The Transatlantic Century
by C. Fred Bergsten, Peterson Institute for International Economics
Op-ed in The Washington Post
April 25, 2002
© Washington Post
The President of the United States and the leadership of the European Union will hold their regular semiannual summit in Washington on May 2. Even the closest observers of world affairs are blissfully unaware of these sessions. The chief outcome of one of their recent meetings was an agreement to consider the adoption of new winemaking standards.
This picture would be comic if it did not represent such a wasted opportunity. The United States and Europe are the world's only economic superpowers. They are crucial both to each other's prosperity and to the stability of the world economy as a whole. They need to start thinking of themselves as an informal "G-2" steering committee for the global system rather than as petty antagonists over bananas, steel, and other minutiae. Such a transformation would help blunt charges of "American unilateralism" as well as bring substantial economic benefits to all.
Fundamental changes in the world economy call for such a new mindset. Japan seemed a likely member of the leadership committee, and even a dominant player, a decade ago. It failed to assume global responsibilities commensurate with its economic weight when it had the chance, however, and its decade of severe decline and rapidly aging population now raise serious doubts about its leadership in East Asia let alone its worldwide position.
China is the rising power in economic as well as strategic terms. It is still a very poor country and far from being a full market economy, however, let alone a political democracy. Its capacity for global leadership is probably a decade or two away.
Meanwhile Europe has become virtually the economic equal of the United States. Its population is larger than ours and its total output is only 20-25 percent smaller. Our external trade levels are identical. The combined monetary reserves of its members are much larger than our own. The creation of the euro, which will eventually rival the dollar, further promotes the integration of Europe into a single economy.
On issues where Europe speaks with a single voice, and has thus been able to translate its economic weight into negotiating leverage, a "G-2" already exists. The best example is trade, where the European Commission has represented Europe since the creation of the original Common Market. Both sides of the Atlantic have thus held veto power over global trade policy for about four decades. The great liberalization and rule-making advances of the postwar period—the Kennedy Round, Tokyo Round and Uruguay Round in the World Trade Organization—could proceed only when the "G-2" agreed.
Even on trade, however, the United States and Europe seldom behave like responsible systemic leaders. They did get together at the recent WTO Ministerial in Doha to launch new multilateral negotiations, reversing the disastrous failure at Seattle in 1999. But their incessant and growing battles over agriculture, aircraft, bananas, beef, dispute settlement modalities, genetically modified products, mergers policy a la GE-Honeywell, regional preferential deals, retaliation methods, sanctions, steel, subsidies, tax policy and many others threaten trade war rather than promise systemic improvement.
These trade-related issues represent only a piece of the acute transatlantic differences on economic issues, many of which have broader security and foreign policy ramifications. There is a basic split over energy, with America's fixation on low prices and gas guzzlers confronting Europe's revealed preference for much higher prices and conservation. There are closely related disputes over the environment, with Europe moving to implement the Kyoto Convention to combat global warming which the United States has denounced.
International finance is another traditional area of sharp conflict (along with periodic cooperation). Despite President Bush's laudable pledge to sharply increase US foreign aid, European levels are about three times as great and breed resentment over inadequate "burden-sharing" by America. A sharp disagreement over World Bank lending policies has held up replenishment of its funding for the world's poorest nations.
Most importantly, the huge US trade deficit means that the United States must attract about $500 billion of financing from the rest of the world every year to balance its books. That imbalance reflects a sizable currency misalignment between dollar and euro that will require intensive and cooperative management at some early point rather than today's "benign neglect" of both. The alternative is an outbreak of trade protection and a dollar crash that is probably the greatest single threat to continued US prosperity and global stability.
Creation of the needed "G-2" will thus require a considerable change in conduct, based on a basic change in mindsets on both sides of the Atlantic. Much of the problem lies in Europe, which has largely failed to get its representational act together except for trade and competition policy. Hence the United States has been under no compulsion to interact with a single Europe and is continually tempted to play the individual European countries against each other.
But the bigger adjustment may be required on this side of the Atlantic. The United States is the only military superpower. Its economy, at least for now, is the world's strongest. Why would it want or need to share power with anyone?
The answer is twofold. Precisely because of its military superiority, and the need to act by itself on some occasions in that domain, the United States will inevitably be charged with unilateralism for the foreseeable future. Those charges are particularly acute at present due to the strong differences in transatlantic views on the Arab-Israeli conflict, Iraq and even the next steps in the campaign against terrorism.
The United States should thus deliberately, and even ostentatiously, share power and proceed multilaterally in areas where doing so makes substantive sense. Economics is such an area, in light of Europe's parity and America's revealed need for major cooperation. The United States simply cannot dominate the world economy as it does global security affairs and Europe is its only potential partner, in terms of both economic capability and cultural compatibility.
Effective transatlantic cooperation will not suffice to assure a prosperous global economy. In today's pluralistic world, with its proper insistence on political legitimacy, smaller industrial countries and developing nations alike must engage actively in international economic management. Thus the importance of the multilateral institutions is greater than ever and there is continued room for a "G-7," "G-20," "G-77" and many others. But an effective "G-2" is necessary if broader cooperation is to have a chance to work.
The United States and Europe now see each other as inward-looking, highly egotistical entities. Europe views the United States as wanting to run the world with other people's money. Americans characterize Europeans as pontificating free riders who hide behind America's willingness to exercise leadership even when that is unpopular. Both need instead to start thinking in terms of cooperating and indeed coordinating consistently, both to minimize the problems they cause for each other and to provide progressive leadership for the world as a whole. They should begin implementing an informal "G-2" steering committee for the world economy and start using occasions like the May 2 summit for that purpose.