David P. Calleo

David P. Calleo is an American scholar—a student of European and American politics, history and political economy—based at the Johns Hopkins University Nitze School of Advanced International Studies, where he is the Dean Acheson Professor. He also holds the title of University Professor.

Talk

America, Europe and the Twenty-First Century

At the middle of the 20th century, Europe – the continent that had ruled the world for four centuries – found itself partitioned and dominated by two giant federal powers from outside – the United States and the Soviet Union. Within a very few years, however, the states of Western Europe, led by a reconciled France and Germany, and encouraged by their American protector, had mounted a continental federal experiment of their own, today’s European Union. The West Europeans, grouped together in their “Community”, grew skilled at manipulating the “superpowers”. In some senses, the postwar system began to grow more tripolar than bipolar. By the century’s final decade, the Soviet part of Europe’s postwar system broke down. Russia disgorged its captive parts, East European states regained their independence and “East” Germany was allowed to unite with “West” Germany.  At the Treaty of Maastricht, in 1992, the rechristened European Union redefined itself and reached out to incorporate not only the newly united Germany but most of the other Central European States. Europe was not only “whole and free” but transformed, as Europe’s own federal experiment, although still essentially a confederation, appeared to be developing rapidly. European states began discussing coordinating their military forces and diplomacy. At the end of the century several member states created a “Eurozone” around a common currency. This seemed a major step toward Continental integration and a major challenge to the exclusive global reserve status of the American dollar. Pundits speculated over whether this more centralized European Union would remain America’s global partner or become its rival[1].

Today, these expectations seem somewhat ironical. The Eurozone is regularly said to be disintegrating. Of course, America’s own continental federation, trammeled in constitutional stasis, is, if not disintegrating, at least widely declared dysfunctional.[2]

The problems in the two systems are in some senses similar. For several decades, government in neither federal system has been able to adjust spending to income. Regular fiscal deficits, in the US and in many EU member countries, have accumulated to form substantial loads of official debt.[3] By now both federal systems are caught in a long simmering global financial crisis, intimately related to their own high indebtedness. In the European Union, several member states find themselves menaced by a “sovereign debt crisis,” where they actually have difficulty raising the cash needed to cover their current obligations. Paradoxically, while many EU members are among the world’s richest and most powerful states, their own European Monetary Union deprives them of the power to set national monetary and exchange rate policies, but fails to substitute a central authority able to act effectively for the Union as a whole. Thus the huge collective potential of the EU’s economies is impaired by its mixed constitution.[4] Sovereign power is scarce in the EU. It lies in whatever flicker of general will proceeds from the bargaining of the member states. In principle every state has a voice. Reaching decisions requires lengthy deliberations and imaginative compromises.

The challenge has been to find institutions capable of formulating and enforcing rules acceptable to all. Progress has certainly been made, but there is still only a shaky consensus. In effect, today’s financial crisis in Europe raises the fundamental issue that any federal or confederal union of states must confront: to what extent and in what ways should richer member-states subsidize poorer member-states?

In America’s own long experience as a federation, the central government has regularly channeled money from rich states to poor states.[5] From the start, the EU members also agreed that a high degree of equality was an essential condition for sustaining a European Union. Accordingly, the EU has regularly channeled regional and structural funds into the poorer member-states and the more vulnerable parts of the shared economy, agriculture especially.[6] These subsidies have sometimes been abused but have often also achieved impressive results, most recently in the transformation and absorption of several new member states from Eastern Europe.[7]

Ideally, every EU member should be well enough endowed to compete with reasonable success. Where the necessary resources are lacking, they should be transferred. But adjusting market outcomes to pursue redistributive goals easily generates resentments highly dangerous for a federation. Just as a successful nation state requires a strong sense of common identity and interest throughout its population, a successful federal union requires a strong sense of solidarity and mutual respect among its member states. Quarrels over burden sharing erode those unifying sentiments.

Fortunately for Europe’s future as a federation, the ties of mutual attraction are not merely or even primarily economic. The EU endows Europe’s states with political advantages that are beyond price. For several generations Europe’s Union has removed from European life the old fear of internecine (neigh-scene) war. It has given European states a framework of shared institutions, habits and perspectives needed to understand each other’s needs and reconcile differences peacefully. The more prosperous states have at least as much to lose from an end to this confederal experiment as the poorer. Germans, in particular, have every reason to support a project that cements their alliance with France. Otherwise Germans risk falling back into the disastrous patterns of Bismarckian Europe, where everyone else feared united Germany. While the Germans no doubt did much to bring down ruin on themselves, no one can deny that others relentlessly plotted against them, or that they ultimately came to share Europe’s suffering to the full. Bismarck’s “nightmare of coalitions” proved all too prophetic.

Of course, the EU’s economic accomplishments are themselves highly impressive. The Eurozone alone competes closely with the US to be the world’s largest economy.[8] If we take the EU as a whole, and not just the Eurozone, it forms a substantially larger economy than the American. In most years, it is also the world’s biggest exporter and importer of goods and services.[9] By measurements of “quality of life,” EU countries often rank higher than the US. [10] Being bound together into confederal Europe greatly strengthens the bargaining positions of the Union’s individual member states. Before the euro, the dollar regularly disrupted trade within the EU’s single market, essentially because the effects of the dollar’s fluctuations often fell unevenly and irrationally on the different national EU currencies.[11] Uncertainty about internal exchange rates contradicted expectations that the single market would promote more rational European investment patterns.[12]

Partisans of the Euro in France argued that a strong currency was essential for a wealthy country whose prosperity depended on the production and export of high quality goods and services.[13] A weak currency, devaluing frequently, was thought to reflect an economy vulnerable to non-Western countries with cheap labor. Sustaining a strong currency, however, requires controlling inflation and that, in turn, requires controlling government spending. European welfare states obviously have their own powerful inflationary tendencies. But since the 1960s many Europeans have come to believe that their own domestic indiscipline is much more difficult to control thanks to the constant powerful inflationary impulse they see coming from America.

This inflationary impulse particularly offends the conservative monetarism that has dominated the EU’s official policy-making since the 1970s. In its view, economics is fundamentally a moral science whose purpose is to explain, foster and justify a rules-based system that rewards productive work and discourages speculation. Competition is essential, but if it is not to disrupt society with brutal damage to the most vulnerable, it needs to be regulated within a well-established institutional framework. In this largely Continental outlook, postwar neo-Keynesian economics gives rise to an inflationary culture that deranges the market. This inflationary mind-set undermines the value of productive work, assaults human dignity, damages national cohesion and opens the door to totalitarian controls. From this perspective, the US is a runaway hegemon whose relentless inflationary expansion of the money supply is a threat that Europe must contain.

Anglo-Saxon economists tend to be outraged at these arguments. Their monetary quarrel with the conservative Continentals goes back to the 1920s, when Britain and the US imposed the “gold-exchange standard”, which enjoined the world to accept dollars and pounds in place of gold. As General de Gaulle pointed out in the 1960s, this permitted the US to finance its foreign purchases simply by creating more dollars. Not only did the General find this practice unjust – it, for example, forced European countries to finance American purchases of European assets – worse, it was relentlessly inflationary. It permitted the US to export credit abroad without reducing it at home. Hence the swelling US external deficits since the 1980s. By now the world is flooded with dollars. A crash of our currency is avoided thanks to those foreign countries that hold giant reserves in our currency.

These arrangements worked well enough during the Cold War, when our creditors were also our protectorates. It could be claimed, with some justice, that America’s deficits were the result of the extra burdens it carried for the collective defense. The end of the Cold War, however, changed not only the geopolitical framework but the “geo-economic” framework as well. Given Europe’s long-standing grievances over American inflation, it was not surprising that establishing the Euro was an early European response to the end of the Cold War. The past several years demonstrate not only the problems of a confederal currency, but also that Europe is determined to defend the Euro, along with the anti-inflationary policies that inspired it.

Compared with Europe, America’s fiscal problem is less excessive welfare spending than a combination of welfare and military spending that exceeds the willingness of Americans to pay taxes. We simply go ahead with the spending. Hence, our very large fiscal and external deficits. Our solution has been large-scale credit creation, made possible by the reserve role of the dollar. As a consequence, the dollar loses its value over time while the Euro grows stronger.

At present, of course, the dollar is regarded by markets as among the safest of all global assets. Nor is this surprising. The US remains a cohesive federation with a strong central government, a still expansive economy, a military unmatched by anyone and an irrepressible vocation for global hegemony. It is worth noting, however, that without the “exorbitant privilege” provided by the reserve role of the dollar, the US would find it difficult to continue its hegemonic global role, sustain its high consumption, or support its heavy load of foreign debt. In effect, America’s financial strength depends increasingly on its hegemonic position. Initially, it was America’s financial and industrial strength that underlay its hegemonic role. Today, the hegemonic role does not so much reflect America’s strength as cover up its growing weakness. Shorn of its monetary hegemony, the US might prove a modern-day Samson. The continuing large accumulation of surplus dollars in China, Japan and elsewhere suggests a growing artificiality in America’s global position.

How could America put itself, and the world, on a more sustainable path? The possibilities depend on the shape of the global system that appears to be evolving. In the years following the Soviet collapse, three narratives have been on offer to sketch the future: the triumphalist, the declinist and the pluralist. Each suggests a different global role for the US and a different relationship with Europe.

According to the triumphalist view, the Soviet collapse left the US the only superpower, free to pursue global hegemony so long as America’s own domestic base would support it. Of course, hegemony always has opponents and its exercise needs to be managed skillfully. The first Bush Administration, for example, was careful to cultivate its European allies but wary of encouraging too much European military autonomy. The second Bush Administration, by contrast, often thought the US might be stronger without its European allies.

The recent drift of events, the financial crisis in particular, has made the triumphalist view a less plausible vision for the future. This boosts our second or “declinist” narrative, according to which America’s hegemonic role always was unlikely to last. That is because a hegemon, carrying the principal burdens for sustaining the global order and security enjoyed by everyone else, inevitably exhausts itself. As the free riders grow stronger while the hegemon grows weaker, the world grows increasingly chaotic, until a new hegemon eventually arises. Declinists believe that events since the Second World War broadly confirm such a pattern. It is not hard these days to find the requisite signs of world disorder, or of America’s financial and psychological exhaustion. Nor is there any shortage of those who speculate that China will be the eventual successor.

Declinists who find it difficult to imagine China replacing the US as global hegemon are drawn to our third or pluralist narrative, one that sees the global future dominated not by a single hegemon, old or new, but by several rising regional powers—perhaps, too, by a variety of non-state actors and interest groups capable of coordinating on a global scale. The classic recipe for peace in such a system is a stable balance of power, upgraded into a concert of collaborative major states.

These three narratives, in all their variations, have faded in and out over the years. The middle years of the Reagan Administration were golden years for declinism. The abrupt Soviet collapse brought forward the triumphalist narrative. It remained strong in the first Bush Administration, through the Clinton Administration and into the second term of the George W. Bush Administration. By then the signs of America’s economic disorder and decline had grown increasingly clear. The shrinking credibility of the triumphalist narrative, particularly in its unipolar version, has fed a revival of American interest in the Western alliance. Instead of pursuing the imaginary omnipotence of the triumphalist view, a declining US should seek to rejuvenate the grand alliance that won it the Cold War. Closer cooperation with Europeans could compensate for America’s own faltering strength. The US and the EU together still possess an overwhelming superiority in world military and economic power. If that power were sufficiently united and focused, the threatened end of American predominance and Western superiority might be postponed indefinitely. The argument clearly has a certain plausibility, but there are some fundamental objections.

To begin with, the European Union itself is far from effectively united for playing a constant world role. It can be argued, of course, that weak European states divided among themselves are ideal partners for the US. As might be said to be the case with NATO in Afghanistan, a strong-willed US can appropriate European resources without having to make too many concessions to European interests. But a weak and factious European confederacy is not a satisfactory ally for the US.

Europeans, of course, remain content to have a formal Atlantic alliance continue indefinitely—as a way of maintaining a basic framework of balanced order in the face of big and hostile neighbors. So long as Russia or Iran have governments unfriendly to the West, Europeans are unlikely to throw away their American protection. Neither, however, are they willing to pay too high a price for it—as the history of transatlantic relations during the Bush Administration makes clear.

The Obama Administration has attempted to reverse Europe’s disaffection by adopting a strategy of “constant engagement” with the European allies [Gordon Brookings]. These American policies have certainly improved the atmosphere for transatlantic relations. But it remains to be seen whether they will forge and sustain common interests strong enough to keep a close global alliance together. The US and the EU states have competing as well as common interests—in relations with Russia and the Islamic world, or in any new world order generally. Relations with China are certainly vital to both Americans and Europeans, but their policies toward China are unlikely to be easily compatible. Each is, after all, competing to fill the role of China’s principal Western partner.

Even if the Europeans are pleased with Obama’s approach, it is not clear that it has much support among Americans. Moreover, some analysts perceive a growing alienation of publics across the Atlantic. Current studies point to a wide “American-Western European values gap” (Pew I). Much of this gap has to do with different views about the welfare state, religion or social issues. Of course, an immense number of particular economic interests regularly span the Atlantic. Inevitably, however, some of these are severely competitive.

In the end, how Europe and America fit together in the new century depends greatly on how the two continental federations themselves evolve. Since Europe commands large resources, and is still defining how it will combine them, its decisions have the potential to impose significant changes on the world in general. If Europe’s sovereign states, while remaining in a confederal union, can somehow find the formulas needed to manage their own interdependence successfully, Europe will assuredly remain a major force in the world – both for its strength but also by its example. The EU would remain one of the world’s largest economic “systems.” As a confederacy it would be unlikely to define itself primarily as a military power. Instead, it would present a model that favors bargaining and conciliation. Its constitutional character would accord well with its geographical position, occupying, as it does, the “Cape” of the Eurasian continent. Europe’s natural instinct would be to reach out to Russia and the Muslim world to entice them into its own orbit of stable peace and prosperity. If Europe evolves in this fashion, it may prove ideally suited to act as a mediating power between the US and China. Indeed, confederal Europe might prove to be the key to a world system that permitted the mutual accommodation of rising Asia and a still vigorous West. In this reborn bipolar system, juxtaposing China and America, Europe could have the balancing role for which its own confederal character would have prepared it.

All this assumes that Europe’s still mostly confederal constitution will persist. But many people now believe that to survive the EU will need to turn away from that traditional confederal constitution toward a more centralized American-style federal model. If the EU does follow this path it might come to play a different role in the world. Given the resources and imperial traditions of its major states, moving seriously to a centralized federation might, over time, put Europe on a path that leads toward becoming a superpower. Having such a Europe would probably reduce the chances for a renewed bipolar system, with Europe in a mediating role. More likely it would point toward our third narrative — a multipolar world of several great powers. In such a world, Europe’s taste for compatible diversity and conciliatory manners might still provide a model for others. Of course, Europe’s own long history easily suggests instead an unhappy outcome for this plural world without a hegemon. Instead of a golden age of confederal peace, with or without a stronger Europe, the world may find itself reentering the early 20th century caught in a new age of unmanageable great power competition. Still, whatever the odds for a rational and peaceful global order in our 21st century, the prospects seem more promising if Europe remains a major player. Europe’s reassertion, combined with America’s sustainable consolidation and Asia’s more measured rise, together suggest a rational and hopeful future for the world. Much will, of course, depend on whether Europe collectively can continue to develop its own model successfully — in other words find the right balance between conciliation and effectiveness.

Perhaps to help things along, we should try harder not to see the European Union as a primitive, incomplete version of ourselves – a continental nation state in the making. Instead we should see the EU as a different federal formula, one that builds on the achievements of nation states and links them in a fashion that brings a stable peace to their relationships. Perhaps that will make us more willing to learn from what the Europeans have actually achieved, less worried that they will eventually threaten us, and more patient with the halting progress of their institution-building. Europe’s importance for shaping the world’s future suggests a heavy responsibility for Western leaders and opinion-makers — a challenge perhaps not well enough understood in Europe or America.

 

 


[1] See for example Charles A. Kupchan, ‘The End of the West,’ The Atlantic Monthly, November 2011, Volume 290, No. 4, pp. 42-44.

[2] See Jeffrey Sachs, “The US has already lost the battle over government,” The Financial Times, Thursday August 16, 2012. Page _ and “US economic debate must move on from the 1930s,” ibid. 13 July 2012, p. 11

[3] For a summary of the loosening of fiscal discipline among members of the Eurozone, see Erik Jones, ‘Merkel’s Folly,’ Survival 52:3, June-July 2010, pp. 23-25. Concern over American federal debt, however, had been a preoccupation of the ‘declinist’ school since at least the 1980s. See David P. Calleo, Beyond American Hegemony: The Future of the Western Alliance (Basic Books: 1987), The Bankrupting of America: How the Federal Budget Is Impoverishing the Nation (William Morrow and Company, Inc: 1992) and Paul Kennedy, The Rise and Fall of the Great Powers, (New York: Random House, 1989).

[4] For the argument that the EU’s constitution was not adequate for an effective reaction to the crisis, see David Crossland, ‘Why the ECB Can’t Fix Europe’ by David Crossland (Businessweek, October 8, 2008. Available at http://www.businessweek.com). For a complete summary of the various responses to the crisis, see Gert Wehinger, ‘Lessons from the Financial Market Turmoil,’ OECD, 2008. Available at http://www.oecd.org/finance/financialmarkets/41942918.pdf).

[5] See Daniel P. Moynihan, Herman B. Leonard and Jay H. Walder, ‘The Federal Budget and the States: Fiscal Year 1999,’ Harvard University, 24th Edition, December 2000, pp. 25-33.

[6] For the budget used to carry out the EU’s Cohesion policy, see Marjorie Jouen, ‘The “Cohesion Pact”: Weathering the Crisis,’ Notre Europe Policy Paper 52, April 2012, p. 7. For figures of EU appropriations for agriculture and rural development, see section III, page 219 of the 2012 General Budget Draft of the European Union. Accessible at: http://eur-lex.europa.eu.

[7] In fact, there is evidence to suggest that Structural Funds spent through the EU’s cohesion policy helped poorer, newly integrated countries while simultaneously creating substantial returns for richer members. Jouen’s 2012 report states that while Poland benefitted the most from Structural Funds flowing to the region between 2004 and 2009, “around 27% of funds received by Poland found their way back, either directly or indirectly, to the 15 old Member States.” See Jouen, 2012.

[8] By measure of GDP in millions of euros. ‘Gross Domestic Product at Market Prices,’ Eurostat, chart last updated August 14, 2012. Accessed at: http://epp.eurostat.ec.europa.eu note on difficulty, multiple measurements of GDP.

[9] ‘Trade in Goods by Main World Traders,’ Eurostat. Chart last updated July 6, 2012. Accessed at http://epp.eurostat.ec.europa.eu Note on Trade balance, look up bop charts and trade figures, how much is US exporting/importing in goods/services, and same for EU. The relative standing is confused by the unstable exchange rates (http://research.stlouisfed.org) and difficulties of measuring.

[10] Quality of life, as opposed to standard of living (which is a quantitative income-based measurement), is an elusive measure of well-being. Different organizations use a wide variety of indicators to measure quality of life, and many different approaches to the measurement have been taken (e.g., the UN’s Human Development Index, the NEF’s Happy Planet Index, etc.). The US often falls below EU countries in such approaches, mainly when the comparison is based on measurements of income, health and education equality. According to one such approach, the Economist Intelligence Unit’s “Quality-of-life” index, the United States ranks thirteenth in the world, a ranking that places it behind eight EU member states. The Economist rankings, as well as the methodology used to determine “quality-of-life,” are available at http://www.economist.com/media/pdf/QUALITY_OF_LIFE.pdf. Also, the US has a substantially less equal distribution of wealth than the EU as a whole and its member states. See “Distribution of Family Income – Gini index,” CIA World FactBook, available at: https://www.cia.gov/library/publications/the-world-factbook/fields/2172.html.

[11] In the 1980s, many European economists complained of the dollar’s uneven fluctuation against the Deutschemark, an asymmetry that resulted in unstable exchange rates in the greater EMS. See Kai Behrens, ‘Destructive Discipline – The International Politics of the German Balance of Payments,’ (forthcoming) PhD dissertation, Johns Hopkins University, Ann Arbor: ProQuest/UMI.
For a quantitative look at uneven dollar exchange rate fluctuations against the different European currencies from 1971 to the introduction of the euro, see table 8.1 in David P. Calleo, ‘Twenty-First Century Geopolitics and the Erosion of the Dollar Order,’ chapter 8 in Eric Helleiner and Jonathan Kirshner (eds.), The Future of the Dollar, Cornell University Press, 2009, pp 164-190.

[12] European Commission, ‘One Market, One Money,’ European Economy No. 44, October 1990. Accessible at  http://ec.europa.eu/economy_finance/publications/publication7454_en.pdf

[13] For further discussion, see Jeffry Frieden, ‘Making Commitments: France and Italy in the European Monetary System, 1979-1985,’ The Political Economy of European Monetary Integration. 2nd Edition. Eds. Barry Eichengreen and Jeffry Frieden, 2001, p. 30.