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.  

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.

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.

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.

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.

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.

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 ...

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.

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.  

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 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.

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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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?).

Read on

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?