Why the Euro Crisis Matters
By Bruce Stokes
The euro zone crisis is not simply an economic issue. It is a political problem, one that poses a grave challenge to the foreign policy and security interests of the United States. And its fallout could affect U.S. strategic interests for years to come.
The trans-Atlantic alliance, long the cornerstone of America’s engagement with the world, was already eroding before Europe’s sovereign debt problems came into view, thanks to the alliance’s lack of a clear future mission and the lure of Asia. As the continent’s economic problems accelerate, they accentuate the alliance’s underlying problems, complicating Washington’s ability to deal with its myriad foreign challenges.
Sovereign debt defaults by one or more euro zone countries and the subsequent potential breakup of the euro zone could well lead to stagnant economic growth, debilitating introspection and self-preoccupation in Europe.
“A Europe that is not united,” warns Simon Serfaty, a scholar at the Center for Strategic and International Studies in Washington, D.C., “is, by definition, less strong. And a Europe that is less strong will become increasingly less vital to the United States in the 2010s, when American power will need to rely on allies that are not only willing, but capable.”
The U.S.-European partnership and U.S. foreign policy have weathered potentially debilitating challenges in the past, to be sure: France’s withdrawal from NATO in 1966, the Vietnam War of the late 1960s and early 1970s, the basing of American intermediate-range nuclear missiles in the early 1980s, the wars in the Balkans in the 1990s and, most recently, the Iraq War.
Thanks to U.S. strategic leadership, the trans-Atlantic alliance remains solid, suggesting America can weather this storm, too. But past performance is no guarantee of future results. And it would be shortsighted to underestimate the challenges that lie ahead.
The Inconceivable Becomes Possible
The possibility that the euro zone could ever break up was once considered inconceivable, for several reasons. First, the economic cost of such an unraveling was just too high. Moreover, the treaty creating the euro made no provision for a nation leaving. Finally, the political commitment of the continent’s leaders to the project was so strong that it was widely assumed they would never let the euro fail.
But as the crisis has metastasized, the inconceivable has become possible. Last November, a credit rating firm, Moody’s, told its clients: “The probability of multiple defaults by euro area countries is no longer negligible. A series of defaults would also significantly increase the likelihood of one or more members not simply defaulting, but also leaving the euro area.”
This is true even though it has become increasingly clear that if any nation leaves the euro zone, it will probably have to leave the European Union, as well. In the wake of a default on its government debt and the effective devaluation that would accompany a reversion to its former currency, bank deposits, people without jobs and goods would all flee.
In turn, other European governments would likely feel the need to limit those flows to protect their own economies. This would effectively terminate a country’s participation in the European Union.
A Lost Decade?
A splintering Europe would be disastrous for the continent’s economy as a whole. The euro zone, which the European Commission thought would grow by 1.8 percent in 2012, is now expected to increase by no more than 0.5 per cent.
Individual nations could fare even worse: growth for Italy is forecast at just 0.1 per cent, while Portugal’s economy should shrink by 3 percent and Greece’s by 2.8 percent. And even these estimates may prove optimistic.
Accordingly, Europe risks a “lost decade,” not unlike that experienced by Japan in the 1990s — but with far graver consequences for the rest of the world. After all, Tokyo had a deep pool of national savings to draw on. Europe does not. The most immediate strategic problem for the United States created by the euro crisis will be the erosion of Europe’s capacity to share the burden of paying for global public goods. Debt-strapped countries are already tightening their belts, with even greater austerity in their futures. Flatlining growth will also mean decreased revenues, compounding their budgetary woes.
The Impact on Defense
The first casualty of the crisis is likely to be military spending. In 2010, the United States devoted 4.8 percent of its GDP to defense, while the United Kingdom spent 2.7 percent and Germany just 1.3 percent. So a burden-sharing gap already exists — and is growing.
“In Europe, defense spending has dropped almost 2 percent annually for a decade,” noted U.S. Secretary of Defense Leon Panetta, in a speech in Brussels in early October. And since the financial crisis began in 2008, European nations have cut military spending by an amount equivalent to the entire annual defense budget of Germany.
This translates into real reductions in military capacity. Over the next several years, the United Kingdom plans to curtail defense spending in real terms by 7.5 percent by phasing out its troop deployment in Germany, scrapping the Nimrod reconnaissance aircraft, mothballing one planned aircraft carrier and leaving the other carrier with no planes to land on it for several years.
For its part, Berlin had already announced plans to trim €8.4 billion from its €31.5 billion annual defense budget. It also plans to suspend conscription, reducing armed forces personnel from 250,000 to 185,000. The Luftwaffe will curtail its planned acquisition of Eurofighters and reduce its contingent of Tornado aircraft, and the air force’s fleet of military transport aircraft will be cut back.
All of these measures will reduce Germany’s airlift potential and expeditionary capability. And since all of these cuts had already been announced before the euro crisis hit with full force, more reductions in defense spending can be expected.
The cost of shortchanging defense was already evident during the Libyan conflict, in which Britain and France would not have been able to carry out their successful mission without U.S. munitions. Factoring in America’s own budgetary constraints, with the Pentagon facing tens FOCUS The U.S.-European partnership has weathered potentially debilitating challenges in the past. But future success can’t be taken for granted. 25 of billions of dollars in mandated spending cuts, longstanding American resentment about Europe’s lack of defense burden-sharing is only likely to grow, poisoning future trans-Atlantic military collaboration.
... And on Climate Change Cooperation
European nations are on track to meet their share of the $30 billion goal, but that assessment is based solely on 2010 outlays. Europe will need to pony up equal amounts in 2011 and 2012, and more in later years. If the continent’s economy does not grow, cash-strapped governments may find it difficult to meet that commitment. And with America also facing budgetary and political constraints on such outlays, the West has little hope of leading the international effort to stop global warmEurope’s budget woes are also likely to weaken its commitments to help curb global warming. In December 2009, at the Copenhagen climate change summit, rich nations promised to give poor countries $30 billion in “new and additional” resources by 2012 to cope with climate change. That sum would be a down payment on a pledge to provide $100 billion annually in climate finance by 2020.
A Less Attractive Role Model?
More broadly, the euro crisis is undermining Europe’s pivotal position as a democratic, free-market role model for its immediate neighbors.
“The idea of the E.U. and the euro was that affluence would be created and shared,” notes Charles Kupchan, a senior fellow at the Council on Foreign Relations. “Now, that is fading. Instead of delivering affluence, the E.U. now delivers austerity and pain.”
Nowhere is this more evident than in Greece. One of the main reasons Athens was admitted to the European Union in 1981 was to cement democratic governance in the land where democracy itself first blossomed — but which was ruled by a military dictatorship from 1967 to 1974.
“For the Greeks,” says Serfaty, “getting into the E.U. was a way to end political instability and an undemocratic threat that defined Greece in the past. Being forced out of Europe would resurrect those things. Moreover, it would define an easy way out for other states with potential populist leadership.”
If the technocratic government installed in Athens last November fails, the temptation will be for the Greek electorate to turn to populist politicians who promise less pain. A country where the standard of living declines sharply could also face a growing public backlash in the form of rising nationalism. History teaches that an effective way to distract a disgruntled electorate is to foment external threats. A Greek politician intent on doing so would have ample opportunities to fan latent anti-Turkey sentiment in Cyprus or in the Aegean.
At the same time, association with the European economy is likely to look less and less attractive to Turkey. Already, fewer than half of Turks (48 percent) think joining the European Union would be a good thing for their country, according to the German Marshall Fund’s 2011 Transatlantic Trends survey. And given Europe’s current troubles, such support is likely to shrink over time. In addition, a Turkey that no longer aspires to join the European Union and whose behavior is no longer constrained by the need to meet conditions for admission could well become a more unpredictable, unhelpful free agent in the Middle East.
As the E.U. looks less successful economically and less politically functional, it will also hold less appeal for the former nations of the Soviet Union, which are likely to slip further back into Moscow’s orbit. For that matter, the idea of a united Europe has less allure for the Russians themselves. “Russian liberals used to present the European project as a model for Russia,” notes Dimitri Simes, president of the Center for the National Interest. “Now they cannot say this with a straight face.”
With the future of North Africa up for grabs and the Balkans still unsettled, the last thing Washington should want is for the European Union to become a centrifugal rather than a centripetal force in its own corner of the world.
Compounding the problem, European weakness and self-preoccupation could dash all American hopes for trans-Atlantic cooperation in dealing with the China challenge.
An Opening for China
Beijing is already flexing its muscles in the South China Sea and the Indian Ocean, and extending its influence in Pakistan, Africa and Latin America. In addition, its brand of state capitalism looks more attractive to many governments around the world than the form being practiced in Europe or even in the United States.
Hard-pressed to counter this influence on its own, Washington could find itself without an effective European partner. Already, European governments hoping to sell Beijing their sovereign debt have come under pressure to back off anti-dumping cases aimed at Chinese firms. If Beijing ever contributes to a euro bailout fund, as some in Europe hope, the foreign policy price for its cooperation could be steep. “The downside risk,” said Kupchan, “is that the U.S. will find itself navigating a new East Asia map very much on its own.
Left without an effective strategic partner, America’s drift toward an Asia-centric foreign policy will only accelerate. Already, a majority of Americans (51 percent), including seven in 10 Americans born after the end of the Vietnam War, thinks Asia is more important than Europe to U.S. national interests, according to the German Marshall Fund survey. And as Europe appears more and more dysfunctional, that sentiment is only likely to grow — a development that is in neither America’s nor Europe’s interest.e in Europe hope, the foreign policy price for its cooperation could be steep. “The downside risk,” said Kupchan, “is that the U.S. will find itself navigating a new East Asia map very much on its own.”
For all these reasons, Europe’s problems are now America’s headache, too. So as Washington scrambles to cope with the economic consequences of the euro zone crisis, it must also reassess how much it will be able to depend on Europe as a strategic partner in the future.
Bruce Stokes is a senior transatlantic fellow at the German Marshall Fund in Washington, DC.
February 01, 2012