer of 2011 may be the crucial juncture which historians will say marked the end of American hegemony itself.

Originally published 13 September 2011.