"Tell me how this ends," David Petraeus famously asked back in 2003, referring to the U.S. war in Iraq. Today, I'd like somebody who knows more about international finance than I do to answer that question regarding the eurozone.
Today we learned that with the exception of Germany, the rest of the eurozone is slipping back into recession. Take a look at this graphic here, and you'll see that problem countries like Spain and Italy are in particularly bad shape, with economies that are not only under their 2008 levels, but beginning to shrink at an accelerating rate. And the OECD forecasts for next year -- see here, here, and here -- are not exactly encouraging.
Why does this matter? Because countries like Spain, Italy, and Greece all need genuine economic growth in order to get out of their larger debt problems. In fact, they need economic growth that is sufficiently strong to provide a surplus over their existing debt service (and other expenses), so that people holding their debt (or expecting to buy new bonds when it's time to roll the current set over) have reason to believe that the debts will eventually be repaid. This is why everybody gets nervous when interest rates on new debt rise about the canonical 7 percent mark.
The issue is ultimately one of confidence. If the institutions holding Spanish or Italian debt and the lenders who have to issue new debt (to cover the service on the old debt) are convinced that the Spanish and Italian economies will eventually start growing and that the money to pay these debts will be there in the future, then interest rates will remain low and the danger of default will recede. But if these same lenders begin to suspect that these economies aren't going to grow enough (and might even continue to shrink) they will rightly conclude that the money to pay their existing debts (including the debt service) will be lacking. At that point, they will only be willing to lend more money at interest rates that are even less sustainable. And that's when states have to start thinking about bailouts, or about leaving the eurozone and solving their problems through a new (and highly devalued) local currency.
The happy ending to this story, if there is one, is that the various structural reforms now being imposed on these countries will simultaneously cut government costs (thereby freeing up money for debt service) and eventually trigger robust economic growth (thereby increasing tax revenues and providing even more money). But thus far this doesn't seem to be happening. Instead, we get recurring crises, each dealt with by some sort of hastily improvised mechanism mostly designed to kick the can down the road and wait for a miracle to occur. But unless the curves in the graphic cited above hit an inflection point and start heading upward, I don't see how this favorable outcome ever gets reached.
But international finance isn't my real gig, so there may be aspects of this situation that I've failed to grasp. If any of you think you understand what's really happening, tell me how this ends.
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On the eve of the EU Summit, Mark Sheetz offers the following commentary, which differs in some respects from mine.
In several recent blogs on the euro crisis, Stephen Walt has expressed exasperation with European leaders and pessimism on the fate of the eurozone. His reaction is understandable and consistent with virtually all journalists and economists who study the issue. They are frustrated at the slow pace of European decision-making and the fact that a solution seems obvious. In recent days, demand for action has become nearly hysterical, with analysts, columnists, and editorial writers for the New York Times suggesting that time for a solution is "running short," that "the endgame is fast approaching," that the eurozone is facing a "meltdown," and that a collapse is "perhaps inevitable."
So, what is the solution? Conventional economic wisdom insists that either Germany acquiesce to some sort of bailout or the eurozone is finished. Germany must consent either (a) to the issuance of joint and severally liable Eurobonds or (b) to a policy of monetary easing by the European Central Bank (ECB). The problem is being treated as a technocratic economic matter. Hence, technocrats have come to power in Greece and Italy. But the matter is essentially political and the crisis turns on central problems of international relations theory, like anarchy, sovereignty, and power.
Economists believe that the basic problem of the eurozone is economic: that national economic imbalances can no longer be restored through the traditional method of currency devaluation. But the problems of the eurozone are fundamentally political: (a) it expanded too fast, wider won out over deeper, (b) there is no commitment to common budgetary policies, and (c) there is no mechanism to enforce agreements.
The debate is congealing around two poles, a pessimistic pole predicting the breaking apart of the eurozone versus an optimistic pole of closer integration. The solution includes both. On the one hand, wide economic disparity among members of the eurozone will force weaker members to leave. Greece, as well as those countries that use the euro but cannot afford it (PIGS), will be cast off from the eurozone by a mounting centrifugal force.
On the other hand, the remaining members will converge on tighter economic policy along the German model. As a corollary to more restricted membership, those countries remaining in the eurozone will harmonize their policies regarding deficits and government pensions and achieve some sort of convergence in the major items affecting budget deficits. This will have the effect of bringing Europe closer together, or at least those countries that can achieve convergence. It may also create a more politically coherent Europe, with those remaining in the eurozone leading the European Union economically and politically. Such a situation might even give a common foreign policy the chance to develop and cohere around a small group of stronger European countries.
Some believe that a Greek expulsion from the eurozone will be catastrophic. They assume that a Greek default within the eurozone is manageable, while a Greek exit would make contagion worse. My own feeling is that contagion -- and the accompanying collapse of the European project -- would be the result of Greece staying in the euro, not the result of Greece getting out. The recent evidence of market contagion to Italy and Spain appears to support this claim. A referendum in Greece would have cleared the air. It would have restored a stark reality that European leaders would not be able to evade. If Greeks had voted "no" on the referendum, Greece would have had little choice but to return to the drachma. That would have been a lesson to others. They would have recognized that they have only two choices: (a) converge fiscal and monetary policies or (b) press the "eject" button. The problem now is that European leaders may still think they can muddle through by patching up a country here and there. That will destroy the clarity exposed by a Greek default.
The divide, as usual, is between France and Germany over monetary policy. The French, along with their southern European allies in Greece, Italy, Spain, and Portugal, favor easy money, while the Germans, along with northern Europeans in the Netherlands, Austria, and Finland, insist on a tight money policy. Any hint of German capitulation to French demands of easier money will be the end of the euro. The first sign of wavering, the first inkling that a compromise is afoot, will signal to the markets that the floodgates for a river of euros are open, that fiscal and monetary discipline are history, that inflation will be rampant, and that the euro will be worthless.
Germans will not pay for the profligacy of their neighbors. Otherwise, where would it stop? Any concession towards easy money will only reinforce the "moral hazard" of further risk-accepting behavior. It is a story as old as Aesop: the ant and the grasshopper. Germany entered into the euro under assurances that all members would conduct their economic affairs responsibly. If this is no longer the case, then Germany will reserve the right to withdraw. A former British chancellor of the exchequer agrees, insisting that Germany would sooner withdraw from the euro than see its integrity compromised. Another (not insignificant) factor is the survival of Angela Merkel as chancellor. Any suggestion of Merkel wavering at the prospect of easy money is tantamount to political suicide. So all the speculation that the ECB or the EFSF will "stabilize" (rescue) the euro is so much folderol.
The power calculus, then, favors Germany. France will be dragged along kicking and screaming, but two points suggest eventual French capitulation. One is that Germany will otherwise threaten to secede from the euro, which would put France in a nasty competitive economic position. And the second is that, without the unity embodied in a common currency, French hopes of ever again exerting influence on the world scene will have evaporated. Europeans understand that they cannot meet global challenges as individual nations because they are no longer great powers. As President Sarkozy conceded, "If Europe does not change quickly enough, global history will be written without Europe."
The original path to the common currency was through a convergence of economic policies. Nations would have budget deficits of no more than 3 percent of GDP, and total debt of no more than 60 percent of GDP. If euro members had stuck to these criteria, they would be in dandy shape now. So a return to that mechanism, with additional penalties for non-compliance, might work. The problem is to create binding agreements.
On the question of enforcement, one possibility mentioned is an automatic increase in taxes to offset a budget deficit beyond acceptable limits. Other devices to ensure compliance with EU oversight of national budgets are available for the same purpose. These sanctions would be imposed by a central authority that can override national budget decisions. The European Court of Justice and the European Commission have been suggested as ultimate arbiters, but such supranational enforcement has its limits in a union of sovereign states.
Sovereign governments may oppose such measures for domestic political reasons. As long as sovereignty remains, national governments may negate previous agreements. Even within national governments, as in the U.S. Congress, existing legislatures may negate the agreements of previous legislatures. Therefore, a more severe penalty is required.
The ultimate penalty for non-compliance is, of course, expulsion. The eurozone could expel any country that fails -- after a suitable time period -- to adhere to budgetary guidelines set forth in a new agreement. The ultima ratio of economic union is expulsion, just as the ultima ratio of politics is war. It lurks behind every decision as the final alternative.
So the demise of the euro, as a proxy for the EU itself, is not on. Neither is a consolidation on the German federal model. A big push for more Europe is not in the cards now. The loss of that much national sovereignty is unrealistic, given the immature development of a European identity. That is why convergence of fiscal and economic policies is the most likely outcome, not complete structural reform.
But convergence will not save the euro if member states refuse to comply with agreed guidelines. Both France and Germany violated the guidelines in 2003, breaking through the barriers of 3 percent budget deficits and 60 percent debt for more than a year. If the founding members of the eurozone fail to comply or to remedy violations within prescribed time periods, then the euro will well and truly collapse. In a union of sovereign powers, political will is the ultimate arbiter.
Mark S. Sheetz is an Associate in the International Security Program at the John F. Kennedy School of Government of Harvard University. He is currently writing a book on France, Germany, and the Transformation of Europe.
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It's Thanksgiving once again, and it's become something of a ritual for me to record what I'm feeling grateful for each year. For starters, I want to thank the various people who responded to my request for advice on "policy analysis" yesterday, both via the "comments" section and to me directly. I got some very good suggestions, and I appreciate the help. Whether my students will be similarly appreciative remains to be seen.
This year, I'm thankful that the euro hasn't collapsed - yet -- and I'm keeping my fingers crossed that it won't. It's true that the unraveling of the eurozone would be a striking vindication of a broadly realist view of international relations, but it would also produce tremendous human suffering and that's way too big a price to pay to vindicate a theory. So I hope Europe's leaders manage to defy my usual pessimism and navigate through the crisis. If they do, I'll be even more thankful next year.
I'm also grateful that there's been no war with Iran. Whatever the Obama administration's other shortcomings might have been, those at the top seem to have understood the folly and futility of unleashing major military action against Iran. I won't give them high marks for imaginative diplomacy, but at least they haven't done great harm.
I'm also giving thanks that the United States is getting out of Iraq, and I wish I could believe that we will draw the right long-term lessons from the debacle. On that score, it is not a good sign that many of the architects of that war are still taken seriously as foreign policy "experts," and some are even advising GOP candidates. Doesn't say much for our national learning curve, does it? But even if historical amnesia sets in quickly, I'm pleased that we are finally leaving Iraq to its own leaders. Now if we can just draw a similar conclusion about that other exercise in imperial futility ... Afghanistan.
Like nearly everyone, I'm troubled by the continued turmoil in Egypt and by the Assad regime's brutal behavior in Syria. But I'm thankful that the situation in Libya has thus far defied my worst fears and made at least some modest progress toward the establishment of a more legitimate political order. The capture of former heir-apparent (and accused war criminal) Saif al-Islam Qaddafi and former security head Abudullah al-Senussi pretty much eliminates any possibility of a "loyalist" insurgency, which is a good sign too. The country still has a long way to go, but I will be keeping my fingers crossed.
On a purely personal note, I'm thankful for the courageous policy analysts, writers and bloggers who make it easier for me to do this blog. I'm talking about people who seek puncture conventional wisdom, challenge orthodoxies, and rock the boat on occasion. I value them because they are an antidote to the flood of cautious semi-official narratives that dominate most of the writing on foreign policy, and so they help me think outside the box. So heartfelt thanks to Carl Conetta, Phil Weiss, Juan Cole, Gordon Adams, Martin Wolf, Jerry Haber, Uri Avnery, Jim Lobe, Helena Cobban, Glenn Greenwald, M. J. Rosenberg, John Mueller, Andrew Sullivan, Spencer Ackerman, Jerry Slater, Gideon Rachman, and many others too numerous to list or even remember. I don't know a lot of the people just mentioned, and I don't always agree with any of them. Heck, I don't always agree with this guy either. But I'm glad they are doing what they do.
Of course, I cannot omit my annual word of thanks to the whole gang at FP, including the reporters, writers, and bloggers with whom I've occasionally tussled. The editors remain a delight with whom to work, and it's been a pleasure to be part of their team. And because all bloggers ultimately depend on readers, I'm especially grateful for those of you who take the time to read this stuff.
With each passing year, I've become more aware and more appreciative of my own good fortune. It's been a pretty soft gig to be born a white American male in the mid-1950s, in a country enjoying enormous geopolitical advantages and considerable prosperity. I like to think I've done ok with the advantages I was handed, and there's no doubt that the deck was stacked in my favor from the start. And that goes for a lot of my colleagues and contemporaries too.
More broadly, if you compare the era in which most of us have lived to the previous fifty years (1900-1950), there's little question that we've enjoyed a period of comparative benevolence. The first half of the 20th century witnessed two enormously destructive world wars, the worst economic depression in history, and several brutal genocides. The past sixty years has its own share of tragedies, to be sure, but the overall level of violence was much lower, economic growth was fairly steady (until recently), and many of us never had to endure the insecurities, travesties, and sacrifices that earlier generations experienced or that were still common in other parts of the world.
Most Americans ought to be especially grateful for their extraordinary good fortune, and Thanksgiving is an appropriate time for us to reflect upon it. And as I watch Europe teeter on the brink of financial collapse, observe the violent political contestation that is sweeping the Middle East, note the rapidly shifting balance of power in Asia, and contemplate the tragicomic follies of our so-called leaders in Washington, I do wonder how long it will last, and whether I will look back with regret at the tranquility we have lost.
But tomorrow, I will give thanks for the good that remains, and think about what can still be done to preserve and extend it.
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The struggle to save the euro is beginning to look like a chase scene from an Indiana Jones movie. First, our hero dodges the landslide, then runs from the spear-wielding aborigines, then is surprised by a snake ("I hate snakes!"), then is pursued by well-armed Germans and has to escape on horseback, only to plunge over a waterfall, only to be captured by ... you get the idea.
So this week we had 48 hours of excitement after Greek Prime Minister George Papandreou announced he was going to hold a referendum on Greece's acceptance of the European bailout. Consternation reigned, and markets tumbled. And then he said, in the best tradition of Emily Litella: "Never mind." Markets rebounded, and the bus lurched on toward the next crisis.
As I've emphasized before, I'm no macroeconomist (although my respect for some of them has been dropping steadily since 2007). From my decidedly non-expert perspective, here's what I've concluded.
The real issue with respect to Greece and Italy (and thus, the euro) is whether genuine economic growth can be restored to these economies. All the bailouts and austerity and haircuts (i.e., voluntary reductions in debt) in the world won't help these states (and especially not Italy) if they can't generate enough economic growth to pay back what they owe. (Strict austerity is a problem here, by the way, because it reduces growth in the short term). If they don't grow they can't pay, which will place a lot of European banks at risk of major losses and maybe bankruptcies. And because this whole arrangement depends on confidence -- a debt is an asset if you think it will be repaid, but it's a loss if you believe it won't -- you'll get a credit event if the markets ever conclude that growth won't happen and the debts won't get repaid, and the euro is probably finished (at least in its present form). End of story.
So the fact that things have calmed down a bit (just as they do at the end of a good chase scene), doesn't tell us much about the future. All these diplomatic machinations to arrange rescue packages, etc., can buy time, but they won't solve the problem if economic growth does not return. And the big difference between this thriller and a Spielberg movie is that the script is being written as we go along and we have no guarantee of a happy ending.
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Has it really come to this? That the fate of Europe's economy is in the hands of Silvio Berlusconi, whose career in Italian politics is closer to opera bouffe than responsible statesmanship? Whatever you think of the latest effort to save Europe and the Euro -- and I'm not that impressed -- this does not strike me as an encouraging sign. After all, Berlusconi first became Prime Minister in 1994 and he's served three terms since then. Since 1996, Italy has managed a pitiful 0.75 percent average growth rate, and its anemic economic performance is why there are lingering doubts about its ability to pay its debts. But hey: at least the problem is in the hands of someone with a proven track recordof double-dealing, indictments, sex scandals, and personal aggrandizement.
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For those of you who are curious about the relationship between scholarship and the real world, with particular reference to the social sciences, I recommend FT columnist John Kay's recent essay "The Map is Not the Territory: An Essay on the State of Economics." Kay is an experienced professional economist himself, and the essay is a penetrating critique of the kind of divorced-from-reality thinking that has dominated a lot of macroeconomic research over the past few decades. As you'll see if you read the piece, he's especially irritated by the unwillingness of some prominent macroeconomists (including Nobel Prize winners like the University of Chicago's Robert Lucas) to acknowledge that the failure to anticipate the financial meltdown of 2007-2008 casts some well-founded doubt on the direction that economic thinking has taken in recent decades.
Kay's essay also contains some valuable lessons for political science and other academic disciplines. My favorite passage:
For many people, deductive reasoning is the mark of science, while induction - in which the argument is derived from the subject matter - is the characteristic method of history or literary criticism. But this is an artificial, exaggerated distinction. ‘The first siren of beauty', says [macroeconomist John] Cochrane, ‘is logical consistency'. It seems impossible that anyone acquainted with great human achievements - whether in the arts, the humanities or the sciences - could really believe that the first siren of beauty is consistency. This is not how Shakespeare, Mozart or Picasso - or Newton or Darwin - approached their task.
The issue is therefore not mathematics versus poetry. Deductive reasoning of any kind necessarily draws on mathematics and formal logic; inductive reasoning is based on experience and above all on careful observation and may, or may not, make use of statistics and mathematics. Much scientific progress has been inductive: empirical regularities are observed in advance of any clear understanding of the mechanisms that give rise to them. This is true even of hard sciences such as physics, and more true of applied disciplines such as medicine or engineering. Economists who assert that the only valid prescriptions in economic policy are logical deductions from complete axiomatic systems take prescriptions from doctors who often know little more about these medicines than that they appear to treat the disease. Such physicians are unashamedly ad hoc; perhaps pragmatic is a better word.
Needless to say, I like this argument because I believe it is important for the social sciences to be a diverse intellectual ecosystem instead of a monoculture where one approach or method reigns supreme. Even if one approach or theoretical model were demonstrably superior -- and that is rarely, if ever, the case -- there would still be considerable value in having lots of other scholars working in different ways. Sometimes we learn by exploring deductions in a formal model (though we often just restate the obvious when we do); at other times we learn by "soaking and poking" among policymakers, by constructing a data set and exploring patterns within it, or by immersing ourselves in the details of historical cases or by exploring the categories of thought and discourse that surround a given policy domain. Given that all these approaches yield useful knowledge, why would any serious department want to privilege one approach over all others?
But because academic disciplines are largely self-defining and self-policing (i.e., we determine the "criteria of merit" and success depends almost entirely on one's reputation among fellow academics), there is the ever-present danger that academic disciplines spin off into solipsistic and self-regarding theorizing that is divorced from the real world (and therefore unlikely to be refuted by events) and of little value to our students, to policymakers, or even interested citizens. This tendency occurs primarily because proponents of one approach naturally tend to think that their way of doing business is superior, and some of them work overtime to promote people who look like them and to exclude people whose work is different. Anybody who has spent a few years in a contemporary political science department cannot fail to have observed this phenomenon at work; there just aren't very many people who are genuinely catholic in their tastes and willing to embrace work that isn't pretty much like their own.
This situation creates a real dilemma: if you believe in academic freedom (and I do), then you don't want outside authorities interfering in the production of knowledge, telling academics how to do their work, or setting stupid criteria for evaluating scholarly contributions. But without some pressure to be at least potentially relevant, the social sciences are prone to drift off into what Hans Morgenthau once decried as "the trivial, the formal, the methodological, the purely theoretical, the remotely historical -- in short, the politically irrelevant." I've already touted my own prescriptions for this problem here, but I don't have enormous confidence that any of them will be heeded. But at the risk of seeming to tout my own employer (and similar programs elsewhere), that's why I increasingly expect the most interesting and relevant work to emerg from schools of public policy, and not from the increasingly arcane worlds of traditional disciplinary departments.
Perhaps the single most remarkable development in 2011 is the wave of political protests that have occurred in widely-varying political contexts. In addition to the various upheavals that constitute the "Arab Spring," we've also seen tent cities in Israel, the "Occupy Wall Street" movement and its clones here in the United States, and various imitators in both Europe and Asia. This wave of political contagion is more widespread than the "velvet revolutions" of 1989 (though not yet as significant), and perhaps the nearest analogue would be wave of youth-revolutions and upheavals that occurred back in 1968.
What is going on here? Is there a common set of causes at work, or at least a common thread to otherwise diverse phenomena? I think so, because I see these upheavals as fueled by three important global developments.
The first factor is economic globalization, which has made many states both sensitive and vulnerable to events in far-away places, and led to rising inequality both between and within countries. Yet most governments have failed to enact remedial measures to soften the consequences of economic change and to restore a more level distribution of income, thereby ensuring some degree of economic pain and political discontent.
The second development is the globalization of information, which allows events and ideas to spread much more quickly. As a result, demonstrators in Cairo can watch what's happening in Tunis and imitate it, and then other people in other countries get the idea that protest can be effective, even if their particular grievances are somewhat different. And so it spreads, as the radical idea of ordinary people taking action against the seemingly impregnable becomes increasingly contagious. Plus, each group can learn from each other and feed off the sense of being part of a larger process, instead of feeling like isolated and powerless individuals with scant hope of success. This sort of thing has happened before in world history (e.g., in 1789, 1848, 1919, 1989, etc.), but never in so many far-flung and widely different contexts.
The third reason is the increasingly-evident incompetence and/or corruption of governing elites in many countries, and the tendency of governments to do too much to protect wealthy and powerful interests and not enough to help ordinary people. In Egypt, it was the overt corruption of the Mubarak regime, whether in the form of privileged deals for military officers or for Mubarak's son. In the United States, it was the taxpayer-funded rescue of "too big to fail" financial institutions as well as the "too-well connected to fail" recycling of some of the same people who helped create the whole mess in the first place. And then there's the continued recycling of policy ideas that had been discredited by events but never discarded. People may be disappointed by Obama, but real disenchantment comes from the growing realization that replacing him wouldn't make much difference and might make things much worse. You know the line: "Meet the New Boss....Same as the Old Boss." (Turns out Pete Townshend was a prophet when he wrote "Won't Get Fooled Again," which would be a nice anthem for many of these movements.)
There is, of course, a deeper taproot to all this. As my colleague Jenny Mansbridge reminded me in a superb talk I attended last week, (and which will be published next month in PS), the present combination of economic inequality and political gridlock is fatal to the proper functioning of democratic orders. In a capitalist democracy, corporate interests tend to be wealthier than the rest of society, and the state is the only actor powerful enough to intervene to prevent corporate interests from going too far and exploiting their position. This is what happened in the Gilded Age and again in the Roaring 20s, which eventually led to the Progressive Era and later the New Deal.
But if the political system is gridlocked, then the state cannot act quickly or decisively to retard corporate power. Even worse, as corporate interests grow stronger they tend to acquire greater political power (and especially when a tame Supreme Court helps them, as it did in the Citizens United decision). Instead of just hamstringing the state, corporate interests can get it to enact laws that favor them even more. The result will be rising economic inequality and precisely the sort of irresponsible and unregulated behavior that led to the Great Recession of 2007.
Put these three things together, and you have a recipe for global protests in very different countries. Despite the many differences between conditions in the United States, in Greece, in Egypt, in Syria, in Israel, or elsewhere, what unites the 2011 wave of global protest is the shared belief that the People in Charge do not know what they are doing, care more about their own wealth and well-being than they do about the common weal, or are simply too spineless and shallow to do what at least a few of them secretly know to be right.
Ask yourself: how many contemporary political leaders do you genuinely admire? How many of them would rate a paragraph, let alone a whole chapter, in a revised edition of Profiles in Courage? How many of them seem capable of giving you a straight answer to a hard question, as opposed to offering you a lot of happy double-talk? How many of them are better at making a powerful speech than they are at taking a principled stand and sticking to it? How many of them have really got your back, as opposed to pandering to the endless parade of well-heeled lobbyists and special interest groups? Is there political leader in your country who is not for sale?
If you've been paying attention, and you can't find such leaders in your country, and you having been watching the obscenely wealthy get richer and more powerful, so that they can rig the game to make themselves richer still, then you'd probably think about painting a sign and getting out in the streets. And if I didn't already have this blog for my soap-box, maybe I would too.
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Everyone I read seems to agree that a big part of the solution to the Euro crisis would be the creation of more robust and well-funded European financial institutions. One of the barriers to moving ahead, however, is Germany's reluctance to bail out so-called profligate countries like Greece. Even though a Eurozone collapse would do great harm to Germany itself, a sense of moral outrage among ordinary Germans ("why should I have to pay for somebody else's irresponsible behavior?") is a potent political obstacle that German leaders will have to overcome if this is going to work out well.
I got a small but revealing personal glimpse into this issue today, when the reimbursement form for my recent trip to Berlin arrived by email. The conference I attended was partly supported by Germany's Nationale Akademie der Wissenschaften (National Academy of Sciences), which means that travel expenses must conform to the Bundesreisekostengesetz ("German Federal Travel Expenses Act"). The best part of the reimbursement process is the special form for taxi fare, which states ""Costs for taxi rides are only reimbursable under exceptional circumstances such as urgent official activities or compelling private reasons." Specifically, travelers will be reimbursed for taxi fare only if: 1) "necessary official and personal baggage weighs more than 25 kg"; 2) there is no public means of transport and the destination is beyond walking distance (defined as 2 kilometers); 3) the wait time for public transport exceeds one hour; 4) health reasons; or 5) they are traveling between 11 PM and 6 AM. Note: the form also reminds you that "bad weather" or "lack of knowledge of a place" are not considered "exceptional circumstances."
I don't find this scrupulousness objectionable -- heck, forcing healthy people to walk a couple of kilometers might even be good for them, although making them do it in the rain or snow seems a bit heartless. But if this is how sensitive Germans are about taxi fare, you can see why they might be reluctant to bail out the billions of dollars of extra salaries and other indulgences that some of their Eurozone partners rang up over the past decade or more.
As it happens, I took only one taxi ride on my trip (from Logan Airport to my house), and I'm not going to ask for the money back. Call it my contribution to helping Europe get back on its feet. Not quite the Marshall Plan, perhaps, but one does what one can.
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So today I'm watching stock markets around the world go into
free fall, and the following set of thoughts struck me. For starters, what if the world economy hits a
"perfect storm?" The United States is already well on its way to a
"lost decade," mostly because the Bush administration created an
enormous mess and Obama, his advisors, and the Congress combined to do too
little back in 2009. Europe is still teetering on the brink of meltdown, and
some people have real concerns about China's overheated and opaque economy too.
And these problems are all connected, and not just by bad loans, credit-default
swaps, and the like. If any of these big economies heads back into recession,
that will slow the others and could -- in the worst case -- sends us spiraling
back down into the sort of economic tailspin not seen since the 1930s.
I am not an economist, and I have no idea how likely that "perfect storm" scenario is. But remember that what ultimately got the United States out of the Great Depression was World War II. Suddenly there was a war to win, and the American people didn't mind deficit spending and didn't mind devoting over 40 percent of GDP to defense. And they also accepted that sacrifices would be needed -- rationing, scrap drives, a draft, and the like -- and the war muted the partisan wrangling of the 1930s. That gigantic Keynesian stimulus finally got the economy roaring to life.
So here's my question: in the nuclear age, the danger of a World War II-style global conventional war is greatly reduced, and maybe even impossible. And even the most hard-edged realist would have trouble finding the equivalent of Nazi Germany or Imperial Japan in today's world (by comparison, the Islamic Republic of Iran, with a $10 billion defense budget that is less than 3 percent of U.S. national security spending, isn't remotely in the same league). So if the world were to fall into an economic abyss and a big conventional war is neither likely nor desirable (and let me make it clear that I think replaying World War II would be a VERY BAD THING), then how would we dig ourselves out? And how long would it take, especially when you consider just how dysfunctional, fact-free, and irresponsible our politics has become.
I have been distracted by personal concerns for the past week, and look what happens. The stock market is on a roller-coaster triggered mostly by political incompetence. There are riots in Great Britain, and large-scale protests are roiling Israel. Syria continues its bloody convulsions, our impulsive war in Libya grinds on, and the euro crisis looks no closer to solution. The United States suffers its single worst day in the long and misguided Afghan campaign. Add it all together, and 2011 is beginning to look like 1968 -- a year that violent upheavals occurred in the United States, France, Czechoslovakia, and elsewhere. Except that here the troubles are more widespread, more closely connected, and have more potentially far-reaching consequences.
What's most disturbing about all this is the extent to which so many of our current troubles are self-inflicted. It's obvious to any reasonably sane person how to get the U.S. economy back on track, the problem is that there's a dearth of reasonably sane people in positions of responsibility. Some of the seeds of the 2007-08 meltdown were sown during the Clinton administration (as Gretchen Morgenson and Joshua Rosner make clear in their terrific book Reckless Endangerment), but most of the damage was done by George W. Bush's foolhardy decision to cut taxes, start unnecessary wars, and then fight those wars badly. In short, the United States screwed up big-time between 2000 and 2008. As we all know from our personal lives: when you screw up, you generally have to pay a price.
That means that solving our current problems will not be easy or painless, and we should stop pretending that there's some magic bullet to fire at our current woes. Nonetheless, the basic outlines of what to do are hardly mysterious. We are in a fiscal hole and have a depressed economy, which means we owe lots of people lots of money and aren't generating enough revenues to make people confident that we can get back in the black. We need more revenue, therefore, but we don't want to choke the remaining life out of the U.S. economy.
Accordingly, the best place to get some more revenue is from the wealthiest members of society (who got those big tax cuts from George Bush and made out far better than the rest of America over the past decade or more, and whose consumption won't decline if some loopholes are closed and marginal tax rates rise modestly). I mean, are Bill Gates and Warren Buffett going to lower their thermostats and cancel their summer vacations if we make them pay a bit more?) We also need to trim some entitlements over time, and to cut our bloated defense budget (no matter what new Sec/Def Leon Panetta says). For starters, getting out of Iraq on schedule and out of Afghanistan ASAP would suggest that our leaders really do understand what's truly important and would be a reassuring signal to global markets. In short: a simple combination of entitlement reform, tax reform, and strategic readjustment and we will be on our way to ending the deficit, maintaining our credit rating, and setting the stage for long-term economic recovery.
Except that Washington won't do it. I used to wonder how political paralysis could lead Japan to experience a "lost decade," but we're about to do the same thing if we don't change course. Unfortunately, the GOP is in the hands of leaders who care more about regaining power than they do about the country, and held hostage by know-nothing Tea Party extremists for whom passion is a substitute for reasoning or thought. The White House hasn't helped either: it declared victory too soon on the economic front and thought it could continue "business as usual" in foreign and defense policy, with a better presidential salesman. And for some reason the most gifted presidential "communicator" since Ronald Reagan has been unwilling or unable to take his case to the American people.
What are these people thinking? I scan the political horizon, and I don't see anyone remotely like George Marshall, Dwight Eisenhower, or even Dean Acheson. We are in the midst of the biggest strategic challenge since the end of World War II, but where is our Kennan or Kissinger? Neither of them were infallible, but each had a genuine strategic vision for the United States, its position in the world, and the actions that needed to be taken to preserve vital interests. And make no mistake: what is needed now is a foreign policy that is based on a clear and hard-headed strategy, one that identifies key priorities, writes off liabilities, and marshals the relevant elements of power to preserve what is vital first and foremost. Instead, we get a foreign policy based on wishful thinking, lofty ideals, or an endless list of global projects offered up by policy wonks and special interest groups, along with more bad advice from the people who got us into our present circumstances. And the latest GOP presidential aspirant -- Governor Rick Perry of Texas -- seems to think that all our problems can be solved if we just pray hard enough. I don't want to tread on anyone's beliefs, but if that isn't a sign of desperation and policy bankruptcy, I don't know what is.
Lord knows that I don't have all the answers, but I used to think that at least a few people in positions of responsibility had a few. But at this point I'm beginning to wonder.
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Back in the good old days, American officials used to lecture other countries on how to reform their economies and how to be responsible players in the international economic order. Today, with U.S. credit-worthiness held hostage to a bunch of self-serving flat-earthers in the Republican Party, and with the management of the rest of the economy in the hands of lobbyists, too-big-to-fail banks, and politically-connected financiers or financially-connected politicos, it's to be expected that states like China would start lecturing us. Who can blame them?
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My vacation is drawing to a close, and as usual, I didn't get as much done as I'd hoped. I did bring my reading list along and I've made some progress on it, but then I got distracted re-reading Bob Woodward's Obama's Wars. It's even more depressing the second time around, insofar as it shows just how difficult it was for Obama and his advisors to get the national security establishment to think "outside the box" on the AfPak problem. And most of the warnings that were issued at the time -- that the "surge" wouldn't work in the absence of effective Afghan partners and genuine help from Pakistan -- seem to have been borne out.
Assuming Woodward's account is accurate, what is most striking is how most of the inside debate is about tactics rather than strategy. There are endless go-rounds about how many troops to send, what mix of counterterrorism vs. counter-insurgency to adopt, what deadlines to impose (or not), and how to try to elicit more cooperation from the Afghan and Pakistani governments. But there's not a lot of discussion of the broader strategic issues: is it a good idea for the United States to be constantly interfering in the lives of some 200 million Muslims in Central Asia? What are the fundamental sources of our terrorism problem, just how serious is it, and is it possible that the problem might diminish if we weren't meddling there (and elsewhere) and if we passed the buck to others and let them bear burdens in non-essential areas? These are strategic issues, and you don't get the sense from Woodward that these got much of an airing.
If you're intrigued by these larger questions, you should definitely read Paul MacDonald and Joseph Parent's "Graceful Decline: The Surprising Success of Great Power Retrenchment," from the Spring 2011 issue of International Security. Based on a comprehensive survey of 18 cases of great power decline (defined as situations where a great power's ordinal ranking of share of economic power changes for the worse), MacDonald and Parent show that declining powers are usually able to adjust their strategic commitments without significant harmful consequences. Money quotation:
Faced with diminishing resources, great powers moderate their foreign policy ambitions and offer concessions in areas of lesser strategic value. Contrary to the pessimistic conclusions of critics, retrenchment neither requires aggression nor invites predation. Great powers are able to rebalance their commitments through compromise, rather than conflict. In these ways, states respond to penury the same way they do to plenty: they seek to adopt policies that maximize security given available means. Far from being a hazardous policy, retrenchment can be successful. States that retrench often regain their position in the hierarchy of great powers. Of the fifteen great powers that adopted retrenchment in response to acute relative decline, 40 percent managed to recover their ordinal rank. In contrast, none of the declining powers that failed to retrench recovered their relative position.
If McDonald and Parent are right, it suggests that Obama & Co. erred when they decided to double down in Central Asia. After the debacle in Iraq and the 2007 financial crisis, the United States needed to take bold action to bring its global commitments in line with its resources. Obama wisely kept us on course out of Iraq (though not that quickly), but an ambitious new team of foreign policy wonks wanted their turn at running the world and did relatively little to put U.S. grand strategy on a more sustainable footing. Woodward's account of the debate on Afghanistan suggests that Obama and a few of his advisors understood the need to retrench in a general way (and Obama has repeatedly talked about the greater importance of "nation-building" at home) but they were unable or unwilling to make the hard choices necessary to pull of this adjustment or to impose that consensus on the entire national security establishment.
Retrenchment is going to happen eventually, I'm sure, just not nearly as fast as it should have.
I visited the National Library in Dublin last week, and spent an hour at a terrific exhibit on the life and works of W. B. Yeats. I've never been a big fan of Yeats's poetry (my tastes run more to Auden, Neruda, e. e. cummings, and Hardy), but some of his best works are undeniably brilliant. Like "The Second Coming," which is probably one of the most famous poems of the 20th century and one that seems uncannily relevant whenever we enter a turbulent period of global politics:
Turning and turning in the
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: somewhere in the sands of the desert
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Reel shadows of the indignant desert birds.
The darkness drops again; but now I know
That twenty centuries of stony sleep
were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?
I thought of that poem as I reflected this morning on recent events, and wondered if we are now witnessing the slow crumbling of the international order that has existed for decades. As I noted in an earlier post, after World War II the United States created and led a political, security, and economic order in nearly every corner of the globe, except for the communist world. The communist world eventually succumbed and became part of that order too, as first China and then Russia abandoned communism and adopted market economies and joined the various global institutions that had been designed and coordinated in Washington.
Looking back, a striking feature of the past two decades is that the central features of U.S. foreign policy and the basic Cold War institutions remained largely unchanged long after the Cold War ended. NATO is still around; our bilateral security ties in Asia haven't changed much, and we retained pretty much the same set of allies and policies in the Middle East. The United States continues to think of itself as the "indispensable power" and the Leader of the Free World (which is a bit ironic given our incarceration rate), and Democratic and Republican policy wonks spend most of their time debating how and where to use American power, but never questioning whether it was right or proper or wise to use it in lots of places. Despite an enormous set of structural changes, in short, the central features of U.S. foreign policy have remained quite constant.
The end of the Cold War -- and the brief "unipolar moment" that followed it -- just meant the United States could throw its weight around a bit more without worrying that a hostile great power might try to stop us. Instead, it was a combination of hubris, ignorance, and arrogance that led us into a series of costly quagmires, accompanied by a self-inflicted financial meltdown that stemmed from an equally toxic combination of arrogance and avarice.
But have those disasters brought us to the brink of a major shift in the global order? Is the familiar landscape of world politics in the process of being transformed? Consider the following:
1. The financial crisis has put the Eurozone under unprecedented stress, and the European Union's future looks increasingly bleak. Check out this piece from the Guardian here, and see how confident you are that the European Union will survive in its present form.
2. NATO looks more and more obsolescent. Its performance in Afghanistan has been disheartening and the recent war in Libya is a monument to NATO disharmony (because most NATO members aren't involved), as well as a revealing demonstration of just how weak the alliance is when it can't rely on the United States to do all the work. And does anyone seriously believe that the Libyan adventure will convince Europe to get serious about defense spending in the future? Not in this economic climate, and not when Europe really doesn't face major external threats.
3. The Arab world is in upheaval, and seems likely to remain unsettled for years. The United States has yet to formulate a clear policy towards this new situation, and contrary what the White House seems to think, having the President give another lofty speech is not a policy. Qaddafi's days may be numbered and the Assad regime in Syria looks like it's on borrowed time too, but what comes after either one is anyone's guess. Prospects for a smooth transition and economic turnaround in Egypt look equally dim.
But the key point is that the outcomes of these processes won't be determined by us; the United States lacks the resources, respect, and moral authority to shape the political future in any of these countries. Given our track record in the region in recent years -- and I include Obama's dismal post-Cairo performance -- why should anyone listen seriously to our views?
About 13 months ago, I returned from a visit to Greece and said I was increasingly pessimistic about prospects for a successful turnaround there. Money quotation (emphasis added):
In order to stave off default, Greece needs to trim its budget drastically (which means throwing people out of work or reducing their incomes), while at the same time stimulating economic growth. The problem is that it's hard to do both at the same time, because cutting the budget (or collecting taxes more efficiently) reduces domestic demand and thus chokes off economic growth. And because Greece is part of the Eurozone, it can't stimulate export-led growth by the normal expedient of devaluing its currency. (The sinking Euro helps globally, but not within the Eurozone itself.) Greece's prospects for economic growth are further handicapped by conditions elsewhere in Europe: It will be hard for Greece to grow if the rest of Europe is stagnant. If the government's efforts at restructuring lead to widespread political unrest, then chances of robust growth are even slimmer. And once the financial markets begin to realize all this, bond spreads will increase again and we will be back in the same soup we were in a few weeks ago.
All of which leads me to conclude that Europe as a whole is going to be in difficult shape for quite some time, unless EU officials figure out a way to do a lot more than they have done so far. And a double-dip European recession could trigger a double-dip recession here in the United States, which would have profound economic and political consequences (e.g., goodbye to Barack's second term?)."
Back then, I was surprised that anybody thought differently (i.e., that anyone believed the initial bailout would work). It didn't, of course, and Greece, the bankers, and the EU are now back in the soup. As the New York Times reports (my emphasis):
"Analysts and Socialist Party insiders said that Mr. Papandreou seems likely to succeed in passing the austerity package, having secured more support within the party. But economists are nearly unanimous in predicting the loans will only buy time, but do nothing to pull the country out of its economic morass and potential default.
Or as Ken Rogoff, co-author of a terrific study of financial crises ("This Time Is Different: Eight Centuries of Financial Folly), points out: "There is every possibility that at the end of this Greece is going to default anyway."
If that's true (and it sounds right to me) then Greece may have no alternative but to abandon the Euro and leave its creditors (and the Eurozone countries) to their fates. I'm no expert on these matters, but most of what I've read so far tells me that this would be very bad news for the European economy, and for us. But you can relax, because at least things are going well in Libya and Afghanistan and Pakistan and the Mideast and Japan and ...
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I had the privilege of delivering a keynote speech to the Naval War College's Current Strategy Forum on Wednesday, and you can find a video of the talk here.
The title of my talk was "The Twilight of the American Era," and my central point was that we are nearing the end of the unusual position of primacy that the United States has enjoyed since the end of World War II. In 1945, the United States produced about half of gross world product, we were a creditor nation with a trade surplus, and we had the world's largest armed forces and sole possession of atomic weapons. The Soviet Union had a large land army but not much else, and its economy was always decidedly inferior to ours.
This position of primacy allowed the United States to create, maintain, and lead a political-economic-security order in virtually every part of the world, except for the Soviet Union and Warsaw Pact itself. Not only did the United States play the leading role in institutions like the UN, IMF, World Bank, and GATT, but we also established a dominant security role in Europe through NATO and in Asia through bilateral treaties with Japan, Australia, South Korea, New Zealand and others. In the Middle East, the United States helped create and support Israel and also forged security partnerships with various Arab monarchies, thereby obtaining a predominant role there as well. U.S. hegemony was already well-established in the Western hemisphere, and though the U.S. didn't pay much attention to Africa, it did enough to preserve its modest interests there too.
Over the next forty years, this position of primacy was challenged on several occasions but never seriously threatened. The United States lost the Vietnam War but its Asian alliances held firm, and China eventually moved closer to us in the 1970s. The Shah of Iran fell, but the United States simply created the Rapid Deployment Force and maintained a balance of power in the Gulf. Israel grew ever-stronger and more secure, and Egypt eventually realigned towards us too. And then the Soviet Union collapsed, which allowed the United States to bring the Warsaw Pact into NATO and spread market-based systems throughout the former communist world.
This situation was highly unusual, to say the least. It is rare that any single power-let alone one with only 5 percent of the world's population -- is able to create and maintain a particular political and security order in almost every corner of the world. It was never going to last forever, of course, and three key trends are now combining to bring that era of dominance to an end.
The first trend is the rise of China, which discarded the communist system that had constrained its considerable potential and has now experienced three decades of explosive growth. China's military power is growing steadily, and as I and other realists have noted, this trend will almost certainly lead to serious security competition in Asia, as China seeks to limit the U.S. role and as Washington strives to maintain it.
The second trend is the self-inflicted damage to the U.S. economy, a consequence of the Bush administration's profligacy and the financial crisis of 2007. The United States faces a mountain of debt, the near-certainty of persistent federal deficits, and a dysfunctional political system that cannot seem to make hard choices. This situation does not mean the United States is about to fall from the ranks of the great powers, but the contrast with earlier periods -- and especially the immediate aftermath of World War II -- is stunning. Just look at our tepid response to the Arab spring and compare that with the Marshall Plan, and you get some idea of our diminished clout.
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If you're relaxing on Memorial Day and reflecting on the sacrifices that some of our fellow citizens have made to advance the common good, I have three suggestions for things to read. All are drawn from the Sunday New York Times, and together they paint a worrisome portrait of the challenges we face as a nation.
The first article, appropriately, is a portrait of several soldiers from the 1st battalion, 87th infantry and the challenges they face as they return from Afghanistan. Several have been wounded, one has seen his marriage dissolve, all of them face an array of medical problems or personal obstacles, and none seem to have bright prospects once they return. Together, their stories remind us that most of the people who have been fighting these wars aren't members of a privileged elite; quite the contrary, in fact.
The second article, by Gretchen Morgenson, summarizes a recent paper by Joseph Gagnon and Marc Hinterschweiger of the Peterson Institute of International Economics. Here the subject isn't the human cost of war; it is the economic consequences of a decade or more of American profligacy. The basic story is that our society has lived well beyond its means, and we will face a rising mountain of public debt -- in the best case rising to more than 150 percent of GDP by 2035 -- unless we "design a long-term plan to reduce fiscal deficits in the future." Gagnon and Hinterschweiger believe there is still time to ward off this gloomy scenario, but only political leaders are willing to make hard choices about entitlements, tax rates, and other forms of government spending (including defense).
And the third article is Robert Reich's review of a new book on the financial crisis: Reckless Endangerment, also by Gretchen Morgenson (the same) and Joshua Rosner. The book (which I have downloaded this but not yet read) is a portrait of some of the key individuals who helped create the environment in which the mortgage crisis and financial meltdown occurred. Here's the paragraph (by Reich), that caught my eye:
The real problem, which the authors only hint at, is that Washington and the financial sector have become so tightly intertwined that public accountability has all but vanished. The revolving door described in "Reckless Endangerment" is but one symptom. The extraordinary wealth of America's financial class also elicits boundless cooperation from politicians who depend on it for campaign contributions and from a fawning business press, as well as a stream of honors from universities, prestigious charities and think tanks eager to reward their generosity. In this symbiotic world, conflicts of interest are easily hidden, appearances of conflicts taken for granted and abuses of public trust for personal gain readily dismissed."
Reich is quite familiar with this world, having famously been a "Friend of Bill (Clinton)" from the latter's Oxford days, as well as faculty member at Harvard and Secretary of Labor in Clinton's first term. As someone who has been lucky enough to teach at prestigious universities, I've some experience with these interconnected webs of influence myself, though hardly at the highest reaches, and Reich's summary here rings true to me.
Put the three pieces together, and it makes somber reading for Memorial Day. For they remind us that the people who have engineered our biggest failings in recent decades -- including the wars in Iraq and Afghanistan-have largely escaped any of the consequences. Similarly, most of the people whose mistakes led to the financial meltdown have retained their wealth, status, and political power. And as we spend the next couple of decades digging ourselves out from these various messes (assuming that our sclerotic political system actually manages to make do something effective), it's ordinary Americans who will pay the biggest price. As usual.
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It's not as though the world came to a halt while the Egyptian drama was keeping us glued to our laptops, and at least one interesting development is worth watching closely for a number of reasons. You all know that the EU has been facing a major crisis over the past several years, triggered by deep economic problems in Greece, and to a slightly lesser extent in Spain and Portugal. These troubles forced the eurozone countries to authorize a major financial rescue package last year and led some observers to question whether the euro itself might be at risk.
Over the past few months, however, German Chancellor Angela Merkel and French President Nicolas Sarkozy have been negotiating a joint proposal for deepening economic coordination within the EU (and especially the eurozone) in an attempt to solve some of the problems that produced the crisis in the first place. (The basic issue is that the eurozone countries share a currency, but do not have fully integrated tax systems, labor markets, or fiscal systems, thereby making it much harder for them to adjust when one economy gets into trouble).
Not only does this question have obvious implications for politics and economics in Europe itself, but it also raises some fundamental questions about IR theory and might even be a revealing test of "realist" vs. "liberal" perspectives on international relations more generally. Realists, most notably Sebastian Rosato of Notre Dame, have been bearish about the EU and the euro since the financial crisis, arguing that European member states were more likely to pursue their individual national interests and to begin to step back from some of the integrative measures that the EU had adopted in recent years.
By contrast, institutionalists, and EU-philes more generally, have suggested that the only way forward was to deepen political integration within Europe. The basic idea here is that economic integration is central to European economic health and one of the keys to continued amity within Europe. Equally important, any attempt to leave the eurozone or to dismantle the euro itself would cause an immediate collapse of the currency (and plunge several European states into even deeper crisis). In this view, there's no going back; Europe can only plunge ahead toward closer integration.
As you'd expect, I've tended to be among the bears, in part because I don't think greater "policy coordination" between the member states can eliminate occasional fiscal crises and because I think nationalism remains a powerful social force in Europe. European publics won't be willing to keep bailing out insolvent members of the eurozone, and the integrative measures that have been proposed won't be sufficient to eliminate the need. The original Merkel-Sarkozy proposals got a pretty hostile reception when they were rolled out, and Merkel's hopes of pushing them through probably declined when her designated choice to head the European Central Bank (Axel Weber) withdrew from consideration. So it remains to be seen how much of their program will actually get adopted.
But the EU has surprised doomsayers before, and I can't quite convince myself that a collapse of the eurozone is inevitable. So what we have here is a nice test of two rival paradigms, and students of international politics should pay close attention to how this all plays out. But remember: Like all social science theories, no general theory of international politics or foreign policy is right 100 percent of the time. Accordingly, the future evolution of the EU/eurozone won't provide a decisive test that will validate one approach completely and render the other view totally irrelevant and obsolete. Proponents of each perspective will probably try to claim total victory if events turn their way, but that's not really the way that social science operates.
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I'm back in Singapore for the first time in nearly two years, and what a difference two years can make. Back in 2009, Singapore was reeling from the after-effects of the global recession, which hit its trade-dependent economy particularly hard.
The island nation has regrouped quickly, however, and its economy reportedly grew by an astonishing 17.9 percent in the first half of 2010. The harbor is chock-full of ships again, construction is proceeding apace, and the government expects robust growth to continue.
I don't want to go all "Asian values" on you, and comparing Singapore's economy with that of the United States is risky at best. But I've been reading a few books and articles on the endemic corruption (or if you prefer, criminality), embedded within the United States political/economic system (and watching documentaries about it too). And it made me wonder how much this feature might have to do with the varying trajectories of the two countries.
Case in point: today's Herald Tribune reports that Goldman Sachs has concluded that there's nothing really wrong with how it does business. To quote the print version (not the online edition) Goldman decided "its operations need only a fine-tuning, not a complete overhaul." Hmmmm. I don't know about you, but when a major investment bank has to get bailed out by the American taxpayer, and just paid a $550 million fine to settle civil fraud charges (not the first time Goldman has had to do something like this, by the way), one might reasonably conclude that there were more fundamental problems involved. Not from the point of view of Goldman's present profits, perhaps, but from the point of view of what is good for the society as a whole. And the problem seems to be that maximizing political influence is as much a part of Goldman's business model as the pursuit of economic gain itself.
Mind you, I'm not an economist, and I'm sure there are legions of people out there who would be quick to leap to Goldman's defense. And I'm not really picking on Goldman, because the financial meltdown of 2007-2008 suggested that the rot was far more widespread. Instead what troubles a layperson like me -- and maybe ought to worry you, too -- is that we've just lived through the most significant global recession since the 1930s but don't seem to have learned much in the process. That recession was triggered by malfeasance in mortgage and financial markets, and yet not much seems to have been done to create new arrangements that would prevent something similar from happening again. And the main reason isn't conceptual or economic but political: financial interests give a ton of money to politicians, and -- surprise, surprise -- those same politicians tend not to take actions that these donors oppose, like significantly tighter financial regulations.
Singapore is far from a perfect society, and as I said at the outset, direct comparisons between its situation and that of the United States are somewhat dubious. But I can't help but wonder if maybe we could learn a few things about political economy from them. Like not letting private money play an enormous role in politics, and paying civil servants enough so that more of our best brains choose public service over Wall Street.
I wouldn't call it a "shellacking," but President Barack Obama's trip to Asia wasn't a stunning triumph either. He got a positive reception in India -- mostly because he was giving Indians things they wanted and not asking for much in return -- and his personal history and still-evident charisma played well in Indonesia. But then he went off to the G-20 summit in Seoul, and got stiffed by a diverse coalition of foreign economic powers. Plus, an anticipated trade deal with South Korea didn't get done, depriving him of any tangible achievements to bring back home.
What lessons should we draw from this? The first and most obvious is that when your own economy is performing poorly, and when you are still saddled by costly burdens like the war in Afghanistan, you aren't going to have as much clout on the world stage. After half a century or more of global dominance, some Americans may still expect the president to waltz into global summits and get others to do what he wants (or at least most of it). But that is harder to do when you've spent the past ten years wasting trillions (yes, trillions) in Iraq and Afghanistan while other states were building their futures, and have dug yourself into a deep economic hole.
Second, the geopolitics of the trip are important, as Robert Kaplan lays out in a good New York Times op-ed this morning. I don't agree with everything he says (in particular, I think getting out of Afghanistan would reduce the need to accommodate Pakistan and simplify efforts to forge a closer relationship with India) but most of his points ring true to me.
Third, the other event this week was yet another flap between the United States and Israel, and it's not as unrelated to the situation in Asia as you might think. At about the same time that Obama was making yet another eloquent speech about the need to improve relations between the United States and the Muslim world, Israel was announcing still more construction in East Jerusalem. Just what Obama needed, right?
When Obama said this step was "counterproductive" (now there's tough language!), Israeli Prime Minister Benjamin Netanyahu retorted that "Jerusalem is not a settlement; it is the capital of Israel." In fact, Israeli construction in East Jerusalem is no different than a settlement in the eyes of the rest of the world, because no other government recognizes Israel's illegal annexation of these lands.
And then what happened? Netanyahu sat down for nearly a full day of talks with Secretary of State Hillary Clinton, who proceeded to say (for the zillionth time), that the U.S. commitment to Israel's security was "unshakeable." She then declared that the U.S. position on future talks will seek to "reconcile the Palestinian goal of an independent and viable state, based on the 1967 lines, with agreed swaps, and the Israeli goal of a Jewish state with secure and recognized borders that reflect subsequent developments and meet Israeli security requirements" (my emphasis).
Translation: the Obama administration is back in business as "Israel's lawyer," and the man who first coined that phrase -- former U.S. negotiator Aaron Miller -- said as much, referring to Clinton's statement as "the beginning of a common U.S.-Israeli approach to the peace negotiations." Given that Netanyahu has made it clear that East Jerusalem is not negotiable and that his own vision of a two-state solution is a set of disconnected Palestinian statelets under de facto Israel control, this is not an approach that is going to lead anywhere positive. And like his Cairo speech, Obama's remarks in Indonesia will soon be dismissed as more empty phrases.
So where's the connection between this issue and our strategic position in Asia? Indonesia is a potentially crucial partner for the United States (if you want to see why, take a look at the sea lanes in Southeast Asia), and it is also a moderate Muslim country with history of toleration. Yet the Palestinian issue resonates there too, and makes it harder for the Indonesian government to openly embrace the United States. As Kaplan notes in his Times op-ed, "China also plays on the tension between the West and global Islam in order to limit American influence there. That is why President Obama's mission to rebrand America in the eyes of Muslims carries benefits that go far beyond Indonesia and the Middle East."
What Kaplan doesn't say is that the United States' one-sided support for Israel against the Palestinians is an important source of the "tension" that China is exploiting. As the deputy chairman of Indonesia's largest Islamic group, Masdar Mas'udi, put it last week: "The solution of the Palestine problem is key to many problems between the West and the Muslim world… Our hope as Muslims to Obama and the U.S. is not unreasonable: If the Palestine problem could be resolved, it would be more than enough."
So the next time you read about some senator or congressperson denouncing any attempt to use U.S. leverage on both sides to bring about a solution to the Israeli-Palestinian dispute, ask yourself why they are trying to undermine the U.S. effort to bolster its strategic position in a region that ultimately matters far more to U.S. security and prosperity. And by making it harder to achieve a workable two-state solution that would preserve its democratic and Jewish character and enhance its international legitimacy, they aren't doing Israel any favors either. Indeed, the remarkable thing about these zealots is that they are managing to undermine the United States' security and Israel's long-term future at the same time.
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The Council on Foreign Relations is not the first place I look for outside-the-box thinking, but can be a useful weather-vane marking shifting attitudes within the establishment. And on that score, two articles in the upcoming issue of Foreign Affairs merit your attention.
The first article, entitled "American Profligacy and American Power," is by former Deputy Treasury Secretary Roger Altman and Council President Richard Haass. It is telling indictment of past policy errors that have undermined American power, and it is refreshing that Altman and Haass outline the strategic implications clearly. Some money quotations, with my emphasis added:
One way or the other, by action or reaction, there will be a profound shift in U.S. fiscal policy if the U.S. government continues to overspend. Deficits will be cut sharply through a combination of big spending cuts, tax increases, and, quite possibly, re-imposed budget rules. No category of spending or taxpayers will be spared."
But the impact of the United States' skyrocketing debt will not be limited to the behavior of markets or central bankers. Federal spending will decrease once the inevitable fiscal adjustment occurs, and defense spending will go down with it. …
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Back on Sept. 16, I gave a lecture at Cornell University's Einaudi Center for International Studies. The title was "Doomed to Fail: The Foreign Policy of Barack Obama," and in it I elaborated a number of themes that I've also addressed in several blog posts, including this one and this one. The audience was attentive, the questions were excellent, and I especially enjoyed my conversations with Cornell students afterward.
One member of the audience took issue with my central theme during the Q and A, and offered a perceptive alternative analysis. He argued that I hadn't given Obama sufficient credit for staving off an even deeper collapse of the U.S. and world economy, and he reminded me and the audience that Obama inherited an economy in free-fall. Back then, a lot of people were genuinely worried that we were headed toward a 1930s-style global depression. We seem to have avoided that fate -- knock wood-at least so far.
The questioner also pointed out (correctly) that a further melt-down would have caused great human misery and had poisonous effects on politics at home and abroad, fueling even more xenophobia, conspiracy theorizing, and nativism than we have already seen. And if that had happened, then the failures that I had focused on in my talk (Afghanistan, Israel-Palestine, Iran, China, etc.) would have seemed like minor problems by comparison.
On the whole, I thought he made a very good point. Although I had begun my talk by describing the mess the Obama inherited -- including the economic downturn -- I hadn't given him enough credit for the economic measures undertaken at the very outset of the administration. Critics may be right that he should have done more to rein in Wall Street, pushed for a bigger and less pork-driven stimulus, etc., but the fact remains that we didn't tumble totally into the abyss, and we've already forgotten how worried everyone was back then.
The problem Obama faces, alas, is that you don't get much political credit for preventing non-events. He'd be blamed if the 2008-09 depression had gotten worse, but he gets no applause for preventing any number of Very-Bad-Things-That-Might-Have-Occurred-But-Didn't. In addition to the Even-Greater Depression of 2009, other non-events include the 2009 Israeli attack on Iran, the Venezuelan-Colombian border war of 2010, and al Qaeda's successful attack on Yankee Stadium last week. I could go on but presumably you get the point: we're not very good at giving our leaders credit for the bad things that don't happen on their watch. And to be fair, that goes for Obama's predecessor too.
I've been perfectly happy to criticize Obama & Co. when I thought they were making mistakes, but my critic's question reminded me that we ought to give them credit where's it due. Hence this post.
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Back in 2005, I wrote an op-ed in the Financial Times on the value of having a reputation for competence. My inspiration was the lame U.S. response to Hurricane Katrina, and I argued that one ingredient in U.S. global influence was other states' perceptions that Americans knew what they were doing, would deliver as promised, and would get the job done. The Marshall Plan, the moon landing, and other straightforward displays of competence reinforced America's material power and made other leaders more inclined to listen to our advice. By contrast, repeated blunders lead other states to doubt our wisdom or our capacity to deliver, and make them more inclined to tune us out. You can read it here.
I was reminded of that piece this morning, when I read about all the problems India has experienced trying to prepare for next week's Commonwealth Games. The obvious contrast is with the Beijing Olympics, which were intended to demonstrate Chinese efficiency and competence, and clearly did just that. By coincidence, Tom Friedman picked up on the same theme is his column today, and made some invidious comparisons with America's current situation.
How competent do we look these days? Although the United States is still an attractive society in many respects, one doesn't get the sense that others are dazzled by how competent we are. The 2008 economic meltdown made Wall Street look inept or corrupt (or both), and the endless partisan squabbling in Washington isn't going to impress foreign audiences either. And as I've harped on before, our foreign policy record in recent years is mostly a litany of failures, and I don't expect it to improve much in the near future.
A big part of the problem, however, is that the United States has chosen to do a few things that are very difficult, and where failure is to be expected. Like nation-building in Iraq and Afghanistan. Trying to occupy and govern foreign societies that are rife with internal divisions, where there is a well-founded hatred of foreign intruders, wouldn't be easy for anyone. Indeed, trying to create a political system there based on our historical experience rather than theirs has got to be one of more ambitious -- if not utterly misguided -- objectives that Washington could have picked.
You don't see the Chinese trying to do anything silly like that, which may be one reason they are looking more competent these days. (I'm not saying they actually are, however, because China's own development plans have some significant downsides too). But no matter how much we try to spin the story ("the surge worked!") our dismal record in Iraq and Afghanistan makes the United States look like it doesn't really know what it is doing. Why should anyone follow the U.S. lead anymore, if this is where it gets you?
The solution is not to retreat into isolationism and cede the initiative to others. Rather, the solution is to remind ourselves what American power is good for, and avoid taking on tasks for which it is ill-suited. The United States is very good at deterring large-scale aggression, and thus good at ensuring stability in key regions. (That assumes, of course, that we aren't using that same power to destabilize certain regions on purpose). We are sometimes good at brokering peace deals -- as in Northern Ireland and the Balkans -- when we use our power judiciously and fairly. And we've often done a pretty fair job -- in concert with others -- at encouraging intelligent liberalization of the world economy. The United States is not very good at governing foreign societies, especially when the local inhabitants don't want us there and when we have little understanding of how they work. And if we keep trying to do this sort of thing, we're likely to look inept far more often than we look effective.
In short, regaining an aura of competence isn't just about trying harder, or restoring the work ethic and "can do" attitude that we associate (rightly or wrongly) with earlier eras. It also entails picking the right goals and not squandering time, money and lives on fool's errands.
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I had dinner a couple of weeks ago with a group of Harvard colleagues (and a visiting speaker), and we got into an interesting discussion about America's future as a world power. Nobody at the table questioned whether the United States was going to remain a very powerful and influential state for many years/decades to come. Instead, the main issues were whether it would retain its current position of primacy, whether China might one day supplant it as the dominant global power, and whether U.S. standards of living would be significantly compromised in the future.
One participant (a distinguished economist), was especially bullish. He argued that the United States enjoyed a considerable demographic advantage over Europe, Russia, and Japan, largely due a higher birth rate and greater openness to immigration. These societies will be shrinking and getting much older on average, while the United States will continue to grow for some time to come. He also argued that the United States remained far more entrepreneurial than most other societies, and a better incubator of technological innovation. Despite our current difficulties, therefore, he was optimistic about the longer-term prospects for the U.S. economy and for America's position as a global power.
But then came the crucial caveat. After reciting this long list of American advantages, my colleague remarked: "of course, our political system could screw it all up." And everyone around the table nodded in agreement.
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The following commentary is by Professor Sebastian Rosato of Notre Dame University, who offers a decidedly pessimistic take on the EU's future. His new book, Europe United: Power Politics and the Making of the European Community, will be published by Cornell University Press in January 2011.
The Untied States of Europe
by Sebastian Rosato
Everyone, it seems, has an opinion about Europe's debt crisis. Optimists, such as Princeton political scientist Andrew Moravcsik, declare that "it is too soon to count Europe out." The European Union has survived plenty of crises in its time and will get through this one as well. Pessimists like Harvard historian Niall Ferguson disagree, arguing that what has happened in Greece is likely to happen elsewhere. To his mind, Europe could be on the verge of a "disastrous Europewide banking crisis" that has the potential to bring down the euro.
Given the amount of ink spilled on the Greek drama, it's easy to lose sight of the real tragedy here. Regardless of how the EU navigates the current mess, the dream of a United States of Europe -- a political, military, and economic union from Lisbon to Latvia and the Baltic to the Balkans -- is over. What most people don't realize is that this has been the case for almost twenty years.
Nothing can be done to salvage the dream because deep structural forces are at work. The Europeans formed their union during the cold war to counter the awesome power of the Soviet Union. So when the USSR collapsed in 1991 there was suddenly no need for a United States of Europe.
The events of the past two decades show clearly that the end of the cold war also signaled the end of the European dream. EU member states have made no significant move toward political or military union and have begun to unravel their economic union. Absent a serious external threat to Europe, this process will continue. In the future, the current crisis will be remembered as just another warning sign that the dream was ending.
Although calls for a European union go back centuries, they were never seriously entertained before 1945. Nation states like France and Germany jealously guarded their sovereignty -- their right to independence.
It was only in the context of the cold war that the Europeans took a big step toward creating a United States of Europe. In 1951, France, Germany, Italy, and the Benelux states created the European Coal and Steel Community. In 1957, they extended the coal and steel model to the whole economy by forming the European Economic Community. Then, determined to preserve their new trading bloc, they fixed their currencies through the European Monetary Agreement. In less than a decade, they had established an economic union.
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Back in September, I said I wished the Obama administration wasn't required by law to submit a formal statement of its “National Security Strategy.” I said this in part because I think such efforts are mostly a waste of time, but also because I thought it might be better not to be too explicit about the adjustments forced upon Obama by the Bush administration’s errors and the 2008 recession. So I suggested that they try to make the report as boring as possible.
The new National Security Strategy was released yesterday, and the usual parsing of its prose is now underway. (You can find other reactions here, and here, and an inteview with the report's primary author, Ben Rhodes, here.) I doubt Rhodes and his colleagues were trying to take my advice, but they have succeeded in producing a document that could make even the most dedicated foreign policy wonk’s eyes glaze over. I haven’t done a word count compared to the Clinton or Bush versions, but I’d bet this one is substantially longer. It’s certainly duller. None of the earlier reports deserved prizes for clarity, consistency, or rhetorical achievement, but the new version manages to make the drama of world politics positively enervating. Given my earlier recommendation, I guess congratulations are in order.
So having struggled through it, what are my first impressions? Let me start by saying that it's hard for me not to like a report whose first page says "to succeed, we must face the world as it is." It then goes on to say that "we need to be clear-eyed about the strengths and shortcomings of international institutions that were developed to deal with the challenges of an earlier time." I read that and almost thought that somebody had screwed up and let a realist into the drafting room.
But I kept reading, and soon realized that this was not the case. Although the report reflects certain broad realities, it ignores plenty of others. It offers the usual bromides about NATO’s position as the “cornerstone” of U.S. engagement, for example, but takes no notice of the economic difficulties that will inevitably reduce Europe’s ability to be a substantial partner. It talks about the continued "pursuit" of Middle East peace, but is silent on what the administration has learned after eighteen months of trying. It offers a predictably upbeat view of our strategy in Central Asia without acknowledging the possibility that our efforts won’t succeed. Needless to say, that is not quite "facing the world as it is."
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The last thing I want to do is write anything that might spook the markets, but I don’t think anybody will take my views on finance or economics so seriously as to spark a run on Wall Street.
I say this because I just got back from Athens and I spent much of my travel time reading Liaquat Ahamed's terrific book Lords of Finance: The Bankers Who Broke the World. Taken together, the trip and the book have reinforced my pessimism about Greece's prospects of reversing its economic slide, and my concern that this situation will have significant negative repercussions elsewhere. The problem, as others know far better than I do, is that it will be very difficult for Greece to rescue its position despite the recent EU/IMF rescue package.
In order to stave off default, Greece needs to trim its budget drastically (which means throwing people out of work or at reducng their incomes), while at the same time stimulating economic growth. The problem is that it’s hard to do both at the same time, because cutting the budget (or collecting taxes more efficiently) reduces domestic demand and thus chokes off economic growth. And because Greece is part of the Eurozone, it can’t stimulate export-led growth by the normal expedient of devaluing its currency. (The sinking Euro helps globally, but not within the Eurozone itself.) Greece’s prospects for economic growth are further handicapped by conditions elsewhere in Europe: It will be hard for Greece to grow if the rest of Europe is stagnant. And if the government’s efforts at restructuring lead to widespread political unrest, then chances of robust growth are even slimmer.
And once the financial markets begin to realize all this, bond spreads will increase again and we will be back in the same soup we were in a few weeks ago. All of which leads me to conclude that Europe as a whole is going to be in difficult shape for quite some time, unless EU officials figure out a way to do a lot more than they have done so far. And a double-dip European recession could trigger a double-dip recession here in the United States, which would have profound economic and political consequences (e.g., goodbye to Barack’s second term?).
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For the past 500 years or so, world politics has mostly been driven by the actions and priorities of the transatlantic powers (aka "the West"). This era began with the development of European colonial empires, which eventually carved up most of the globe, spread ideas like Christianity, nationalism and democracy, and created many of the state boundaries that still exist today. (They also screwed a lot of things up in the process). Although other actors (e.g., Japan) played significant roles too, especially after 1945, the transatlantic community (broadly defined) had been the most important set of players for centuries.
Europe's decline after World War II was immediately followed the era of American liberal internationalism. With NATO and Japan as junior partners, the United States underwrote a variety of global institutions (mostly of its own making), maintained a vast array of military bases, waged and won a Cold War, and sought-with varying degrees of enthusiasm and success-to spread core "Western" values and institutions to different parts of the world.
I don't want to go all Spenglerian on you (or even Kennedy-esque) -- but I'm beginning to think this era is essentially over, and that we are on the cusp of a major shift in the landscape of world power. Asia's share of world GDP already exceeds that of the United States or Europe, and a recent IMF study suggests it will be greater than the United States and Europe combined by 2030. Europe has already become a rather hollow military power, and the current economic crisis is going to force European states-and especially the United Kingdom -- to cut those capabilities even more. Needless to say, hopes that the euro might one day supplant the dollar look rather hollow today. Politics within many European countries is likely to get nasty as austerity kicks in, and there will inevitably be less money and less support for Europe's various philanthropic projects in Africa, Central Asia, or the Middle East. Such activities won't disappear entirely, but it's hard to see how they can continue at anywhere near their current levels.
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I'm beginning to think that what’s happening in Europe these days is really critical, in the sense that it will have large and lasting ramifications no matter how it turns out. Europeans were feeling their oats a few years back, and starting to talk in lofty terms about the strength of their common currency, their unique ideas about "civilian power," and their plans for defense integration and a common foreign and security policy. The EU was expanding, major neighbors like Turkey were knocking on the door, and the United States was shooting itself in the foot in Iraq and elsewhere.
Today, however, Europe's prospects don't look quite so bright. European officials have finally gotten around to assembling a rescue package for Greece (remember when a trillion dollars was a lot of money?) and this belated action seems to have quieted markets for awhile. But it remains to be seen if Europe’s problem children (Greece, Portugal, Spain, Ireland) will be able to raise taxes and cut budgets enough to make themselves solvent again. If not, then the rescue package will just have kicked the problem down the road, and we will face a renewed crisis a year or two from now. And if that happens, don’t expect another bailout.
In the past, Euro-optimists like Princeton’s Andrew Moravcsik have argued that crises like this just make Europe stronger, by forcing it to get its house in order and strengthen the relevant supra-national institutions. Maybe, but I’d be more convinced if my friend Andy hadn't described Europe as being "stronger than ever" last August (i.e., well before this latest crisis hit). Meanwhile, voters in Germany just delivered a sharp rebuke to Chancellor Angela Merkel and the Christian Democrats, sending a clear message that their support for costly bailout packages is not infinite.
The larger problem is longer-term. Europe’s population is declining and aging, which means that a smaller number of workers will have to pay for welfare benefits for an ever-growing number of retirees. Cutting benefits will be politically difficult, raising taxes is always hard, and immigration won’t bring in many of the skilled and highly productive workers that Europe needs. The latter step also creates cultural frictions. Maybe the well-off countries can jettison Greece et al from the Eurozone (thoug not the EU), but to do this would be to enshrine inequality within the EU itself and would be a major step backward. No doubt Europe will find a way to muddle through, but austerity will be the watchword for some time to come.
In any case, whether Europe grows closer together or begins to spin apart, it’s going to carry a lot less weight in world affairs in the next few decades. Its population is shrinking and aging, its military power is increasingly hollow, and it’s going to be short on money for years to come. If U.S. officials think they are going to get a lot more help from NATO in the decades ahead, they are living in a dream world.
So here’s my question: will NATO's new “Strategic Concept,” currently being formulated for presentation at the NATO summit next fall, reflect this emerging reality? Will it openly acknowledge that Europe is not going to commit more resources, and identify a set of (fairly modest) common goals that the alliance actually has some chance of achieving? Or will it contain the usual pious declarations of transatlantic solidarity, along with various empty pledges that everyone knows are no more than polite fictions?
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I'm in Athens at the moment, attending an Economist conference on "What is Shaping the Global Agenda?" My task, in case you're curious, was to offer an American perspective on the global foreign policy agenda, in fifteen minutes or less. I focused on four issues: climate change, the changing balance of power, Israel-Palestine, and global nuclear security. I may not have offered many bold new insights, but at least I didn't exceed the time limit. And if you want to know the basic line I took, read this.
Not surprisingly, the big topic in most of the conversations (and many of the sessions) is the Greek financial crisis and its broader implications. There's been a pretty clear consensus from the people here that I've talked with (most of them from the business community): 1) yes, there will be a bailout, 2) it will probably work; 3) Greece's situation is mostly of its own doing (poor investment choices, ineffective tax system, padded public budgets, fatal combination of persistent deficits and falling competitiveness, etc.) and 4) the whole mess raises big questions about the EU.
I am hardly an expert on financial markets (though like a lot of other Americans, I've gotten more interested in them since 2008!) so I have no great wisdom to impart on the origins of Greece's troubles or the specific nature of the rescue package that is now being assembled. But it seems to me that this crisis is a serious body blow to the European Union itself. The EU can point to plenty of successes over the years, but the combination of continued expansion and the creation of a common currency back in 1995 now looks like an exercise in hubris.
The central problem, as plenty of people pointed out, is that EU didn't create the right institutional machinery when it created a unified currency. Once states give up their own currencies, they can't deal with financial or fiscal crises by devaluation. With that flexibility lost, the EU needed far more centralized economic authority (e.g., a true European central bank and a centralized European tax system) to make things work properly. As one banker told me here, it would be no problem if Europe were really one country and Greece was just a poorer province. But Europe's member states refuse to give up those powers, and so the stability of the euro rested on the naive assumption that all the member states would follow the rules and stay within certain fiscal targets. This was like assuming that it would never rain, or that at least everyone would always be carrying their own umbrella. Or as one European academic recently put it: European monetary union was "not ready for bad weather."
Indeed, as Steven Erlanger points out here, it's been a pretty tough couple of years for the EU. It didn't cover itself with glory in response to the 2008 recession, and the EU had no mechanism for dealing the volcanic eruption in Iceland that snarled air traffic all over Europe. Instead, what we got was a confused array of poorly-coordinated national policies. And then Greece had to turn to the IMF rather than its European partners to arrange a proper restructuring program.
Among other things, these events cast further doubt on the possibility that Europe will ever speak with one voice on foreign policy. By creating a president of the European Council and a High Representative for the Union of Foreign Affairs and Security Policy, the Lisbon Treaty of 2007 was supposed to be a step in that direction. In reality, however, foreign policy (including economic policy) remains primarily the prerogative of national leaders, with all the potential for division and delay that this implies.
There are in theory two ways that the EU could go in response to these events. One possibility is that these recent failures will eventually prompt a further expansion of all-European institutions. This view is the modern version of old-style functionalism: if Europe needs certain institutions to work properly, it will eventually create them.
The second possibility-which I'd deem more likely -- is that we have in fact seen the high-water mark of the EU project. Nationalism is still alive and well in Europe, the Cold War is over and there is thus less need for unity against an external threat, Germany is gradually shedding its post-World War II reticence, and the consequences of over-expansion and excessive ambition have been fully exposed. I'm not saying the Union is headed for the dust-heap of history or anything like that (no bureaucracy goes out of business that quickly, especially when there are thousands of pages of laws involved), but a significant consolidation of power in the near future seems most unlikely.
Given that the EU Union has been one of the more interesting political experiments in recent decades, this is going to be fascinating to watch. Time for IR theorists to place their bets?
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People like me tend to focus on problems, mostly because we are interested in finding ways to address them and thereby improve the human condition. Nonetheless, we should occasionally remind ourselves that all is not doom-and-gloom. In fact, there are plenty of reasons to be cautiously optimistic about the state of the world today, and maybe even about the future. The overall level of global violence is at historic lows (despite some tragic conflicts that still defy solution), the world economy has done very well over the past half-century (despite its recent problems) and life expectancy, public health, and education levels have risen dramatically in many parts of the world (though conditions in a few places have deteriorated badly).
So Cassandra-like pessimism may not be appropriate, even for a realist. Nonetheless, I am beginning to wonder if our ability to deal with various global problems is decreasing, mostly due to the deterioration of political institutions at both the global and domestic level. Here are some tentative thoughts in that direction.
One way to think about the current state of world politics is as a ratio of the number of important problems to be solved and our overall "problem-solving capacity." When the ratio of "emerging problems" to "problem-solving capacity" rises, challenges pile up faster than we can deal with them and we end up neglecting some important issues and mishandling others. Something of this sort happened during the 1930s, for example, when a fatal combination of global economic depression, aggressive dictatorships, inadequate institutions, declining empires, and incomplete knowledge overwhelmed leaders around the world and led to a devastating world war.
Human society is not static, which means that new challenges are an inevitable part of the human condition. New problems arise from the growth of societies, from new ideas, from our interactions with the natural world, and even from the unintended consequences of past successes. As a result, policymakers are always going to face new problems, even when the old ones remain unresolved.
Moreover, a key feature of contemporary globalization is that today's problems tend to be more complex and more far-reaching, and tend to spread with greater speed. A volcano in Iceland disrupts air travel in Europe. A failed state in Afghanistan nurtures a terrorist network that eventually strikes on several continents. The Internet doesn't even exist in 1990, but now it empowers democratic forces, facilitates commerce and intellectual exchange, and enable extremists to recruit supporters and transmit tactical advice all around the world. The HIV virus emerges in Africa and eventually infects millions of human beings on every continent. Bankers in America's mortgage industry makes foolish and venal decisions, and a global financial collapse wipes out trillions of dollars of wealth and affects the lives of billions of people, some of them dramatically. Human beings in the developed world burn carbon fuels for a couple of centuries and now poor countries on the other side of the world face the risk of widespread coastal flooding (or worse) in the decades ahead. In short, the numerator of our critical ratio -- i.e., the rate at which big problems are emerging-seems to be rising.
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Stephen M. Walt is the Robert and Renée Belfer professor of international relations at Harvard University.