The Transatlantic Test
Europe is facing an existential crisis, and it's time the United States recognized it.
Ten months into President Barack Obama’s first year in office, reports emerged that Greek budgetary figures simply weren’t adding up. Six months later, an emergency European summit was held to approve the first $147 billion bailout of Greece. The Greek crisis nearly brought the global economy to a standstill — not bad for an economy that represents just 2 percent of Europe’s GDP.
Fast forward to November 2012. Twenty-one European summits have been held; three eurozone countries have bailout packages (Ireland, Portugal, and Greece, which is negotiating its third package); two more countries (Cyprus and Spain) are on the verge of receiving bailouts; and 17 European governments have changed or collapsed since the beginning of crisis. Eurozone unemployment is at an historic high of 11.6 percent (in Spain, the figure is 25.8 percent) and the economic growth of eurozone economies is projected to contract by 0.5 percent in 2012, according to the International Monetary Fund (IMF).
Washington, we have a crisis — a potential decade-long geoeconomic disaster that will extend well into Obama’s second term or Romney’s first.
Washington has not fully come to terms with the fact that its closest allies and partners are facing the most significant existential crisis since the Second World War. Can the United States exert influence over Europe’s response? While we have the luxury of critiquing three years of the Obama administration’s approach toward the European debt crisis, we can only guess what a Romney administration might do.
From the earliest days of the crisis, the Obama administration diagnosed Europe’s problem as purely economic — not an all-hands-on-deck, hair-on-fire 3 a.m. phone call possessing the global earthshaking qualities of the Lehman Brothers collapse in September 2008, but a worrisome economic problem nonetheless. The response was to dispatch senior Treasury officials and to ensure close consultation between the Federal Reserve, the European Central Bank (ECB), and other central banks to provide needed liquidity and credit. Other suggestions based on Washington’s own experience in 2008-2009 included a TARP-like mechanism and rigorous stress tests to help shore up shaky European banks; a ‘lender of last resort’ in the form of the ECB to ensure full confidence in the European banking system; and an increase in government spending to stimulate the private sector rather than German-enforced austerity — all sound, rational economic advice that was perceived as successful (depending upon your perspective) in resolving the U.S. crisis.
But as the crisis deepened and, when it became increasingly apparent that Europe’s economic problems were causing serious disruptions to America’s own tenuous economic recovery, the Obama administration adopted a more forceful approach. Frequent visits to Europe — on occasion uninvited and unwanted — by Treasury Secretary Timothy Geithner and Under Secretary Lael Brainard, who made more than 17 trips to Europe from 2010-2011; more urgent phone calls between President Obama and German Chancellor Angela Merkel and other European leaders. Yet the United States did not contribute to the IMF emergency fund created to help Europe and other countries affected by the debt crisis, although Brazil, China, India, and Russia did donate funds. Interestingly, European governments have repeatedly turned to Beijing for help during the crisis.
Although the administration increased its transatlantic operational tempo, its message and policy fell flat. And here is why: Europe’s debt crisis is fundamentally a political crisis, not an economic one, although divergent European economic policies clearly fuel it. The Treasury Department certainly had part of the policy answer, but it could never comprehend the intense politics surrounding a 60-year integration project designed to prevent war. (What does war have to do with a currency union, inflation, and bail-outs? Plenty, according to the architects of the European Union.)
Despite Obama’s personal popularity in Europe, European prickliness has been at an all-time high, as the last thing it wanted was an economic lecture from a country that it believed unleashed the crisis in the first place (thanks, subprime mortgage crisis!), boasted a whopping 105 percent debt-GDP ratio, and had just lost its AAA-credit rating. Obama’s serious cajoling of Merkel during a state visit in June 2011 had little effect.
Happily for Obama, Europe never became an issue in the 2012 campaign. Arguably, if the president wins, his victory will have been brought to you by the letters E, C, and B, as the cataclysmic eurozone breakup scenario that many feared dissipated thanks to ECB President Mario Draghi’s verbal bazooka uttered in July, "The ECB is ready to do whatever it takes to preserve the euro." If Obama is reelected, it is probably safe to assume that the administration’s policy toward the debt crisis will remain the same and may even receive less focus and attention in a second term as European borrowing costs fall. If this is the case, an historic foreign-policy mistake will have been made as America’s European allies drift away from the United States and are internally consumed by debt and growing nationalism, separatism, and xenophobia.
Romney does not have a stated policy on Europe or the debt crisis, but he has used Europe as a cautionary tale of what will happen to the United States if it follows European economic policy. In his foreign-policy speeches and July visit to Europe, Romney vowed to renew and deepen America’s relationship with its closest partners and allies, particularly Britain.
Germany needs to be added to this list as well. Yet it is unclear how Romney would operationalize this policy and in what spheres: defense and security (NATO), economic and trade (a U.S.-European Union Free Trade Agreement), political engagement (renewed strategic partnerships), or all three? Will Europe and its debt crisis be a priority, or will it be on a long list of foreign policies that must be reviewed and evaluated in due course? After spending two years in France as he undertook his missionary work, will Romney have a greater sense of, and interest in, European political dynamics than Obama has exhibited? Will he select senior officials that have a deep understanding of Europe?
What is clear is that either Obama or Romney will be confronted by a Europe that is undergoing an historic and transformative political, economic, and societal realignment. A core, AAA-rated Europe, more integrated and under German economic leadership, is beginning to form, and it will be an important global economic partner to the United States. A peripheral Europe, left out of the region’s integration efforts by choice or by dint of local financial situations, is also emerging, leaving Britain and Poland, both important U.S. strategic partners, outside of Europe’s new institutional architecture. Can Europe remained unified under this scenario? Will transatlantic relations need to adapt to these changes?
Both Europe and the United States must recognize that they share similar challenges: an increasingly expensive social safety net, unsustainable debt and deficits, and political polarization that prevent policy action. Rather than pointing fingers across the Atlantic over who has the worst fiscal situation, perhaps we should begin an intense, serious leadership discussion and find new solutions to get our economic houses in order as quickly as possible.
After all, it is the future of the West that is at stake.