Weighing Europe

How Europes Global Partners Assess Power and Influence of a Region in Crisis
Thomas Kleine-Brockhoff, Editor

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The EuroFuture Project

 2013 The German Marshall Fund of the United States. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the German Marshall Fund of the United States (GMF). Please direct inquiries to: The German Marshall Fund of the United States 1744 R Street, NW Washington, DC 20009 T 1 202 683 2650 F 1 202 265 1662 E info@gmfus.org This publication can be downloaded for free at www.gmfus.org/publications. Limited print copies are also available. To request a copy, send an e-mail to info@gmfus.org.

About GMF The German Marshall Fund of the United States (GMF) strengthens transatlantic cooperation on regional, national, and global challenges and opportunities in the spirit of the Marshall Plan. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 as a non-partisan, non-profit organization through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has offices in Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, Warsaw, and Tunis. GMF also has smaller representations in Bratislava, Turin, and Stockholm. About the EuroFuture Program The German Marshall Fund of the United States understands the twin crises in Europe and the United States to be a defining moment that will shape the transatlantic partnership and its interactions with the wider world for the long term. GMFs EuroFuture Project therefore aims to understand and explore the economic, governance, and geostrategic dimensions of the EuroCrisis from a transatlantic perspective. The Project addresses the impact, implications, and ripple effects of the crisis in Europe, for the United States, and the world. GMF does this through a combination of initiatives on both sides of the Atlantic, including large and small convening, regional seminars, study tours, paper series, polling, briefings, and media interviews. The Project also integrates its work on the EuroCrisis into several of GMFs existing programs. The Project is led by Thomas Kleine-Brockhoff, Senior Transatlantic Fellow and Senior Director for Strategy. The group of GMF experts involved in the project consists of several Transatlantic Fellows as well as program staff on both sides of the Atlantic.

Table of Contents
Acknowledgements .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . ii The Power of Perception: Europes Gestalt as a Foreign Policy Actor as Changed by the Euro Crisis by Thomas Kleine-Brockhoff .. .. .. .. .. .. .. .. .. .1 Turmoil in Europe: Implications for U.S. Strategy by Aaron L. Friedberg .. .. .. .. .9 Assessing the Competition: How the European Crisis Impacts Chinas Global Strategy by Qin Yaqing .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 25 Dimming Prospects: Indias Fading Interest in the European Union by Mohan Guruswamy .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 37 Cooperation as a Result of Crisis: The Future of the Japanese-European Relationship by Satoru Mori . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 53 Worth a Second Chance?: Europe as a Model and Partner for Brazil by Marcus Vincius de Freitas .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 69 Looking Elsewhere: Turkeys Reaction to the New European Sclerosis by Soli zel .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 81 Appendix .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 93

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Acknowledgements

his publication is produced by the EuroFuture Project of the German Marshall Fund of the United States. The individual papers were initially published as part of the EuroFuture Paper Series, which features strategists from around the world who analyze how their country or region positions itself vis--vis a changed Europe. GMF in-house experts explore the implications of the crisis through different regional prisms and provide thematic and cross-sectoral analysis. The German Marshall Fund of the United States understands the twin crises in Europe and the United States to be a defining moment that will shape the transatlantic partnership and its interactions with the wider world for the long term. GMFs EuroFuture Project therefore aims to understand and explore the economic, governance, and geostrategic dimensions of the EuroCrisis from a transatlantic perspective. The Project addresses the impact, implications, and ripple effects of the crisis in Europe, for the United States, and for the world. GMF does this through a combination of initiatives on both sides of the Atlantic, including large and small convening, regional seminars, study tours, paper series, polling, briefings, and media interviews. The Project also integrates its work on the EuroCrisis into several of GMFs existing programs. The Project is led by Thomas Kleine-Brockhoff, senior transatlantic fellow and senior director for strategy. The group of GMF experts involved in the project consists of several transatlantic fellows as well as program staff on both sides of the Atlantic. This publication was edited by Thomas Kleine-Brockhoff, head of the EuroFuture Project. The following people contributed to compiling this booklet: Christine Chumbler, Peter Sparding, Javid Ahmad, Jennifer Diamond, and Diane Berringer.

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The Power of Perception

Europes Gestalt as a Foreign Policy Actor as Changed by the Euro Crisis
by Thomas Kleine-Brockhoff

n March 2013, Russian Prime Minister Dimitry Medvedev and European Commission President Jos Manuel Barroso jointly took the stage in Moscow to assess the state of Euro-Russian relations. Standing side-by-side, Medvedev lectured Barroso for what he thought was an inept handling of the euro crisis, especially the bail-out of Cyprus. Medvedev did not mince words when he concluded by quoting unnamed Russian eurosceptics: The euro crisis has strengthened ideas that Europe is in decline in the 21st century.1 Barroso shot right back: Dont believe in this idea of the decline of Europe. () The European Union is stronger than it is today fashionable to admit.2 Who is right? Who is wrong? Did Medvedev, in whatever blunt terms and for whatever reasons, simply state the obvious? Did Barroso only deliver the dutiful response that can be expected from the European Commissions top representative? Or is there a deeper truth in Barrosos words that is hidden in plain sight: that Europe, in spite of the euro crisis, is holding up quite well in the world? Four years into the euro crisis, the debate about its foreign policy consequences takes on more urgency as longer term effects of the ongoing crisis start to emerge. Is the European Union a spent force on the global stage? is the question that Giovanni Grevi, an experienced analyst of European foreign policy, feels he cannot avoid asking.3 The answer, however, is complex. The direct economic financial and economic consequences of the crisis will linger for some time to come, as Edwin Truman from Washingtons Peterson Institute points out: Growth will be slow, interest rates will remain low, and the general attractiveness of euro assets will be low.4 Already, the crisis has translated into a loss of attraction of Europes common currency. The euros attempt to challenge the status of the U.S. dollar as the main global reserve currency has been set back, perhaps by a generation, as developing
1 Russian PM lectures Barroso on Cyprus, EU Observer, March 21, 2013, http://euobserver.com/ economic/119525 2 Ibid. 3 Giovanni Grevi, Renewing EU Foreign Policy, in Giovanni Grevi and Daniel Keohane (eds.), Challenges for European Foreign Policy in 2013, p. 15. 4 Emerging nations dump euro reserves, Financial Times, April 1, 2013, p.1, http://edition.cnn. com/2013/03/31/business/emerging-markets-euro

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nations shed euros from their reserves. In 2012 alone, central banks in developing nations sold 45 billion, according to data compiled by the International Monetary Fund.5 However, it is much less obvious how the economics of the ongoing crisis translate into the realm of influence and power, and what the transmission mechanism might be. How uncertain and disputed the crisis impact on foreign policy appears to be is well-documented in the latest edition of the European Council on Foreign Relations scorecard, in which Europes performance on the world stage is assessed. The headline result reads: Yet again, the eurocrisis has eroded Europes image, soft power, and capacity to pursue its interests.6 A caveat is added later in the report: European foreign policy did not unravel in 2012.7 Rather, the performance shows timid signs of stabilization and resilience, which leads the authors to conclude that Europe performed surprisingly well in its foreign policy in 2012.8 Marta Dassu, the Italian under secretary of state for foreign affairs and an ECFR Board member, even used the launch of the scorecard to challenge a key result, namely that the EU had been inward looking and the bandwidth of its leaders limited. As Justin Vaisse described, Dassu asserted that Europes leaders have avoided fragmentation and put Europe on the path to recovery. And that in itself is a foreign policy achievement. Would anyone have preferred to see a more active Europe abroad while it was accelerating its disintegration? The leaders bandwidth used for the crisis was thus well spent, and it is now possible to re-establish Europes influence on a sounder basis.9 In a different report, this one by the German Institute for International and Security Affairs (SWP), analysts Ronja Kempin and Marco Overhaus detect three different schools of thought in the debate about the foreign policy consequences of the crisis: Some observers focus on the term geo-economics and note that foreign policy has increasingly been used as an instrument to pursue economic interests. This strategy has always been controversial. The crisis has strengthened its proponents. Another group of experts sees the effects of the crisis in an accelerated process of erosion of EU foreign policy, typified by lack of funds, reduced coherence, and decreasing political will. A third group concludes that the financial as well as debt crises, so far, have had little effect on Europes Common Security and Defense Policy.10
5 Ibid. 6 European Foreign Policy Scorecard 2013, London, January 2013, blog entry by project leaders Justin Vaisse and Susi Dennison, http://ecfr.eu/publications/summary/european_foreign_policy_scorecard_2013 7 Ibid. 8 European Foreign Policy Scorecard, London 2013, p. 12, http://ecfr.eu/page/-/ECFR73_ SCORECARD_2013_AW.pdf 9 Justin Vaisse, The Scorecard Tour: Washington, February 27, 2012, http://ecfr.eu/blog/entry/the_ scorecard_tour_washington 10 Ronja Kempin and Marco Overhaus, EU-Aussenpolitik in Zeiten der Finanz-und Schuldenkrise, SWP-Studie, Berlin, April 2013, p.5, translation by the author.

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And indeed, Europes recent foreign policy activism might seem surprising given the depth of the crisis and the level of self-absorption. The world has witnessed EUassisted progress in Myanmar and talks with Iran and Somalia. High Representative Catherine Ashton brokered a breakthrough agreement between Serbia and Kosovo. The European External Action Service, by some accounts, is starting to find its footing. And while Europes response to the Arab Spring leaves much to be desired, the same is true for other global actors. Therefore, the reason for Europes tepid response might be rooted in the nature of a complex foreign policy challenge rather than the continents weakened stance as a foreign policy actor. The record on recent European China policy is more mixed. When it comes to military interventions out of area, Europe seems to want to defy the odds. For years, the United States had complained about European reluctance to use military force to uphold global order. Yet in the face of the European crisis, nothing less than a role reversal can be observed. While the United States is in the middle of a strategic retrenchment to correct its previous state of overextension, Europe (or at least a large part of the continent) seems to have entered an interventionist phase if the actions in Mali and Libya can be interpreted as a new willingness to police the neighborhood. While such views are hotly debated in Europe, this continent-wide conversation has two shortcomings: it mostly focuses on the short term rather than the strategic outlook, and it looks from the inside out. It is Eurocentric in that its participants are mostly Europeans who assess their own foreign policy and their own regional and global influence. But power is also about perceptions, including the perceptions of others, as theorist Hans J. Morgenthau once observed: The prestige of a nation is its reputation for power. That reputation, the reflection of the reality of power in the mind of foreign observers, can be as important as the reality of power itself. What others think about us is as important as what we actually are. Thus all nations, and especially those active in foreign policy, must see to it that the mental picture other nations form of their power at least represents faithfully the actuality of their power, if it does not excel it.11 That the European Union is not a nation state makes the assessment more challenging. European power is a combination of what the continents nation states as well as its Union bring to the table. But this complexity does nothing to render Morgenthaus observation irrelevant. Therefore, the German Marshall Fund of the United States (GMF) has set out to explore the mental picture that other global players have of Europe and its gestalt as a foreign policy actor. Over the course of 2012, GMF commissioned a set of policy papers from authors from around the world in the interest of looking at the crisis from afar. In other words: a perspective from the outside in in order to complement the prevailing view from the inside out. Strategists and analysts
11 Hans J. Morgenthau, Vietnam: Shadow and Substance, in The New York Review of Books, Special Supplement, Getting out of Vietnam, Volume 5, Number 3, September 16, 1965, http://www.nybooks. com/articles/archives/1965/sep/16/vietnam-shadow-and-substance

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from six countries (the United States, Turkey, India, China, Japan, and Brazil) were asked to contribute. The authors were asked four questions: 1) How is the crisis interpreted in your country? 2) How, in your view, does the crisis affect Europes foreign policy? 3) How does the crisis change your countrys relations with Europe? 4) How does the crisis change your countrys strategic outlook? The goal of this set of questions was to gain a better understanding of how enduring the crisis as an influencing factor of foreign policy is seen to be by other actors. How deeply will it influence their longer term strategy towards Europe? Clearly, the brand Europe has taken a hit, but has its prestige sustained long term or even irreversible damage? Is Europes current posture more wishful thinking than reality? Or, conversely, has an alarmist perspective pervaded the debate to a degree that Europe, in actuality, has more influence than it is seen to have? Such perceptions can theoretically be dangerous misconceptions with potential real-world consequences, as Morgenthau pointed out half a century ago: The policy of prestige must guard against two pitfalls. If it exceeds that actuality by too much, prestige will become bluff, and a policy based upon such a misreading of reality will fail () On the other hand, prestige that makes a nation appear to be less powerful than it actually is reduces the influence the nation might in fact exert.12 Wisdom, according to Morgenthau, lies in ensuring that the shadow that a nations power casts in the form of its prestige is neither too large nor too small, but always retains a rational relationship to the substance of power.13 In this spirit, the goal of this series of papers is, quite modestly, to contribute to the current debate about the perceptions of Europes power versus its actual power. The contributions in this volume are anything but homogeneous, which is not surprising given the intellectual diversity of the authors and their geographical distribution. Their countries have distinctly different relations with Europe. Three authors hail from nations that are allies of Europe (the United States, Turkey, Japan), while three come from emerging partners (Brazil, India, China). And even within each of these two groups, the impact of the crisis on the partnership varies, depending on breath, depth, and level of ambition of the relationship. Only on the most basic level is there a relatively broad agreement. Quite obviously, a deep economic crisis across much of the worlds largest trading block affects the whole globe. Slowing growth is a concern all over the world, and the contagion effects of the European crisis are enumerated by the authors in this volume. Accordingly, the concern is highest in the slowest growth country (Japan) and lowest in the highest growth country (China). However, in China this assessment comes with a somewhat surprising caveat: the euro crisis has brought down the unsustainable growth numbers in export-oriented China and has thus helped to prevent the possibly serious consequences of overheating. However, if the crisis
12 Ibid. 13 Ibid.

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persists, the Chinese economy, and, maybe more importantly, Chinese society, will suffer. If growth rates fall below 8% (as they have recently), Chinas ruling elites will become concerned about what they call social stability, which is code for the political status quo. Several authors see at least some economic opportunities emanating from the crisis as well. For example, Brazilian multinational corporations have gone bargain hunting in Europe. In Japan, the crisis is seen to exert pressure to innovate in order to break out of the slump. In China, the U.S. financial crisis, as well as the ensuing euro crisis, seems to have propelled the debate about economic reform and a piecemeal rebalancing towards a growth model based more on domestic consumption. Most analysts in this volume argue that Europe will eventually recover and remain an important player in world affairs and globalization, despite the bumpy road ahead (Marcus Vinicus de Freitas from Brazil; similarly Satoru Mori from Japan). Europes significance cannot be easily dispensed (Qin Yaping from China), not least because there is no substitute for a unified Europe when it comes to global issues (Aaron L. Friedberg from the United States). Yet, continuing to be a global player does not necessarily mean restoring the status quo ante. Friedberg interprets the crisis as a trend accelerator. He sees longstanding tendencies toward introversion, demilitarization, a diminished share of wealth, and a dwindling voice in world affairs continuing through the end of the crisis and beyond. For Soli Oezel from Turkey, the crisis, in combination with the United States financial crisis of 2007-08, makes it all the more apparent that the power shift from West to East is a firmly established reality. Indian analyst Mohan Guruswamy has the dimmest view of Europes prospects. His outlook is markedly different from the other authors. He detects that initial heady optimism over a resurgent Europe seems in hindsight overly optimistic. His bottom line: The European Union, it now seems, was a case of too much hope tinged with innocence. The EU counted for very little when it mattered. It was at best of times a loose fraternity of countries seeking its own place in the sun. In this view, the crisis exposed united Europe as a chimera. According to Guruswamy, the effect is that India has begun to deftly shift its bets elsewhere. There is no agreement, however, about the consequences of what most authors see as Europes shrinkage to a global actor with diminished reach. The dividing line runs between Europes traditional allies and its new competitors for space on the global scene. Traditional allies worry about the NATO alliance, (world) order, defense spending, and burden-sharing. A quarter-century after the fall of the Berlin Wall and Europes emergence as a global stabilizer, U.S. policymakers are concerned once again with Europes weakness, as Friedberg writes. But as this is the first time in 400 years that European security has been a regional rather than a global question, Europe is now neither the central problem nor the seat of the central solution in the global order (Oezel). Therefore, the United States no longer sees Europe as the primary focus of their strategic attention (Friedberg).
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Nonetheless, a weakened European Union would negatively affect the United States, adds Friedberg: NATO, too, could be badly weakened, and without its traditional platform to support and legitimize its actions, the United States would be far less likely to intervene. Friedberg calls on his countrymen to reset their expectations: To the extent that U.S. strategists hope to engage Europe as a whole in new overseas military ventures, or even to rely on it to police its own backyard, they are likely to be disappointed for the foreseeable future. Nobody is more concerned than the Japanese author, Mori. The prism through which he views the euro crisis is its effect on the strategic rivalry between Japan and a rising China. According to this argument, an enduring crisis in Europe would increase Japans trade dependency on China. Trade dominated by China would increase that countrys leverage over Japan. Mori fears that in such a situation, China will find it easier to apply economic pressure on Japan over contentious bilateral issues such as overlapping claims on the Senkaku islands. Therefore, it does not come as a surprise that the Japanese government has already started to take action by trying to improve trade ties to the United States and the European Union. Quite naturally, the analysts from the BRIC countries (Brazil, Russia, China, and India), but especially China and India, see things differently. They treat the euro crisis as an irritation because it seems to complicate the road towards their preferred model of global order: the multi-polar world. Both see Europe as one of the few key players in that emerging world of multi-polarity. For China and India, multi-polarity is seen as a way of becoming an equal in a world of great powers. Guruswamy shows some disappointment that the Europeans are now unlikely to play the role he (as well as many in India) had originally assigned to the them: The free worlds restraining counterweight to the United States perceived unilateralism not only did not take off, for all practical purposes it never happened. For Guruswamy this means that India will now look for U.S. leadership and that the rising nations will supplant Europe in the new global pecking order. Interestingly, Brazilian author Freitas is much less concerned with Brazils place in a world that witnesses a weakened Europe. His lesson to draw from the crisis is about Europe as a model for regional integration. For many years, Europe had been considered the most appropriate model for South America, but, says Freitas: no longer! Overall, this set of essays offers multiple perspectives onto the European crisis, thus broadening the view beyond the usual European self-reflection. Seeing the crisis through the prism of each countrys national interest allows for a fresh, sometimes surprising look. Flattery for Europe is not on offer. Yes, the analysts think through the opportunities emanating from the crisis. But these paragraphs are rather short. Yes, they consider that Europe, as a result of the crisis, could integrate further and emerge stronger. But it is an afterthought, not comparable to the mainstream mindset of European officials. This collection of essays is, if anything, a threat assessment from around the globe. At the very least, there is no schadenfreude about the travails of Europe.
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The crisis, it seems, has changed the perspective on Europe in a number of important countries, thereby confirming the more skeptical of the European analysts. Kempin and Overhaus, in the aforementioned study conclude that the crisis has aggravated some of the structural and long term deficits of European foreign policy.14 The question is whether consequences of the crisis combined with long term structural deficits will create a lock-in effect. The alternative is more benign. In this view, foreign policy is not seen as an independent variable, but rather as a function of the overall health of the economy and the institutions inside Europe. Consequently, an economic recovery will help to undo the damage that the crisis has seemingly inflicted on Europes influence and power. At this stage, it is too early to tell. Thomas Kleine-Brockhoff is a resident fellow with the German Marshall Fund of the United States, based in Washington, DC.

14 Kempin/Overhaus, p.7.

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Turmoil in Europe
Implications for U.S. Strategy
by Aaron L. Friedberg

Introduction
or 45 years after the end of World War II, U.S. strategists worried far more about Europes perceived political, economic, and military weakness than they did about its potential strength. Following the collapse of the Berlin Wall and the end of the Cold War, this pattern was briefly reversed. With the signing of the Treaty of Maastricht, the birth of a United States of Europe seemed finally to be at hand. Possessed of a vast market and nascent institutions of central governance, this new entity was widely seen as having the potential to become a major player on the world stage. While it had long supported the principle of European integration, these developments were met in Washington with a measure of ambivalence. Some observers feared that a more closely integrated Europe would use tariffs and subsidies to gain an unfair advantage in global economic competition. Others warned that it might start on an independent course in foreign and defense policy, diverting resources from traditional mechanisms for transatlantic cooperation, such as NATO, and putting itself at odds with the United States over how best to handle sensitive issues like Middle East peace and nuclear non-proliferation. The last several years have seen a reversion to the post-war norm, but with one important modification. U.S. policymakers are concerned once again with Europes weakness but, in contrast to the Cold War, they no longer regard the continent as the primary focus of their strategic attention. Instead, over the last two decades, the center of gravity of U.S. strategy has migrated steadily eastward, from Europe to the Middle East and the Persian Gulf and now, with the Obama administrations self-proclaimed pivot, to East Asia. As seen from Washington, Europe is becoming a strategic sideshow and, what is more, it appears increasingly to be a hindrance in dealing with other challenges, rather than a help. If the present crisis results in an economic implosion, Europe could drag others down with it, making it more difficult for the United States to generate the resources necessary to meet other pressing geopolitical challenges. Even if it avoids the worst, Europe as a whole seems unlikely for some time to come to have either the inclination or the energy to do more than just cope as best it can with its own
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problems. While the more extreme predictions about Europes future may turn out to be too pessimistic, they are certainly within the realm of possibility. The purpose of this paper is to identify a range of plausible scenarios for the further unfolding of the euro crisis and to consider their implications for U.S. strategy. Having briefly reviewed the underlying causes and dynamics of the current crisis, I will identify three such scenarios. First, it is possible that a near-death experience could give Europe the jolt of political energy required to forge stronger central institutions and a closer union. At the other end of the spectrum of possibilities, it is conceivable that the fissures revealed by the euro crisis could widen to the point that they cause the European Union to split apart. Finally, between these two end points is a range of outcomes that can be grouped under the heading muddling through. Europe may continue to limp along in something resembling its current institutional form, avoiding the worst without truly resolving its underlying contradictions. After describing the pathway that could lead to each scenario, I will consider the potential impact and the implications for the United States in four concentric geographical spheres: within Europe itself, in the broader Middle East (including the Persian Gulf, the eastern Mediterranean, and North Africa), in East Asia, and globally (at the level of international norms and institutions).

Causes1
The euro crisis and the bursting of the U.S. real estate bubble are causally connected, but the two catastrophes also bear a striking resemblance to one another. In each case, the sources of danger were identified in advance by a handful of astute observers and appear obvious in retrospect, but they were either discounted or overlooked entirely by the majority of analysts and decision-makers. In the words of Martin Feldstein, one of those who anticipated Europes troubles over a decade before they began to unfold, recent events are not an accident or the result of bureaucratic mismanagement but rather the inevitable consequence of imposing a single currency on a very heterogeneous group of countries.2 With the introduction of a common currency in 1999, the nations of the eurozone surrendered the ability to set their own monetary policy, but they retained the right to tax and spend as they saw fit. In deference to long-standing German fears of inflation, the European Central Bank that was set up to administer the new currency had price stability as its primary objective. Over the course of the subsequent decade, the ECB worked to keep inflation and interest rates low.
1 For useful overviews of the underlying economic dynamics of the crisis see Erik Jones, The Euro and the Financial Crisis, Survival vol. 51., no. 2 (April-May 2009), pp. 41-54; Alexander Nicoll, Fiscal Union by Force, Survival vol. 53, no. 6 (December 2011-January 2012), pp. 17-36; Martin Feldstein, The Failure of the Euro Foreign Affairs vol 91, no. 1 January/February 2012, p. 1051-116. 2 Feldstein, The Failure of the Euro, p. 105. See also Feldstein, EMU and International Conflict, pp. 60-73.

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This helped Germany to restrain wage growth, implement much-needed labor market reforms, and improve productivity, which, in turn, enabled increased competitiveness, leading to rising exports and growing current account surpluses. But low interest rates throughout the eurozone also made it easier for governments and households in other countries, especially those in the south to borrow, spend, and go more deeply into debt. Cheap money helped to sustain large public sectors, generous social welfare programs, and consumer spending. In several countries, as in the United States, low interest rates also fueled a rapid run-up in real estate prices. In contrast to Germany and some of the other northern economies, reforms were deferred, labor costs grew relatively rapidly, competitiveness declined, and current account deficits ballooned. In pre-euro Europe, such imbalances would have been corrected by some combination of rising interest rates and declining exchange rates. Under the new dispensation, however, national governments no longer had the ability to manipulate these instruments of policy. Provided that others were willing to buy their debt, they could, however, continue to borrow in order to fund their growing fiscal and current account deficits. Until the onset of the global financial crisis, investors made no distinction between bonds issued by Germany and those of Greece or Ireland or Spain; all were assumed to carry equal, minimal risk. This began to change in the wake of global financial crisis. As growth slowed across much of the advanced industrial world, tax revenues declined, government spending increased, debt deepened, and the ratio of debt to GDP rose. Countries in which this indicator was already relatively high saw an especially alarming deterioration. Fearful that some governments had now gone so deeply into debt that they might be unable to make good on their obligations, investors began to demand higher interest rates in order to compensate for the perceived increase in risk. Starting in early 2010, the yields on long-term bonds issued by various eurozone nations began to diverge, with those of Greece, Portugal, Ireland, and, to a lesser extent, Spain and Italy increasing the most dramatically. Albeit to varying degrees, all of these countries were soon seen to be in danger of slipping into a self-reinforcing downward spiral, in which higher borrowing costs would contribute to deeper government deficits, mounting debt, rising investor fears, further increases in interest rates and debt burdens, and ultimately, the possibility of default. National financial crises also threatened the solvency of commercial banks in the affected countries, many of which saw their large holdings of government bonds diminish in value at the same time as they were forced to write off bad private sector loans. As the crisis deepened, there were growing worries about contagion. Even in countries with comparatively healthy public finances, like France and Germany, banks holding substantial quantities of private and sovereign debt in troubled economies found themselves at risk. As always in such situations, psychological factors loomed large. Whatever the objective indicators might suggest at any given moment, investor anxieties about the future threatened to create self-fulfilling
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prophecies, as the demand for ever-higher risk premiums pushed one country after another to the brink of default.

Scenarios
Since the start of 2010, a combination of actions by national governments and multinational institutions has been sufficient to stave off disaster, but even the most optimistic observers do not believe that these measures have put Europe on a clear path to stability and sustained growth. Across the continent, governments have sought to reduce fiscal deficits by slashing spending and raising taxes. In the most serious cases, austerity has been imposed as a precondition for loans intended to enable governments to continue to finance their debt at sustainable cost from regional and international financial institutions. Low cost lines of credit have also been made available to prevent bank failures and insure the continued functioning of the European financial system. In addition to their more concrete effects, all of these emergency measures are intended to reassure investors, stabilize markets and restore the normal processes of economic growth. At this writing (late September 2012), the situation remains highly volatile and the array of alternative futures is exceptionally broad. Depending on how events play out, Europe, and the world, could look very different six months or a year from now than they do today. That said, and acknowledging the possibility of hitherto unforeseen black swans, there are three basic scenarios (or families of scenarios) that together incorporate a significant portion of what appear at this point to be plausible outcomes.

An Alexander Hamilton Moment3

The very gravity of the current crisis, and the deep flaws that it has revealed in the foundations of the European project, could provide the impetus for fundamental reforms. Faced with the prospect of collapse and even chaos, leaders and publics may be willing to accept measures that they have hitherto rejected. More specifically, national governments may consent to granting even greater control over economic policy to central European institutions. Some observers have drawn an analogy to the early years of U.S. history. The American founders tried at first to build a nation in which virtually all decision-making authority was dispersed among the 13 original states. Within a few years, they were forced by the evident weakness of their initial design to draft a new constitution that granted considerable authority to the federal government.4

3 This phrase is borrowed from David McCormick, Europe needs its own U.S. fiscal union moment, Financial Times (June 20, 2012). 4 In addition to McCormick, see Charles A. Kupchan, Centrifugal Europe, Survival vol. 54, no. 1 (FebruaryMarch 2012), pp. 111-118.

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Similarly, if they wish to preserve their Union, the individual European states may have no choice but to endow it with a great deal more power. In this view, as two high-ranking former officials put it, the only cure for what ails Europe is more Europe.5 The precise details of what this might entail are a topic of intense debate, but most observers agree that, if the euro (and perhaps the EU) are to survive, the states of the eurozone will have to harmonize their tax and spending policies, perhaps creating some kind of fiscal union with the power to do more than set notional targets for national governments.6 Some also urge enhancing the powers of Europes central banking institutions, giving them the resources and the authority necessary to insure deposits, buy the debt of troubled economies, and issue Eurobonds backed by the full faith and credit of the entire EU.7 All such proposals face strong political opposition. States in poor financial condition worry that they will be subjected to harsh austerity measures for many years to come. Those in better shape fear that they will be forced to pay part of the price for their neighbors improvidence. Successful reform would appear to depend on the ability of political leaders to generate precisely the sense of European solidarity, and faith in European institutions, that are now in very short supply. Assuming that an immediate catastrophe can be avoided, and these political obstacles overcome, Europe as a whole could be on a path to sustained stability and renewed growth. But the road to recovery will not be short and success is by no means assured. Reducing fiscal deficits and debt-to-GDP ratios will take time, and the process will tend to depress economic growth for years to come. As they struggle to put their finances in order, the nations at the center of the crisis will also have to undertake structural reforms that are going to be all the more painful for having been deferred for so long.8 In order to boost their competitiveness and increase exports, these countries are going to have to reduce costs, presumably through some combination of labor market reforms that will suppress the growth in wages, and the introduction of new technologies and management techniques to improve productivity.9

5 Kemal Dervis and Javier Solana, Could the euro destroy the EU? Europes World no. 21 (Summer 2012), pp. 8-15. 6 Some have suggested that the crisis has already begun this process of harmonization, in effect creating a fiscal union by force the force of financial markets. See Nicoll, Fiscal Union by Force, p. 18. 7 For a skeptical analysis of many of the proposals for reform, see Feldstein, The Failure of the Euro. For the details of one plan reportedly being discussed by top Euro-crats during the summer of 2012, see Konstantin von Hammerstein, Christoph Pauly, and Christoph Schult, Planning for the Future: A Sneak Peek at Tomorrows Europe, Speigel Online, June 11, 2012. http://www.speigel.de/international/europe/ europe=lloks-at-plans-for-political-union-and-budgetary-oversight-a-838142-druck.html. 8 On the need for labor market reforms, especially in the service sector, see Howard Davies, Sorting fact from fiction on Europes economic stagnation, Europes World no. 21 (Summer 2012), pp. 56-59. 9 Nemat Shafik, Deputy Managing Director, International Monetary Fund, Reviving Growth in Europe, Remarks at Brussels Economic Forum, May 31, 2012. http://www.imf.org/external/np/ speeches/2012/053112.htm

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Nor is this a challenge faced only by Europes weaker economies. Over the last two decades, the gap in labor productivity between the EUs original 15 members and the United States, which narrowed considerably between the 1970s and the mid-1990s, had begun to widen once again. As a matter of simple arithmetic, the only way to sustain increases in national income, aside from population growth, is through improvements in productivity. The low birth rates prevailing across much of Europe mean that such increases in output per worker are essential to its future prosperity. As a recent analysis by McKinseys Global Institute concludes: given Europes stagnant population growth, it could be trapped in low GDP growth at or around 1.5 percent unless it can capture some new driver of accelerated productivity growth.10 Unfortunately, at this point, it is not clear whether, and if so where, such a driver can be found. In sum, even if Europe has its Alexander Hamilton moment and emerges from the current crisis not only intact but more unified, it will still have its work cut out for it. Merely avoiding catastrophe will not be enough to preserve Europe from a future of slow growth and a dwindling share of world wealth and power.

Meltdown
At the opposite end of the spectrum of possibilities would be a series of developments leading to the unraveling of the eurozone and perhaps, although the first would not necessarily guarantee the second, the collapse of the European Union itself. This outcome would most likely be the result of some mix of policy errors and market panic. If one country abandons the euro (Greece being the most likely candidate at this point), defaults on its debts, and reverts to a national currency, it may trigger a cascade of events that would be difficult, and perhaps impossible, to control. International capital markets might respond to this decision in ways that would compel other governments to follow a similar path, regardless of their initial intentions. Martin Feldstein describes one variant of this scenario: If Greece leaves and devalues, global capital markets might assume that Italy will consider a similar strategy. The resulting rise in the interest rate on its debt might then drive Italy to in fact do so. And the competitive pressure might force France to leave the eurozone and devalue a new franc. At that point, Feldstein concludes, the European Monetary Union would collapse.11 The economic and political costs of such an eventuality are likely to be so large that, until very recently, few observers were prepared to consider it seriously. While it rated the probability of a breakup of the eurozone at close to zero, a September 2011 study by UBS sought to estimate the impact on individual nations of abandoning
10 Charles Roxburgh and Jan Mischke, European growth and renewal: The path from crisis to recovery, McKinsey Global Institute, July 2011, p. 13. http://www.mckinsey.com/insights/mgi/research/productivity_ competitiveness_and_growth/european_growth_and_renewal_path_to_recovery 11 Feldstein, The Failure of the Euro, p. 115. For another variant, which traces the contagion from Greece to Spain to the other big European economies, see Gerald ODriscoll, How the Euro Will End, Wall Street Journal, June 12, 2012.

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the euro. In the case of a weaker country, the near-term effects would include a sharp drop in the value of the restored national currency relative to the euro, a steep increase in the cost of capital as borrowers demanded high-risk premiums in the wake of sovereign and widespread corporate default, a decline in trade as other countries imposed tariffs to offset the effects of currency devaluation, and losses due to bank failures. Taking all these factors into account, the authors concluded that withdrawal would result in a loss of between 40 percent and 50 percent of GDP in the first year alone, with continuing costs of roughly one-third that amount in subsequent years. By contrast, a relatively strong country like Germany would suffer severe but somewhat less drastic consequences; on the order of 20 to 25 percent of GDP in the first year and perhaps half that much for an indefinite period thereafter.12 The UBS study did not attempt to calculate the costs for Europe as a whole of the unraveling of the eurozone, but it did suggest that these could be even higher than merely the sum total of the losses incurred by each individual nation. Because continent-wide economic turmoil could result in civil unrest and possibly even interstate conflict with unforeseeable long-term effects, the costs of a breakdown are too great to quantify in bald cash terms.13 Without delving into such dark possibilities, Andrew Moravcsik concludes simply that if the euro fails, Europe will face a long-term economic catastrophe that could drain its wealth and power for the rest of the decade and beyond.14

Muddling Through
Despite drastic warnings and calls for dramatic action, it is possible that the current crisis could end not with a bang but with a whimper. If ways can be found to limit the danger of contagion, one or two of the weaker countries might be able to revert to their national currencies without causing the entire eurozone to collapse. Alternatively, European governments and institutions may be able to stitch together a package of emergency programs sufficient to stabilize the situation in the most troubled economies and to achieve a degree of policy coordination adequate to prevent an immediate recurrence of crisis conditions, without necessarily creating new and more powerful mechanisms for centralized economic management. While the consequences of a diminished single currency area are less obvious and would presumably depend on which countries remained, the preservation of the eurozone through a series of half measures is unlikely to lead to marked improvements in economic performance. To the contrary, almost by definition, muddling through would leave underlying problems unresolved and prone to
12 Stephane Deo, Paul Donovan, Larry Hatheway, Euro break-up the consequences, UBS Investment Research, Global Economic Perspectives, September 6, 2011. 13 Ibid. 14 Andrew Moravcsik, Europe After the Crisis: How to Sustain a Common Currency, Foreign Affairs vol. 91, no. 3 (May/June 2012), pp. 54-68.

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reemerge. Daniel Mockli of the Center for Security Studies in Zurich describes the manifestations of this scenario (which he regards as the most plausible): There will be more of the same in terms of austerity, adjustments, EU late-night summit meetings, and rescue packages. For crisis-hit countries at Europes periphery, this will mean long periods of hardship, with ever growing social costs. But the eurozone and the EU proper face difficult years ahead too. The bottom line of all this is that the EU will likely remain bogged down in crisis management for years to come.15

Implications Europe
In his 1997 essay, Feldstein warned that the creation of a monetary union could paradoxically end up increasing the risks of war among its members. Over time, efforts to hold the union together would inevitably lead to conflicts over economic policies and interference with national sovereignty which, in turn, would tend to reinforce long-standing animosities based on history, nationality, and religion. The fact that the founding documents of the EU and the European Monetary Union contained no mechanisms for withdrawal made matters worse. As Feldstein warned: The American experience with secession of the South may contain some lessons about the danger of a treaty or a constitution that has no exits.16 Whatever their differences over economic policy, it is thankfully extremely difficult to imagine a scenario in which the members of the eurozone as presently constituted would have either the capability or the desire to wage war on one another. Greeks may be angry at the German government for imposing austerity on them, but Greece simply does not have the means with which to project military power against Germany. Germans may resent Greece for what they see as its fiscal irresponsibility, but they would probably be happier to see it go than to fight to keep it in the eurozone. The one caveat to these rather obvious points is that the further playing out of the current crisis could lead to radical shifts in the domestic politics of at least some of the countries involved. Nations in which unemployment has reached unprecedented heights and social safety nets are fast unraveling could be subject to severe civil unrest, dramatically increased support for fringe political parties of the left and right, and perhaps even shifts in the character of their domestic political institutions away from democracy and toward some form of authoritarianism.17 Seeking to rally support and deflect popular resentment of poor economic conditions, extreme
15 Daniel Mockli, The strategic weakening of debt-ridden Europe, Strategic Trends 2012 (Zurich: Center for Security Studies, 2012), p. 42. 16 Martin Feldstein, The EMU and International Conflict, Foreign Affairs vol. 76, no. 6 (November/ December 1997), pp. 60-73. Quote from p. 72. 17 As the UBS study notes, past instances of the unraveling of monetary unions have sometimes resulted in the collapse or overthrow of democratic governments and the rise of authoritarian regimes. Euro break-up: the consequences, p. 15.

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nationalist governments might adopt belligerent attitudes towards other countries or perhaps towards unpopular domestic groups. With the possible exception of conflicts involving immediate neighbors, most states would still lack the capacity to use force in a meaningful or effective way against their imagined foreign enemies, but this does not mean they could not do considerable damage in trying. Instead of conquering the world, or even one another, todays European nations are, in the words of Francois Heisbourg more likely to hurt themselves, along the lines of the wars of Yugoslav succession in the 1990s. In contrast to the immediate post-Cold War era, however, there might be few mechanisms available with which to restore order and keep the peace. If the EU unravels due to disputes among core member states, NATO, too, could be badly weakened, and without this traditional platform to support and legitimize its actions, the United States would be far less likely to intervene. Given its shifting assessment of its own interests, Washington might have little inclination to do so in any event. As Heisbourg suggests, in the aftermath of a meltdown scenario the U.S. may well turn its back on [a] newly Balkanised post-EU Europe.18 Putting aside such nightmarish possibilities, the playing out of the crisis within the eurozone seems certain to result in heightened tensions among its members. A protracted period of muddling through will likely yield further frayed nerves and deepening resentments, especially between Germany and the states of southern Europe, and perhaps between Germany and France as well. Even if the present crisis leads eventually to a strengthening of central institutions and a greater harmonization of national economic policies, it will be as the result of a bruising process of negotiation and compromise that will leave no one entirely happy or satisfied. A forced, shotgun wedding is more likely to be followed by an extended period of cautious reconciliation and halting efforts to reestablish trust than by a blissful honeymoon. To one degree or another then, the current crisis is going to reinforce pre-existing tendencies towards introversion, if not solipsism. For some time to come, the great bulk of the political energy in European capitals is going to be directed at consequence management, restoring growth, ensuring social stability, preserving domestic support, and managing relations with other governments, and within the institutions of the EU, whatever their eventual form. In the worst-case scenario of intra-European conflict, U.S. policymakers would face decisions about whether and to what extent to commit scarce resources to help keep the peace and restore stability. While there might be some inclination to turn away and leave the Old Continent to its own devices, in the end, the United States would probably end up intervening to help contain the economic, humanitarian, and geopolitical costs of a total European meltdown.
18 Francois Heisbourg, The defence of Europe: Towards a new transatlantic division of responsibilities, in Francois Heisbourg, Wolfgang Ischinger, George Robertson, Kori Schake, and Tomas Valasek, All Alone? What U.S. retrenchment means for Europe and NATO (London: Centre for European Reform, 2012), p. 36.

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If Europe somehow emerges from the current crisis with its central institutions strengthened, Washington will need to learn how to work with them effectively, perhaps taking the opportunity to finally shift its focus away from NATO and towards truly independent and capable EU security institutions. On the other hand, if Europe muddles through, the United States will likely seek to keep traditional transatlantic security mechanisms afloat, even as it pursues deeper strategic cooperation with a handful of key countries that retain some capacity for independent action. Of these, France and Britain have already shown an inclination to work more closely with each other, and with the United States. The biggest questions surround the future disposition of Germany, which is likely to emerge from the crisis with its influence enhanced, but which still has a strong aversion to employing the instruments of hard power.

The Near Abroad

Even under the most optimistic assumptions about the course of the current crisis, Europe faces a period of sustained, deep cuts in military budgets. Here again, the trends are not new. Compared with the period 1985-1989, by 2010, NATOs European members had collectively reduced military expenditures from an average of 3.1 percent to only 1.7 percent of GDP.19 Since the onset of the crisis, in an effort to narrow budget deficits and bring debt under control, virtually every European government has made further reductions in planned spending, with the larger and more capable states like Germany and the U.K. cutting close to 8 percent, the medium-sized powers 10-15 percent, and the smaller, poorer countries like Lithuania and Bulgaria as much as 30 percent.20 Coming on top of two decades of steady shrinkage, these dramatic reductions are resulting in serious losses of capability. Systems necessary for projecting power have been especially hard hit. Germany is retiring existing submarines, transport aircraft, and fighter-bombers and scaling back plans for procuring new ones. France is closing many of its remaining overseas bases and military installations, especially in Africa, and delaying acquisition of aerial refueling and transport aircraft. The decommissioning of the aircraft carrier Ark Royal has sharply diminished the Royal Navys ability to project military power and has been described by one observer as having essentially ended the era of Great Britain as a world power.21 Further cuts may be in the offing. This is especially likely to be the case if Europe continues to muddle through, but even if the crisis results eventually in the strengthening of European institutions, it will leave a fiscal mess that could take
19 Jorge Benitez, U.S. and European Defense Cuts: A Race to the Bottom, Atlantic Council, August 31, 2011. Http://www.acus.org 20 Claudia Major, Christian Molling, and Tomas Valasek, Smart but too cautious: How NATO can improve its fight against austerity, (London: Centre for European Reform, 2012), p. 2. 21 Patrick Keller, Challenges for European Defense Budgets after the Economic Crisis, (Washington: American Enterprise Institute, July 2011), p. 4.

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years to clean up. At the start of 2011, the European Commission estimated that the EU states as a group would have to devote 1 percent of their collective GDP to loan repayments over the next 20 years, a figure equivalent to half the total defense spending of NATOs European members.22 While the situation will vary by country, the longer the crisis drags on, the higher debt levels are likely to rise and the greater the downward pressure on defense will become. With times tough at home, and external threats abstract, at best, it is to be expected that European publics and their elected representatives will continue to show a strong preference for cutting military expenditures while struggling to preserve social welfare programs. Numerous analysts have suggested that the fiscal crisis could present a powerful inducement, indeed an imperative, for closer European defense cooperation. While this is possible, and would certainly be desirable, there are reasons to be skeptical of how much can actually be accomplished. In an era of declining budgets, dwindling force structures, and general economic malaise, governments will be under considerable pressure to protect indigenous capabilities, jobs, and industrial capacity. In addition to economic factors, there are serious political and strategic obstacles to a genuine pooling and sharing of military resources. As differences over the recent intervention in Libya suggest, European countries may at times disagree over when it is appropriate to use force, and the decision of one government to opt out of a mission could cripple a truly joint operation. This would be especially problematic if the states of Europe were to try to rationalize their collective capabilities through a division of labor scheme in which different national forces were given responsibility for particular tasks, such as reconnaissance and lift.23 Even a Hamiltonian scenario that produced more closely coordinated economic policies seems unlikely to dispel such concerns. The impact of a eurozone meltdown on national military capabilities is difficult to predict. On one hand, the devastating economic effects of such a disaster would impose even tighter constraints on resources. At the same time, the unraveling of Europe could produce mistrust, resentment, and a more threatening security environment. In its aftermath, some states might feel the need to bolster their military capabilities in order to defend their borders, deal with internal unrest, and prepare for a highly uncertain future. Depending on the extent of the damage caused to institutions like the EU and NATO, a financial meltdown could result in the substantial renationalization of defense as well as economic policies all across Europe. In sum, the playing out of the current crisis seems likely to result in a further diminution in Europes collective military capabilities as well as its appetite for using them. Although some may eventually emerge with bigger budgets and stronger forces, even the nations that have traditionally had the capacity to project power to other regions are going to experience cutbacks. To the extent that U.S. strategists
22 Smart but too cautious. 23 See the discussion in Heisbuorg, The defence of Europe, p. 34.

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hope to engage Europe as a whole in new overseas military ventures, or even to rely on it to police its own backyard, they are likely to be disappointed for the foreseeable future. Faced with these realities, U.S. policymakers may prefer for the time being to focus on developing a common, transatlantic soft power approach to dealing with the aftershocks of the Arab Spring. While their ability to influence events will be limited, Americans and Europeans share a strategic interest in seeing that the nations of North Africa and the Middle East that have cast off long-standing secular dictatorships do not become hostile Islamist states or dissolve into chaos. Unfortunately, non-military means have already proven to be insufficient to prevent a bloody civil war in Syria and they seem unlikely to be adequate to dissuade Iran from moving further towards acquiring nuclear weapons. If it decides to intervene in Syria, or is compelled to take action against Iran, the United States will undoubtedly turn to its European allies for help. Even if some of them have the will, as budget cuts proceed, even the most capable among them may lack the wherewithal to do much more than provide a multilateral cloak for what would for all practical purposes be unilateral U.S. action.

Asia
Well before the announcement of the Obama administrations pivot, the United States had already begun to shift its strategic focus from Europe towards Asia. The process of what has since come to be referred to as rebalancing started to get underway at the turn of the century but was delayed for almost a decade by the terrorist attacks of September 11, 2001 and the subsequent wars in Afghanistan and Iraq. With the winding down of those conflicts, U.S. strategists have begun to lift their eyes from the Middle East and Southwest Asia and to concentrate more intently on East Asia and the Indian Ocean. For the time being, however, their ability to take action to counterbalance what is widely perceived as Chinas growing power and increasing assertiveness has been limited by the onset of the United States own financial crisis. In part because of the constraints under which they now feel themselves to be operating, U.S. policymakers have been especially eager to engage others in a collective effort to balance Chinese power. While attention has naturally been concentrated primarily on the United States regional friends and allies, in the last several years there has also been increasing discussion on both sides of the Atlantic of Europes stakes in Asia. In addition to substantial economic ties, European governments have begun to consider whether their countries have broader strategic interests in the region and, if so, how these can best be served. At a minimum there is growing recognition, first, that conflict in Asia would have a direct and harmful impact on the functioning of the global economy and, second, that Chinese behavior could itself be a source of instability.
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Europes contributions to the Asian balance of power were never going to be primarily direct and military, a fact that is merely underscored by recent and planned reductions in defense budgets. Despite this obvious limitation, individual European capitals, and Europes collective institutions, have other instruments at their disposal. When the EU joins with the United States to declare its commitment to finding peaceful, diplomatic, and cooperative solutions to disputes over territory and resources in the South China Sea, it sends a signal to Beijing that unduly aggressive behavior will have a harmful impact on relations with Europe.24 Similarly, when individual European governments resist Chinese efforts to silence their criticism of its human rights record (as many did when, over Beijings protests, they sent representatives to Oslo for the awarding of the Nobel Peace Prize to jailed dissident Liu Xiaobo), they demonstrate their continued commitment to universal principles, despite the potential risk to their economic interests. Through their policies on exports, investment, and technology transfer, European governments can also act in ways that will indirectly influence the balance of hard power in Asia. If the EU were to abandon its post-Tiananmen embargo on arms sales to China, the pace of Peoples Liberation Army modernization would increase, though by how much and in what areas is open to debate. The stringency with which governments monitor and regulate Chinese investment in firms involved in sensitive dual use technologies will also have an impact on the ability of the United States and its advanced industrial allies to maintain a qualitative edge in key areas of military capability. On the other side of the balance sheet, European firms could become quite active in helping other Asian states to strengthen their armed forces, either by selling them finished products or by collaborating in the development and manufacture of weapons and other military systems. The inclination of individual European governments, and of Europe as a whole, to take steps that would constrain or counter Chinas growing power has been undercut by the onset of the current crisis. As a recent study by Francois Godemont and Jonas Parello-Plesner points out, just as the EU was beginning to develop a more coordinated and tougher strategy towards China across a range of issues, the effects of the economic crisis are now fracturing Europes embryonic unity and making it much harder to implement this new approach.25 European governments eager for China to buy their debt and invest in their weakened economies are likely to be even more cautious than usual about antagonizing it with unwelcome pronouncements or policies, including those designed to restrict access to sensitive technologies or to improve the military capabilities of Asian states other than China. The divisive effects of the crisis have also made it harder for Europe to present a united front and easier for Beijing to cultivate ties with key countries and

24 U.S.-EU Statement on the Asia-Pacific Region, Phnom Penh, Cambodia, July 12, 2012. http://www. state.gov/r/pa/prs/ps/2012/07/194896.htm 25 Francois Godemont and Jonas Parello-Plesner with Alice Richard, The Scramble for Europe, European Council on Foreign Relations (July 2011), p. 1.

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to discourage the formulation and implementation of common policies that would run counter to its interests. Persistent weakness of the sort envisioned in a muddling through scenario will exacerbate these tendencies, lessening Europes ability to work with the United States in defining and pursuing common strategic goals in Asia. The fragmentation of European political institutions that could accompany a financial meltdown would leave even the largest states at a disadvantage in one-on-one negotiations with Beijing. Under these circumstances, China would find it easier to extract concessions on access to sensitive technologies, including weapons systems, and to bend individual European countries to its will on a range of economic and diplomatic issues. By contrast, a stronger, more unified Europe would be better positioned to stand up to China and, assuming that its members chose to do so, it could make significant contributions to bolstering strategic stability in Asia. While its ability to achieve them will vary depending on what happens in Europe, Washingtons objectives are likely to remain constant across these scenarios. At a minimum, it will seek to dissuade European governments from doing anything that could accelerate unfavorable trends in the Asian balance of power. To the contrary, where possible, it will encourage policies that have the opposite effect, whether by slowing the growth of Chinese military capabilities or enhancing those of other Asian nations. Outside the realm of hard power, the United States will attempt to maximize its leverage, presenting China with a united front on economic and diplomatic issues by appealing to the interests and values it shares with Europe.

Global
Regardless of the outcome of the eurozone crisis, the coming decades will be marked by the continuation of a phenomenon sometimes described as the rise of the rest, the ongoing diffusion of wealth and power from west to east and from north to south that first became evident in the 1970s and 1980s with the emergence of Japan and the other Asian tigers, and has been intensified since the 1990s by the rapid growth of China, India, and Brazil, among others. As has already been suggested, how the current crisis plays out could accelerate or slow Europes relative decline but, barring catastrophe in other parts of the world, it is not going to reverse it. That said, over the next several decades, the slope of Europes trajectory could have a major impact on the structure and functioning of the international system. Taken together, the nations of Europe have vast resources at their disposal. Working in combination with the United States and the other advanced industrial democracies, they can use these to help defend and spread the values that, whatever their differences, all share in common: a belief in the virtues of liberal democracy, the rule of law, the protection of individual rights and freedoms, market-oriented economics, and the peaceful resolution of international disputes. A Europe that is economically weak and politically divided will inevitably punch below its weight,
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exerting less influence than it could, given the raw capabilities of its constituent parts. Unfortunately, absent a turn around that is not yet in view, it seems increasingly likely that this will be the case. While they may overstate its influence before the crisis, many observers note that recent events have damaged Europes soft power, and, in particular, the attractiveness of its model for domestic development and regional integration. According to Rob de Wijk of the Hague Centre for Strategic Studies, Europes declining appeal means it can no longer set an example for regional development elsewhere, thus further undermining its power to shape the international agenda.26 Austerity and slow growth will also mean that fewer funds are available for development assistance and other programs that have served as instruments of European influence in Africa, the Middle East, and other regions. In what may appear to Americans as a somewhat belated discovery of the continuing importance of hard power, some analysts have also pointed out that the shrinkage of defense budgets will diminish Europes ability to shape events, and not only through active intervention. Nick Witney, Chief Executive of the European Defence Agency, argues that a key function of hard power, as ever, is to work on the perceptions of other competitors whether by persuading the Chinese leadership that Europeans are not so decadent that they will not at some point be prepared to stand up for their own interests; or in emboldening a people, as in Libya, to revolt against their dictator. As Witney notes: in the not-as-yet-post-modern world, nothing conveys resolve so clearly as a willingness to make the sacrifices involved in maintaining armed forces and, from time to time, employing them. If it continues to cut capabilities, Europe risks being marginalized in a world where newer and more hard-nosed powers make the rules and assert their interests and values while Europe retreats into retirement.27 Such a development would obviously be contrary to U.S. interests. As it works to bolster and reinvigorate the order that it did so much to create, the United States is going to need all the help it can get. While its role can only be indirect, and while it will remain preoccupied with its own problems for some time to come, Washington needs to do what it can to encourage Europe to dig its way out of its economic difficulties, avoid the disintegration of its political institutions, and slow, if not reverse, the accelerating trend toward demilitarization. It may be possible, and at times even preferable, for the United States to address some problems in collaboration with a handful of allies. When it comes to global issues, however, there is no substitute for a unified Europe. Although it has yet to fulfill its potential, the EU could be a powerful force for good in the wider world,
26 Rob de Wijk, The geopolitical consequences of the -crisis, Europes World no. 21 (Summer 2012), p. 21. On Europes loss of soft power, see also Walter Russell Mead, The Euros Global Security Fallout, Wall Street Journal (June 19, 2012). 27 Nick Witney, How to Stop the Demilitarisation of Europe, European Council on Foreign Relations (November 2011), pp. 6-7.

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especially if it chose to align and coordinate its policies and programs with those of the United States, Japan, and the other advanced industrial democracies.

Conclusions
From a U.S. perspective, it is tempting, and in a sense reassuring, to see the eurozone crisis as marking little more than an acceleration in long-standing tendencies toward introversion, demilitarization, a diminished share of global wealth, and a dwindling voice in world affairs. For a number of reasons, however, this view is overly sanguine. Even if Europe is destined to decline, the pace at which it does so could be consequential. Coinciding as they do with the United States fiscal crisis and post-war fatigue, Europes troubles could lead to a dangerous diminution of overall Western engagement at a critical moment in various hot spots. Along with problems that may metastasize in the relatively near term (including Syria, Iran, and Afghanistan) there are also emerging long-term challenges to U.S. and European interests that will be far more difficult to manage without a coordinated, collective response. In addition to Chinas rise and the potential destabilization of large parts of the Middle East and North Africa in the aftermath of the Arab Spring, there is the likelihood that an Iranian bomb could trigger a new wave of nuclear proliferation. Finally, it is conceivable that events could unfold in new and highly disruptive ways, perhaps triggering a worldwide depression or the reemergence of armed conflict within Europe itself. The United States has every reason to hope that Europe will emerge from the current crisis stronger, more unified, and more capable of acting as a full partner in dealing with the strategic challenges of the 21st century. At this point, however, it must be said that such an outcome does not appear likely. The avoidance of disaster, and a continuation of previously existing trends, may be the best that can reasonably be expected. This is not good news, to be sure, but it reinforces an important conclusion: regardless of how the current crisis unfolds, but especially if it goes poorly, reinvigorated transatlantic dialogue, and enhanced cooperation, will be essential to the security of both the United States and its European partners. Aaron Friedberg is a non-resident senior fellow with GMFs Asia program and a professor of politics and international affairs at Princeton University.

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Assessing the Competition

How the European Crisis Impacts Chinas Global Strategy
by Qin Yaqing

Europe Matters
he onset of the financial crisis in 2007 led to the wide-spread implementation of stimulus plans by the worlds major economies, developed and developing alike. While some of these measures were effective, the debt problem has become increasingly serious for many governments, and especially in the eurozone, where many countries had previously accumulated heavy debt burdens. Greece was the first to get into financial trouble, followed by Spain, Portugal, Ireland, and Italy all of which already had weak financial institutions and structural challenges in their economies. The European Union (EU) is Chinas largest trading partner and one of its main sources of foreign direct investment. Europe is also Chinas strategic partner and one of the decisive actors in Chinas foreign policy. For China, the euro crisis is not only an economic problem, but also a strategic issue with long-term and deeply consequential impacts.

The European Crisis: An Appraisal

In todays China, there are two general perspectives on the European debt crisis. The first views the crisis as a serious, enduring situation that has adversely affected the world economy in general and the Chinese economy in particular. The second holds that the crisis is manageable and that Europe has the ability to solve it. However, to accomplish this goal, substantial reform will be required, which, in turn, needs political will and effective regional leadership. The European debt crisis first began to attract global attention in 2009 when Greece declared that its deficit was 13.7 percent of GDP, not 6 percent. Initially, many in China thought that the problem would be short-term and that the EU would be able to address the problem quickly and effectively. It was argued in China that the euro crisis was not only one of many crises of its kind to be found in history, but also that it was comparatively less serious than those that preceded it.1 These views were
1 Zhang Yuyan, Jiejue Ouzhai Weiji XukaoTuijin Ouzhou Yitihua (Solution to the European Debt Crisis Lies in Further European Integration), http://www.djckb.com/dzb/html/2012-01/16/content_3970.htm?div=-1, accessed on September 1, 2012.

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supported by the confidence in the overall strength of the EU economy, the efforts by European countries, and the assistance of international organizations.2 But the situation did not develop positively: by the end of 2011, Greek debt had reached an intolerable high of 165.3 percent3 and the country was on the brink of financial collapse. Greeces domestic situation became unstable with political sentiments running high in nation-wide debates and elections. Other European countries Spain, Ireland, Portugal, and Italy whose growth had been lagging for years were faced with similar crises. By mid to late 2011, Chinese scholars agreed that the euro crisis is a long and lasting struggle and recovery would take five or even eight years. Three arguments support this reasoning. First, the combination of a high living standards and low economic growth has reduced the dynamism of the European economy. In Greece, financial deficits a persistent problem for the Greek economy became worse over the last two decades. In the same period, labor costs increased rapidly to maintain a high living standard, inflation constituted a tenacious problem, and the inadequacy of the governments financial management became increasingly evident.4 Borrowing a slippery slope appeared to be the only solution, and was adopted as such. The troubles of high debt and low growth became common to the weaker eurozone economies, as demonstrated by the growth and deficit figures for those countries during 1999-2012. Second, despite the urgent need for reform in the eurozone economies, popular resistance to austerity measures has made it hard to move forward. It is well understood that the debt crisis is a problem that has been long in the making. It is also accepted that improving the situation would require serious reform efforts. Yet, while leaders in European countries have championed reform and change in their election campaigns, there has been little in the way of substantial change. Understandably, the regression to lower living standards is undesirable. But a high living standard without the support of dynamic economic growth is unsustainable and unrealistic. While the origins of European crisis may be seen more from an economic perspective, reform has political implications and very often falls into the category of high politics. As Mancur Olson maintained, when interest groups are concerned only about distribution of wealth and pay little attention to the creation of wealth, the economy will fail, and even a major power will decline.5 The Greek debate has demonstrated the complexity and difficulty that arise when reform tops the political agenda.
2 Qiu Yuanlun, Ouzhou Qianjing Bingbu Andan (Europeans Future is not Dark), http://opinion.hexun. com/2011-07-25/131715418.html, accessed on September 1, 2012 3 Eurostat, April 2012, http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-23042012-AP/EN/223042012-AP-EN.PDF, accessed on September 1, 2012. 4 See Yu Yongding, Cong Ouzhou Zhuquan Zhai Weijidao Quanqiu Zhuquan Zhai Weiji (From European Sovereign Debt Crisis to a Possible Global Sovereign Debt Crisis), Guoji Jingji Pinglun (International Economic Review), No. 6, 2011, pp. 14-24. 5 Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups, Cambridge, Massachusetts: Harvard University Press, 1980; The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, New Haven: Yale University Press, 1982.

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Third, the combination of the crisis in the eurozone and possible crises in other parts of the world has shown a failure in governance. In theory, a crisis will originate in one country and then spread quickly to other neighboring countries. No crisis is an isolated event. The global economic crisis thus reflects problematic governance not only at the national level, but also at the regional and global levels. One reason that the Greek crisis spread rapidly and affected the eurozone as a whole is because there was no common fiscal policy, even though the eurozone countries shared a common currency. The inadequacies of the regional mechanisms for governance have led to an intensified game between economies in the eurozone, between the European Central Bank and the member governments, and between countries deeply trapped in debt and international organizations responsible for promoting global economic development. It is important for the eurozone to form a common financial policy, to issue common bonds, and establish a common banking union.6 However, the implementation of such goals take time and may suffer from opposition. Moreover, there is a risk that the crisis will continue to spread to other parts of the world, causing a governance problem at the global level. The United States is already beset by rapid increases in current account deficits and fiscal deficits, and the Obama administration has pledged to cut a large margin of its expenses. If the U.S. economy and other countries should continue to be affected by the euro crisis, a serious global governance issue may arise. It is therefore clear from these factors that the euro crisis will continue for the time being. Despite these difficulties, Chinese analysts hold that they can be overcome. European integration will continue to move ahead. The most optimistic view is that the debt crisis can serve as a driving force to push forward European integration. As Professor Song Xinning writes: The crisis is a test, in which European countries have strengthened such coordination.7 Simultaneously, it is stressed that the fundamental solution to the euro crisis lies in effective reforms, three of which seem to be quite important. First, the leadership of the regional process of integration must be strengthened. Most Chinese scholars hold that the lack of coordinated policy concerning fiscal and monetary policy at the regional level is a fundamental cause of the crisis. The lack of progress in the fiscal area to accompany the economic and monetary union (EMU) reflects a serious lack of strong and effective regional leadership, which can initiate and implement dynamic reforms. Second, Germany, as the largest economy in the EU, should set the example for rational and effective regional leadership. Despite criticism of Germanys disciplined
6 Wolfgang Munchau, How the Eurozone will be resolving its crisis, YEAR, Press info. http://www.lecercledeseconomistes.asso.fr/IMG/pdf/S05-Munchau-02.pdf, accessed July 12, 2012. 7 Interview with Professor Song Xinning, http://www.chinanews.com/gj/2011/08-18/3265635.shtml, accessed on September 3, 2012. There are some comments in China holding that the European crisis is caused by the fundamental contradiction embedded in capitalism as a system, that is, the contradiction between the socialization of production and the private ownership of productive means. See Jiang Yongyao and Yang Shaolei, Ouzhai Weiji: Dangdai Zibenzhuyi Yitihua Yihua Emeng (European Debt Crisis: A Terrible Dream of Alienation for Capitalist Integration), Xinhua Wenzhai (Xinhua Digest), No. 15, 2012, pp.26-30.

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attitude towards the troubled EU economies and of the internal German debate, it is generally believed that Germany should take the leading role. As Yu Yongding has pointed out, whether Europe can solve the debt problem, and how it will solve it, depends very much on what Germany will do.8 Third, it is critical to restore political confidence in the European Union. The debt crisis is both a financial issue as well as a political one. The Greek debt crisis, together with the difficult situations in other southern European countries, has incited intense debate concerning regional integration efforts. In short, from 2010 to 2030, the first decade will likely witness a long process of European recovery, a process which must be accomplished despite formidable obstacles. If reform measures are effective, the second decade may see a more integrated and economically dynamic Europe.

Impacts on China: Growth, Power, and Governance

China has been affected by the euro crisis because it is highly dependent on the world economy in general and the European economy in particular. Yet opinions vary as to the exact effects on China. Some believe that the consequences are quite serious, and some argue that they are more indirect and not very serious at present. Still others believe that it is too early to tell.9 If there is a consensus amongst Chinese scholars, it is that the euro crisis, if it continues to worsen, will definitely do serious damage to Chinas economy. Traditional Chinese wisdom requires people to see things in a dialectic and complementary way: everything has two sides.10 By this logic, the euro crisis may influence China in three important ways, each of which poses challenges and provides opportunities. In other words, any challenge is also an opportunity, depending on human agency. Growth, power, and governance constitute the three main areas where challenges and opportunities exist side by side.

8 Yu Yongding, Speech at the Annual Conference of 50 Chinese Economists, February 23, http:// money.163.com/12/0213/18/7Q5MRJGD00252G50.html. 9 The debate is still going on well into 2012. See Mei Zhaolong, Cong Oumeng Jianli Caizheng Lianmeng de Quzhe Licheng Kan Ouzhai Weiji Huajie de Qianjing (Prospects for the solution of the European debt crisis: inspiration from the difficult path of establishing a European financial union), Dangdai Shijie (Contemporary World), No. 3, 2010, pp. 45-47; Ding Yuanhong, Ouzhou Zhaiwu Weiji de Genyuan yu Qianjing (European debt crisis: the causes and prospects), Heping yu Fazhan (Peace and Development), No. 1, 2012, pp. 42-45; Liu Fei and Gao Zhanjun, Ouzhai Weiji yu Zhongguo Duice (European debt crisis and Chinas Countermeasures), Guoji Jingrong (International Financing), No. 3, 2012, pp. 12-16; and Yang Chunyuan, Ouzhai Weiji dui WoguoWaimao de Yingxiang Jizhi Tanjiu (European debt crisis: its impacts on Chinas foreign trade), Jingji Luntan (Economic Forum), No. 1, 2012, pp. 14-15. 10 Qin Yaqing, Guanxi yu Guocheng: Zhongguo Guoji Guanxi Lilun de Wenhua Jiangou (Relations and Processes: Cultural Construction of International Relations Theory), Shanghai: Shanghai Peoples Publishing House, 2012; Qin Yaqing, International Society as a Process: Identities, Institutions and Chinas Peaceful Rise, The Chinese Journal of International Politics, Vol. 3, No.2, pp.129-153.

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Growth
The major concern is Chinas economic growth. The euro crisis poses a great challenge to Chinas overall economy. In recent decades, China has prioritized economic growth and export-driven development. After almost three decades of rapid development, Chinas further growth is dependent upon a relatively healthy and dynamic international economic environment. The European Union has played a crucial role in this respect. It is Chinas largest trading partner, and the bilateral trade between the EU and China accounts for 16 percent of Chinas total international trade.11 During the period between January and July 2011, however, the increase of Chinas exports to the European Union decreased from 25 percent to 17.8 percent.12 Reduced trading volume goes hand-in-hand with the appreciation of the Chinese currency vis--vis the euro, which has depreciated by 15 percent, adding to the difficulty for China to export to the European market. The shrinking market in Europe and the appreciation of the Chinese reminbi have clearly affected Chinas exports, contributing to the quick slide of Chinas international trade in the first half of 2012. Data have also shown that Chinas economic growth rate has fallen below 8 percent in the first half of 2012. One of the most important causes for the decline, according to many analysts, is the financial crises in the United States and Europe.13 Although 7.8 percent is still a very high growth rate, it is a record low in the past three years and a rare figure in the last decade. In addition to the lowered growth rate, unemployment and other social problems have become even more dire. Furthermore, China fears that the EU, in light of the depreciation of the euro, will take harsher protective measures because of its own crisis, which will make imports from China less desirable. China has faced restrictive measures by the European Union since the beginning of the crisis. For example, in May 2011, the European Union announced that it would impose simultaneous anti-dumping and anti-subsidiary duties on coated paper imported from China within a five-year period. Again in July 2012, European enterprises asked the European Commission to launch anti-dumping proceedings against Chinese firms importing photovoltaic products to Europe. This caused great concern, because it will be the biggest trade dispute yet between China and the European Union. Even though Chinese Premier
11 According to some studies, as early as 2009 when the eurozone debt crisis had just begun, Chinas export to the European market showed signs of decline. Compared with 2008, there was a 13 percent decrease with the 15 old EU members, a dramatic 36.1 percent decrease with Spain, and an average 17.5 percent decrease with the new EU members. See Kong Fanwei, Ouzhai Weiji Yingxiang Zhongguo Jingji de Tujing yu Yingdui Zhice (Approaches of European Debt Crisis Influencing Chinas Economy and our Countermeasures), Guoji Rongzi (International Financing), October 2011: p.29. 12 Hao Fengjie, Oumei Zhuquan Zhaiwu Weiji dui Zhongguo Jingji de Yingxiang yu Qishi (The Sovereign Debt Crises in the United States and Europe: its Impacts on Chinas Economy and the Lesson to be Learn), http://stock.hexun.com/2011-09-09/133262771_3.html, accessed on September 2, 2012. 13 Zhongguo Jingji Zengsu Sannian Shoupo Ba (Chinas annual economic growth rate has fallen below 8 percent: first time in the last three years), http://www.sina.com.cn, accessed on July 20, 2012. See also Guojia Tongjiju jiu Shangbannian Jingji Yunxing Qingkua Da Jinzhewen (Press Conference by the State Statistics Bureau on the Performance of Chinas Economy in the First Half of 2012), http://finance.sina. com.cn/china/hgjj/20120713/133212561089.shtml, accessed on November 17, 2012.

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Wen Jiabao and German Chancellor Merkel agreed on a negotiated settlement, it seems that it would be very difficult to avert the case. The challenge, however, is at the same time an opportunity, for the crisis has forced China to speed up its domestic economic restructuring. Even before the European debt crisis, China realized that its approach of economic development needed major reform. Although Chinas growth has been dramatic, it is in many ways unsustainable in terms of the heavy dependence on exports, the huge consumption of natural resources, the use of relatively cheap labor, and the damage to the environment. Furthermore, the gaps between rich and poor and between advanced and backward regions have widened, causing significant social and political problems and incurring instability. In fact, sustainable development and major restructuring of the national economy have been recognized as the most urgent tasks for the whole country in various official documents since 2007. This transformation will naturally be difficult. The 2008 financial crisis that started in the United States alerted the Chinese to the importance of restructuring their economic system and improving their development approach. The euro crisis has given China an additional push to make restructuring and reforming urgent responsibilities, especially for the next Chinese government in 2013. In addition, the European crisis may even spur reform in related areas such as politics and society.

Power
The European crisis has stirred up concerns about the changing power relations in the international system. China has persistently supported a multi-polar international system, in which the major actors include the United States, Europe, Russia, and China.14 It is believed that a relatively balanced power relationship among these actors may help maintain a more stable international order and reduce pressure on China itself. Since the idea of balance means more balance of relations, which is an integral part of the Chinese mindset,15 the view is widely held that an equilibrium of power facilitates balanced relationships among equals in the international system. Europe is regarded as one of the most important poles in such a multi-polar system. It is seen as an indispensable force in order to achieve global strategic balance, and, more specifically, balance in the China-U.S.-Europe relationship. In addition, China and Europe did not have any thorny issues of strategic significance. A strong and prosperous Europe thus has been persistently and consistently perceived as being in Chinas strategic interest. The European crisis has diminished the position of the European Union in the world economy as well as in international relations. In economic terms, the position of the euro as a global currency is weakened. This may lead to a revival of the U.S.
14 Qin Yaqing, ed., Daguo Guanx iyu Zhongguo Waijiao (Great Power Relations and Chinas Diplomacy), Beijing: World Affairs Press, pp. 7-14. 15 Qin Yaqing, Rule, rules, and relations: toward a synthetic approach to governance, The Chinese Journal of International Politics, Vol. 4, 2011, pp. 117-145.

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dollar as the dominant currency in the world. Politically and strategically, Europes weaker power position may reduce its role as an effective balance in the structure of the international system. It is possible that Europe may pay more attention to its own problems for the near future, especially if the crisis continues. None of these outcomes support Chinas desired vision of a multi-polar world. At the same time, the European crisis has increased Chinas position in the global arena. As the second largest economy and the most rapidly rising power, Chinas influence and leverage have recently been enhanced. Even though the two crises in the United States and Europe have adversely affected Chinas economic growth, China has still managed to realize a high growth rate in the past five years, higher than most countries in the world. Consequently, Chinas power position has been relatively strengthened. The euro crisis may also augment the overall strategic positions of the five BRICS countries (Brazil, Russia, India, China, and South Africa). They are roughly at the same level of development and, importantly, have a similar strategic outlook. Their voices may be even stronger in discussions of global solutions. As the largest economy among the five, Chinas position may be improved. At the macro-level, the world may see a relative decline of the major developed countries and an increase of economic power of emerging economies. Tellingly, in the last quarter of 2010 and the first quarter of 2011, the total foreign direct investment attracted by the developing members of G20 exceeded that of the developed members.16 All of these factors indicate developments that are favorable for China in terms of its relative power position in the international system.

Governance
There has been increased demand for China to take more responsibility in global governance to accompany its rapid economic growth. Since the end of the Cold War, the number of transnational threats has increased. The world of the 21st century is now challenged by numerous problems, including civil wars, terrorist activities, economic crises, natural disasters, climate change, epidemic diseases, and poverty. The list is endless. Global governance turns out to be more a governance failure.17 Despite the effort made, the world as a whole has not effectively solved any of the above threats, which tend to worsen over time and to become interconnected. The anti-terrorist wars have caused the United States to spend enormous resources on its military. The financial crisis of 2008 and the ongoing European debt crisis have further constrained the major developed countries. Emerging economies have thus been asked for more investment in global
16 Song Guoyou, Oumei ZhaiwuWeiji dui Guoji Jingji Geju de Yingxiang (Influence of Debt Crises in Europe and the United States on Configuration of the International Economic System), Xiandai Guoji Guanxi (Contemporary International Relations), No. 12, 2011. 17 If we look at the few decades since the end of the Cold War, the list of transnational and global threats has been getting longer and longer, but none of the problems have been effectively dealt with, let alone solved. It is indeed a big question for us to think about, the question of a failed world or governance failure. See Qin Yaqing, Managing a failed world: pluralism, partnership, and participation, paper delivered at the Global Challenges Forum, New York, July 7-9, 2012.

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governance, and China has borne the brunt. The 2009 Copenhagen Conference on climate change provides a classic case of European nations asking China to take on more global responsibility. China believes that it is still a developing country. Although its GDP is the second highest in the world and some estimates suggest that it will overtake that of the United States in 2016,18 Chinas GDP per capita is far behind that of many developed countries. The vast area of the northwestern part of China remains very poor, sharply contrasting with the wealthier, coastal east. In China, domestic problems are numerous. For instance, social welfare, public health, education, and employment are among the fields in which huge resources need to be invested. As the Chinese premier Wen Jiabao has repeatedly said, no matter how large the total economy is, the country is still very poor if the wealth is equally divided by a population of 1.3 billion. Further, Chinas GDP per capita ranks around the 100th in the world.19 China, therefore, supports the principle of common but differentiated responsibilities,20 and has declared that it is willing to take more responsibility as long as its resources and capabilities permit. However, the demand for even more responsibility has created heavy pressure on China. The European crisis has caused further intensity of the debate about Chinas role as many Europeans hope and demand that China provide more assistance and investment to help Europe climb out of its financial black hole. The flip side is that China now has more say in global governance, especially in the financial and economic fields. The financial crisis in the United States led to the formation of the G20 as an important platform for global financial governance. China has become an influential member in dealing with the global financial crisis and reforming the existing institutions. In the process, Chinas share in the international institutions such as IMF and the World Bank has increased, strengthening its role in the international decision-making process. For a country that was almost economically negligible just 30 years ago, this is a major achievement. If global governance continues to be the most pressing global issue in the next two decades, thus spurring reform of global governance to meet the need of the rapid changes in the world, Chinas foothold in G20 and other international institutions will provide it with a sharper edge and louder voice in the process of governing the global commons.

18 Josephine Moulds, Chinas Economy to overtake U.S. in next four years, says OECD, The Guardian, November 9, 2012, www.guardian.com.uk/business/2012/nov/09/china-overtake-us-four-years-oecd, accessed September 17, 2012. 19 Wen Jiabao Jianqiao Daxue FabiaoYanjiang (Wen Jiabao gives a speech at Cambridge University), http://news.xinhuanet.com/world/2010-02/03/content-10755604.htm, accessed on July 20, 2012. 20 See Rio Declaration on Environment and Development, in which, Principle 7 states: In view of the different contributions to global environmental degradation, States have common but differentiated responsibilities. www.un.org/documents/ga/conf151.aconf15126-1annex1.htm, accessed on September 17, 2012.

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Chinas Strategic Choices

Since there is now largely a domestic consensus on the lasting nature of the European crisis, it is possible that China will adjust its policies, domestic and international alike.

Efforts at Home
The most direct impact of Europes calamity is on Chinas national economy, and therefore the most direct effort is likely to be taken in the economic field. In the past two years since the relaxation of the U.S. sub-prime crisis, the Chinese government has made deliberate efforts to reduce the speed of economic growth, with a target of 7.5 percent annual growth rate. The outbreak of the European crisis, roughly at the same time, adversely and seriously affected Chinas export and thus helped to reduce the growth rate. In 2012, the growth rate has fallen below 8 percent, reaching a low of 7.8 percent, which has caused concern, for 8 percent seems to be a magic number believed to guarantee social stability. Although Chinese growth still tracks the government target, the trend of the world economy is moving in an undesired direction. If the European crisis continues, China may have to enact stimulus policies. It is assumed that such stimulus policies may not be as big as that in 20082009, which, with 400 billion, boosted economic growth, but at the same time showed negative effects such as inflation in China. 21 At the same time, several policy choices seem more obvious. The first trend is the encouragement of the private sector, as well as investments in small- and mediumsized enterprises (SMEs). In the first round of stimulus spending in 2008, strong support was given to the state-owned enterprises (SOEs). Yet recent government moves seem to pay more attention to the private sector and SMEs.22 The second development is to further increase domestic consumption. With 1.3 billion consumers, Chinas domestic market is huge, but the widening gap between rich and poor has prevented a substantial increase in domestic consumption. To better utilize the potential of the market, the most important measure will be to invest in the impoverished sections of society and of the regions. It is therefore expected that Chinas domestic development strategy will favor people and provinces in the less developed regions. The third option is to invest more in social welfare and noneconomic projects related to public health, education, environment, and cultural development. These policy areas have historically been given inadequate attention because the previous emphasis has been on infrastructure and economic growth.
21 Ma Jun, Ouzhai Weiji dui Zhongguo de Yingxiang (The influence of European debt crisis on China), Capital Shanghai, September 18, 2011, p. 51. 22 Chinese Premier Wen Jiaobao held a series of meetings discussing Chinas economic development, and one of the foci is how to promote the growth of medium-sized and small business. Providing opportunities for equal competition and helping them in terms of financing are two important measures to be taken. See Wen Jiabao Zhuchi Zhaokai Jiangsu deng Sisheng Jingji Xingshi Zuotanhui (Wen Jiabao holds discussion with four provincial leaders on economic development), http://www.js.xinhuanet.com/xin-wenzhong-xin/20, accessed on July 20, 2012.

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Strategic Choices in the World

There should be little change in Chinas overall international strategic policy, and the European Union will continue to be one of Chinas most important strategic partners. Despite the European crisis, China believes that Europe is an important player in the global arena and that its significance cannot be easily dispensed. Moreover, Chinese analysts agree that the euro crisis, though having a lasting and complex nature, will eventually be overcome. There will emerge an even stronger European Union with common financial policy and more coherence.23 This development will eventually help to turn Chinas consistent strategic effort to create a multi-polar world into a future reality. Strategic adjustments, however, have to be made. If China tries to maintain an annual growth rate of around 8 percent, which is believed to be politically and socially desirable, and if China continues to prioritize economic development, it will have to make up domestically for Europes loss of economic dynamism.24 Diversification is perhaps the single word that describes Chinas strategic adjustment. China will likely further diversify its partnerships and reach out to other actors in the world. Two multilateral organizations and two regions are of particular importance. The two multilateral international organizations that China may try to cultivate are the Shanghai Cooperation Organization (SCO) and the BRICS. The SCO bears strategic significance not only because it is the multilateral organization that was initiated by China, but also because of its importance for both Chinas national security and international strategic position.25 At the 2012 summit held in Beijing, Chinese President Hu Jingtao discussed the four major tasks: establishing a harmonious region with stability and prosperity, making a joint effort to maintain regional security, promoting economic cooperation, and coordinating strategies in world affairs.26 Several documents signed by the 11 heads of state reflect the willingness of the members to enhance the SCO as an international organization. The five members of the BRICS are expected to have closer cooperation among themselves and better coordination in major areas of global economic governance. They will strengthen economic cooperation and try to reach a higher level of institutionalization. They also require further reform of the international financial institutions, such as the IMF and the World Bank, including more representation of developing economies, the implementation of the 2010 plan for increasing shares
23 A caution is that Greece may well be a big test. If Greece should withdraw, there would be doubt in China about the EUs ability to deal with the crisis and even about the EU as the best example of regional integration. 24 Another factor that may influence Chinas strategic choice is the U.S. pressure, especially in the last two years, caused by the U.S. strategic adjustment to pivoting to or rebalancing in Asia-Pacific. See Hillary Clinton, Americas Pacific Century, Foreign Policy, http://www.foreignpolicy.com/articles/2011/0/11/ americas-pacific-century?page=full, accessed on July 25, 2012. 25 SCO members includeChina,Kazakhstan,Kyrgyzstan,Russia, Tajikistan, andUzbekistan. 26 http://www.fmprc.gov.cn, accessed on July 24, 2012.

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of such countries, and more equal selection of leaders of the international financial institutions. They also call for more coherence on policies related to political and security issues. As one of the inventors of the BRICS, China will make an even greater effort to build that grouping. The two regions on which China will focus are East Asia and Africa. Although other regions continue to be quite important, these two are unique in many respects. East Asia27 naturally has paramount strategic importance for China. China began to participate actively in the process of regional cooperation in the mid-1990s. The region itself has already seen 15 years of regional economic cooperation. Since the Asian financial crisis and its multilateral platform of financial cooperation with $120 billion, the Chiang Mai Initiative has come into effect and has worked as a regional financial support and assistance mechanism. It has formed a fairly effective intra-regional trade system and established a productive network with a reasonable division of labor between China, Japan, South Korea, and ASEAN countries. The past three years have witnessed tensions in terms of territorial disputes, especially between China and other countries over the South China Sea, together with a U.S. rebalancing strategy in the region. Yet, economic and functional cooperation continues among the East Asian countries. A relatively stable regional security situation and a highly dynamic economic cooperation in the past two decades have proved quite favorable to Chinas national security and economic development. Despite the present difficulty, China will continue to invest strategically in this region. Africa constitutes a partner that will attract increasing attention on the part of China. Since the beginning of the Chinese reform period, strategic attention has largely focused on the developed world, where capital, technologies, and knowledge originated, and where Chinas goods found markets. Considering the present economic crisis affecting the developed world, China has expanded its partnership with Africa. For China, Africa is a new opportunity when the world economy is uncertain and European and American markets are shrinking.28 Chinas trade volume with Africa has reached $166 billion, a 20-fold increase over the past two decades and an 83 percent increase in the past three years, making China the largest trading partner with the continent. At the same time, Chinas investment in Africa has reached $14.7 billion by the end of 2011, increasing by 115 percent annually and covering many areas such as financing, infrastructure, agriculture, and tourism. In addition, Chinas assistance to Africa has increased dramatically in the past two years. The Beijing Declaration issued by the Fifth China-Africa Cooperation Forum in 2012 expressed commitment to, among other things, the principle of non-interference, reform of the international institutions, and common

27 Here East Asia refers geographically to the ten ASEAN countries plus China, Japan, and South Korea. 28 Zhongfei Maoyi Hubu Mou Shuangying (China-Africa trade: complementary for a win-win result), Zhongguo Jingji Daobao (China Economic Herald), July 4, 2012, http://www.fmprc.gov.cn, accessed on July 24, 2012.

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but differentiated responsibility concerning global issues. It is expected that this cooperation will be further expanded in the years to come.

Conclusion
The European crisis has shaken the world, and the impacts are global. Consequently, there are both challenges and opportunities for China. Recovery from the European debt crisis is a long and painful process, requiring extraordinary efforts and difficult decisions. The impacts of the crisis on China are serious, for China has been deeply involved in the world economic system and highly interdependent with other economies, especially developed economies in Europe. It has caused Chinas economic growth to slow down, made the power distribution less balanced, and led to increased demand from the international community for China to assume more global responsibility. At the same time, the European crisis may also give an additional push to China to execute further and bolder reforms in the economic and related fields at home, such as social, institutional, and political reforms, in the years to come. Chinas relative power position will be elevated, and Chinas role in global governance enhanced. There will be both continuity and change in Chinas international strategy. The great attention it has paid to the developed world in general and the European Union in particular will remain relatively unchanged and China will continue to view Europe as a very important player in global affairs as well as a key strategic partner. However, China will tend to diversify its partnerships, both as a direct response to the European crisis (as well as to the previous financial crisis that started in the United States) and as a necessary strategic choice. The SCO and the BRICS are the two main multilateral platforms, and East Asia and Africa, the two main regions for Chinas diversification. In addition, other developing regions, such as Latin America, will also receive more attention in the years to come. Qin Yaqing is the executive vice president and professor of international studies at the China Foreign Affairs University (CFAU), vice president of the China National Association for International Studies, and executive deputy director of the East Asian Studies Center of CFAU. He received his Ph.D. from the University of Missouri at Columbia.

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Dimming Prospects
Indias Fading Interest in the European Union
by Mohan Guruswamy

The Quest for a European Union

he historical roots of the European Union go back to the end of World War II when the many in the war-ravaged continent began yearning for a future free from conflict. But no sooner had WWII ended then Europe again found itself on the abyss of war. The Cold War now divided Europe in a bitter contest between two different and adversarial systems. As Winston Churchill put it: From Stettin in the Baltic to Trieste in the Adriatic, an iron curtain has descended across the Continent.1 Instead of the peace that it yearned for, it was now threatened by Armageddon that promised the extinction of all of Europe, and a good part of the rest of the world. However, the swift post-war economic revival of the three great Western European powers Britain, France, and Germany and the realization that they faced a new challenge to the democratic way of life due to the sudden expansion of the communist universe after WWII united Western Europe in action and in deed. The dangerous geo-political fault-line only spurred the endeavor to unite Europe as one nation so that competing nationalisms and ambitions do not engulf it in war again. When the Single Europe Act of 1987 was signed, it appeared that a new economic and political monolith was soon to be born. The rejection of communism in Eastern Europe followed by the German reunification in October 1990 and the dismemberment of the Soviet Union in 1991 seemed to herald the reinstatement of Europe as the leader of the world, as it was in the 1800s till the rise of the United States in the 1900s. Events followed swiftly. By 1993, the Single Market was established with four new assured freedoms the movement of goods, services, people, and money. The optimism of a united and once again invigorated Europe (less Russia) was symbolized by the Treaty of Maastricht on a European Union in 1993, and the subsequent Treaty of Amsterdam in 1999. The Amsterdam Treaty meant a common citizenship and charter of individual rights and was an attempt to build a continental and democratic nation with a common parliament, a common
1

Nine months after Sir Winston Churchill failed to be re-elected as Britains prime minister, Churchill traveled by train with President Harry Truman to make a speech. On March 5, 1946, at the request of Westminster College in the small Missouri town of Fulton (population of 7,000), Churchill gave his now famous Iron Curtain speech to a crowd of 40,000.

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vision of freedom, security, and justice, and a common foreign and security policy (CFSP). Europe was now to be a seamless union of many great economic and political aspirations. This new union of old and new Europe2 was consummated with the arrival of euro notes and coins on January 1, 2002.

India Takes Note

In the previous decade, the world had witnessed the arrival of China as an economic powerhouse that not only moved the concentration of manufacturing away from the United States and Europe to its territory, but also changed the social equilibrium in both continents by taking away jobs and sucking in capital. In early 2000, the world also saw a rising India, for the first time posting China-like GDP growth figures3 and promising a new way of doing things while retaining the foundations of a Western-style democracy and independent judicial system. Because of its colonial legacy, India derived many of its early political and economic vision from Europe and the U.K. in particular. Europe it seemed, with its benign welfare state care system, was the one to emulate. Many in India also felt that Europe had the potential to supplant the United States as the worlds leading economic and political power. Particularly since the United States got enmeshed in the long and expensive wars against terrorism that took it to distant lands to supposedly establish democracies in very different cultures. While the expedition into Afghanistan by and large had the support of Europe, coming as it was in the wake of 9/11, Europe largely kept out of the Iraq war. Despite France and Germany voicing their opposition to the Iraq campaign, U.S. unilateralism saw itself get enmeshed in an expensive and debilitating decade long war. Many in India interpreted this as willingness to part ways with the United States and a willingness to assume a more active role in world affairs. By drawing closer to Europe, particularly France and Germany, India seemed to be hedging its bets a bit. Europe also signaled its willingness to take a more active role in shaping the emerging geopolitics by embarking on military operations in the former Yugoslavia. This further signaled that after decades of accepting the United States leadership, Europe, actively led by Germany and France, was willing to chart its own course. This was a period of great optimism, particularly within Europe, though in many world capitals there was skepticism about whether the European Union could fulfill what many of its leaders thought was its destiny. In terms of numbers, the European Union looked impressive indeed. Its GDP was bigger than the United

The terms old Europe and new Europe were coined in 2003 by the then U.S. Defense Secretary, Donald Rumsfeld, who exasperated by the unwillingness of Germany and France to support the United States on Iraq, said: Germany has been a problem, and France has been a problem, but you look at vast numbers of other countries in Europe. Theyre not with France and Germany on this, theyre with the United States. Rumsfeld then said Germany and France represent old Europe. The GDP in India expanded 6.9 percent in the third quarter of 2011 over the previous quarter. Historically, from 2000 until 2011, Indias average quarterly GDP growth was 7.45 percent, reaching an historical high of 11.80 percent in December of 2003 and a record low of 1.60 percent in December of 2002.

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States4 and its economy was not made anemic by profligate wars.5 The economy of Europe is currently the largest on earth and it is the richest region as measured by assets under management with over $32.7trillion compared to North Americas $27.1trillion in 2008.6 But it seems those expectations are coming to naught now. The heady optimism over a resurgent Europe, with a somewhat different set of gentler and less demanding values and civilizational aspirations than the United States, seem in hindsight to be overly optimistic. The European Union, it now seems, was a case of too much of hope tinged with innocence. Its members were each quite free to have macro-policies that each preferred, and despite the many stringent and often somewhat demanding regulations that governed standards and economic behavior, it was at best of times a loose fraternity of countries each seeking its own place in the sun. The EU had one currency and one European Central Bank (ECB), tasked to define and implement the monetary policy for the euro zone, to conduct foreign exchange operations, and to take care of foreign reserves of the European System of Central Banks. Above all, the primary objective of the ECB was to maintain price stability to keep inflation low. But due to various structural and conceptual inadequacies, the ECB was unable to enforce diktats to make member states conform to its preferred policies. The consequence of this was the resort to borrowing, mostly from within the euro zone, to fund the populist and often somewhat fanciful aspirations of some member states like Greece, Portugal, Spain, and Ireland. The details of the crisis in the euro zone are well known and it serves little purpose to narrate them here. But what we need to know is that the notion of a united Europe has taken a severe beating after it became apparent that it was business as usual for some countries, as it had been before the advent of the European Union. This inability to act together decisively when faced with a crisis and individual national demands superseding the collective common good has seemingly exposed united Europe as a chimera.

In the Hope for a Multi-Polar World

With the collapse of communism and of the USSR, and the promised rise of the European Union, many people saw the emergence of a new multi-polarity in world politics, instead of the United States-USSR duopoly over world affairs being
4

European Union, $16.24 trillion; United States, $14.57 trillion. List by the International Monetary Fund (Jan 2010-Dec 2010)

Cost of war at least $3.7 trillion and counting By Daniel Trotta (Reuters) New York, June 29, 2011, When President Barack Obama cited cost as a reason to bring troops home from Afghanistan, he referred to a $1 trillion price tag for Americas wars. Staggering as it is, that figure grossly underestimates the total cost of wars in Iraq, Afghanistan, and Pakistan to the U.S. Treasury and ignores more imposing costs yet to come, according to a study released on Wednesday. The final bill will run at least $3.7 trillion and could reach as high as $4.4 trillion, according to the research project Costs of War by Brown Universitys Watson Institute for International Studies. (www.costsofwar.org) http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aL5a46f2RjVA

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replaced by a United States-Peoples Republic of China (PRC) duopoly. Countries like India, which have always favored the emergence of a multi-polar world order, looked forward to the emergence of the European Union as a new force in global governance and that would eventually play a counter-balancing role in world affairs. That India keenly looked forward to the emergence of the European Union is evident from the fact that in 1962, India was one of the first Asian countries to establish relations with the EU. Its mission to Belgium was upgraded and a senior member of the Indian Civil Service (ICS), Mr. KB Lal, was appointed as its ambassador to the EU. With this began the practice of nominating a senior member of the ICS and later its successor, the Indian Administrative Service (IAS), as Indias ambassador to the EU. This positioning of a senior officer of the IAS underscored the economic importance India assigned to the EU and to building a strong and lasting economic relationship with it. The 1994 cooperation agreement signed between EU and India took bilateral relations beyond merely trade and economic cooperation. Together with the Joint Political Statement signed in 1993, it opened the way for annual ministerial meetings and a broad political dialogue. The first India-EU Summit in Lisbon in June 2000 marked a watershed in the evolution of this relationship. India-EU relations now expanded from what used to be a purely trade and economic driven relationship to one covering all areas of interaction. Indias initial optimism about the prospects of the European Union as a global economic powerhouse was only reinforced by the spectacular debut and rise of the euro. In the days following the euros formal debut in 2002, after its virtual debut in 1999, it was pegged at around $0.89. It quickly crept up in value, gaining strength to eventually become one of the worlds strongest currencies. On July 15, 2008, the euro hit a record high against the dollar at $1.599.7 Indias high hopes for Europe, no doubt buttressed by the performance of the euro in the bourses, and high European expectations in turn fuelled by Indias spectacular economic performance since 2000, led to speedy developments. The summit in The Hague in 2004 was a landmark summit, as it endorsed the proposal to upgrade the India-EU relationship to the level of a Strategic Partnership. The Indian government view was: We see this Partnership as more than just the sum of its parts. We see it as a qualitative transformation in the way we engage as equal partners and work together in partnership with the world at large.8 This elevation of the India-EU relationship to a strategic partnership only underscored the importance and optimism in India about the relationship promising to be a transformational one. Since the summit in The Hague there have been ten other summits, the 11th in Brussels in December 2010. This was the first summit after the entry into force
7

The value of the euro has risen by 79 percent in nine years since euro hit 0.84 in Oct. 2000. http:// www.dailymarkets.com/forex/2009/10/26/euro-has-risen-79-against-the-us-dollar-since-2000/ The India-Eu Strategic Partnership Joint Action Plan http://commerce.nic.in/india-EU-jap.pdf

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of the Lisbon Treaty.9 India was represented by Prime Minister Manmohan Singh and the EU by Herman Van Rompuy, President of the European Council, and Jose Manuel Barroso, president of the European Commission. From the EU side, this was the first time that the president of the European Council participated in the meeting, and not the head of the state or government of the rotating presidency of the EU, reflecting the changes brought about by the Lisbon Treaty.Clearly Indias engagement with Europe was proceeding at a galloping pace. It is also true that with the advent of George W. Bush as president of the United States, Indias engagement across the Atlantic with the United States also proceeded at similar pace. While India has traditionally favored equidistance from the power blocs and a multi-polar world system, there seemed to be little doubt about how India was leaning. Its relations with China still remained somewhere between frosty and cold, despite the expanding economic ties. Indias well-established democracy and new economic dynamism was deeply philosophically and economically integrated into Europe and the United States. The post-Cold War situation also saw India try to reduce its dependence on Russian military co-operation and weapon sales. In the period after the collapse of the Soviet Union, India was quick to shift the focus of its perceived interests and concomitant policies westwards. From the mid 1990s, Indias weapons purchases shifted increasingly towards France, U.K., Israel, and the United States. All the major new weapons systems acquisitions after 2000 have either been from Europe (Rafale, Hawk) or the United States (P8 Poseidon, C130J, and C17 Galaxy). Russias importance however still continues, and the recent agreements to co-develop the Fifth Generation Fighter Aircraft (FGFA) with Sukhoi and the not so secret co-operation to build and operationalize Indias nuclear submarine project only underscores this. It is evident that India is placing its eggs in more baskets than one.

Soaring Hope Sours

The promise of a giant single economy in Europe, commonly called the euro zone, soured not much after it soared. India, despite being early to welcome a EU diplomatic presence in New Delhi soon found that it mattered little. For the ordinary Indian citizen, the point of interface with the European Union would have been the issue of visas to facilitate travel. While it was now possible to get one visa to travel freely in all the countries of the EU, the Indian traveler still had to seek an entry visa from one of the Schengen countries. So while New Delhi got a new mission with a flag of its own, it had no interaction with ordinary Indians and hence had no recognition in real terms.

The Treaty of Lisbon or Lisbon Treaty (initially known as the Reform Treaty) is an international agreement that amends the two treaties, which comprise the constitutional basis of the European Union (EU). The Lisbon Treaty was signed by the EU member states on December 13, 2007, and entered into force on December 1, 2009. It amends the Treaty on European Union (TEU; also known as the Maastricht Treaty) and the Treaty establishing the European Community (TEC; also known as the Treaty of Rome). In this process, the Rome Treaty was renamed to the Treaty on the Functioning of the European Union (TFEU).

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The Indian government too soon discovered the EU mission had no role at all. When it came to official discourse, it did not take very much time to figure out that each of the members of the EU marched to the beat of its own drummer. There was practically no abridgement of sovereignties and transfer of authority to the European Union. It was little more than a common flag and a common currency. Indias traditional economic and political intercourse with Europe was with the big three, namely Britain, France, and Germany. That continued. Like its citizens, Indias government also soon realized that the EU counted for very little where it mattered. This has even caused several leading Indian commentators, most notably Shashi Tharoor, till not long ago a minister of state in the Ministry for External Affairs (MEA) to have caustic comments on the diplomatic value of the EU.10 The free worlds restraining counterweight to the United States perceived unilateralism not only did not take off, for all practical purposes it never happened. Though the financial crisis that engulfed the United States in 2008 was one of colossal proportions, the United States fought its way through it, with traditional American grit and ingenuity. That great marquee of Americas economic might, GM, went under and rolled over, to emerge once again as the worlds largest automaker.11 American innovation leaders like Microsoft, Google, and Facebook still fascinated consumers all over the world and dominated markets. And Apple was on a song once again, with a cash hoard that is far in excess of what most countries have as reserves.12 In the past few months, job creation has been on the rise in the United States, as is GDP growth. In addition, the trade deficit has showed signs of beginning a declining trend. The greenback is back in business again. As the Times of India of January 23, 2012 presciently pointed out: The dollars many detractors may have missed it, but the much-maligned U.S. currency is on the rise. The greenback, thought to be on life support and mostly surviving on safe-haven flows, has been climbing since it struck record lows against the euro in July 2008, helped recently by the euro zone debt crisis, an improving U.S. economy, and a return to the dollar as the reserve currency of choice.13 By contrast with the United States, it seems, Europe does not have the economic muscle to win minds and markets. Only Germany in all of Europe seems to have bucked the trend. And it seems that only Germany is burdened with bailing out Europes threatened southern flank. Even though it is still the worlds leading trading nation and its second largest exporter after China, Germany still does not
10

New India, Old Europe, Shashi Tharoor; http://www.project-syndicate.org/commentary/tharoor38/ English; Another stumbling block is that India prefers bilateral arrangements with individual member states to dealing with the EU collectively. Arguably, this is necessary, given European institutions lack of cohesion on strategic questions. Since the Maastricht Treaty created the EU in 1992, Europe has claimed to have a common foreign policy, but it is not a single foreign policy. If it were, EU member states would not need two of the five permanent seats on the UN Security Council, and be clamoring for a third. G.M. Regains the Top Spot in Global Automaking, Nick Bunkley, New York Times, January 19, 2012.

11 12

When Apple reported its blowout financial results this week, it disclosed an amazing fact: The company is now sitting on $97.6 billion in cash. TIME, January 26, 2012.
13

http://timesofindia.indiatimes.com/business/international-business/Dollar-makes-a-comeback-on-EUcrisis-US-economy/articleshow/11596808.cms

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pack the political or military clout its two smaller partners in Europe, the U.K. and France, have. Once again Indias leaders have followed its public and have begun to look to the United States leadership to right the broken world financial system. The United States persistent attempt to jawbone the Chinese trade deficit to manageable levels by raising exports and forcing a correction on the deliberately undervalued Chinese yuan have once again given it a leadership position on issues that matter in the long run for the well being of the world system. Europe, on the other hand, seems staggered by its crisis and is unable to forge a consensus within itself, like the Americans did, to fight its way out of its plight. Like many other countries, India too has begun to deftly shift its bets elsewhere. It is now a commonly held view in India that crisis in Europe will not go away easily or soon. Unlike in the United States, where a national consensus was quickly forged and the president was able to unveil and implement a program to get the U.S. economic and financial system out of the situation it got landed into, there seems no consensus in Europe and no decisive leadership in sight. It is not without good reason that Dr. Henry Kissinger famously quipped: If I want to talk to Europe, who do I call? Collective leadership by heads of many governments seems an impossible business and with every nation and national player pulling in a direction best suited to oneself. It seems Europe will take time to climb out of its predicament, if at all. Many in India believe that the prospects of a centralized and unified Europe, as opposed to the loose union it is now, are currently extremely dim. Unlike many Chinese commentators, Indias experts take a dim view of Europes prospects.14 Karine Lisbonne-de Vergeron captures the dominant Indian viewpoint in his studys summary thus: By contrast, many Indians primarily perceive a sense of latent weakness and stagnation across the European economies. They are more pessimistic than the Chinese, assessing Europes economic foundations to be less solid than they anticipated before the crisis. They are closely watching what is happening in the euro zone, not least because they feel the euros continuation to be in Indias interests, but this view is less strongly held than in China. Later in the study de Vergeron writes: A number of Indians interviewed for this study expressed a sense of latent weakness and stagnation in Europe. For one Indian journalist, Europe primarily remains a group of countries, which are in crisis and declining, when considered on their own, and with increasing doubts hanging over
14

Chinese and Indian views of Europe since the crisis: New perspectives from the emerging Asian giants by Karine Lisbonne-de Vergeron. This report is published jointly and simultaneously in English by the Konrad Adenauer Stiftung and the Global Policy Institute and in French by the Foundation Robert Schuman under the title LEurope vue de la Chine et de lInde depuis la crise: nouvelles perspectives des grands mergents asiatiques

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their having any capacity to be considered collectively. Indians now, unlike before 2008, more rarely speak of Europe and India sharing the problems of building up and managing a huge multi-lingual, multi-cultural, continentwide internal market. Those especially who have business interests in Britain, are much more skeptical of the euros prospects than Chinese commentators, and far more relaxed about the impact of its possible failure upon Indian interests. Indian skepticism in general about Europes prospects has also been conditioned by the optimism generated during the presidency of George W. Bush, which elevated the relationship between the two countries into an easy and warm relationship between two large democracies and powers. Another factor that goes against Europe in India is that it is also seen as an alliance inherently hostile to Russia, a country with which India has had a close political and military relationship. The deliberate exclusion of Russia from the various economic, political, and military arrangements, made by the new and old European nations alike, also creates a point of friction that India would like to do without. It is not that Russia is not interested in joining the EU. Soon after he took over as president of Russia, Vladimir Putin made his interest explicit.15 Generally Russia sees the EU in positive light, but sees NATO as a hostile instrument aimed at it.16 Many Indians who ponder such issues believe that Europe cannot aspire to be a major global player by excluding Russia, with which it has no apparent ideological issues any more. The repeated efforts by the EU nations to judge Russia by the standards that established principles VII and VIII of the Helsinki Accords, dealing with human rights and self-determination issues, is taken by many Indian observers as merely a stick to belabor not only Russia but also countries like India, which face many problems similar to what Russia now has to contend with. India has serious problems with such loftiness.17 As long as the European Union sees itself as balancing Russian power, however diminished it may now be, India will be uncomfortable with closeness with it.

15 In conversation with three Russian journalists, Putin maintained that Russia would not want to be a member of NATO in its present form. However, if NATO were transformed into a primarily political organization, membership would be worth discussing. Ot pervogo litsa: Rasgovory s Vladimirom Putinym (Moscow, Vargrius, 2000), p. 159. 16

Dmitri Trenin, Russia-EU Partnership: Grand Vision and Practical Steps, Russia on Russia, Moscow School of Political Studies, February 2000. New India, Old Europe, Shashi Tharoor; http://www.project-syndicate.org/commentary/tharoor38/ English; Another important impediment to India-EU relations is that Indians dont like anyone lecturing to them. One of the great failings in the EU-India partnership has been Europes tendency to preach to India on matters, such as human rights, that Indians believe they can handle on their own Given this, the EUs effort to write human-rights provisions into a free-trade agreement with India, as if they were automobileemissions standards, gets Indians backs up. Trade should not be held hostage to internal European politics about human-rights declarations. On the actual substance of human rights, India and the EU are on the same side and have the same aspirations. Once this irritant is overcome, negotiations over the free-trade agreement, which have long been in their final stages, can be concluded, and should transform trade.

17

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It may also be pertinent to mention the deliberate exclusion of Turkey from the European Union, despite it being an important member of NATO. This only gives credence to the popular notion that the EU is more of a racial union rather than a union of principles. The United States has always supported the integration of Turkey into then EU, but the major EU countries like France are explicit about their aversion to it.18

Running Out of People

Time is also against Europe. The continent is rapidly aging. Like Japan, Europe has entered the stage of very slow demographic growth and will most likely be confronted with significant population decline during the first half of the 21st century. In Europe, the youngest age group is already shrinking. This world region now faces declining working age populations and the prospect of shrinking domestic (i.e. nonmigrant or native) labor forces. In the near future, the majority of EU member states will experience more deaths than births. And until 2050, the median age in EU will rise to 48 years. The size of the working age population (EU 25+ age group 15-64 in 2005: 317 million) will start to decline after the year 2015, reaching 302 million (-15 million or -5 percent) in 2025 and 261 million in 2050. In contrast to this, the United States will experience sustained population growth until 2050 and most likely throughout the whole 21st century.19 It is estimated that by 2050, the number of people over 60 in Europe will have doubled to 40 percent of the total population or 60 percent of the working age population.20 In 2005, the population of Europe was estimated to be 731million by to the United Nations, or slightly more than one-ninth of the worlds population. A century ago, Europe had nearly a quarter of the worlds population. According to UN population projection, Europes population may fall to about 7 percent of world population by 2050, or 653million people (medium variant, 556 to 777million in low and high variants, respectively).21 The imminent shortage of working age people and its unwillingness to alter its immigration policies to attract a better trained and skilled workforce, and to draw highly educated technology professionals, due to age old prejudices will cost Europe
18

Turkey is part of Europe. Fear keeps it out of the EU, Tariq Ramadan, The Guardian, August 6, 2009. When on his recent visit toTurkey, President Obama called for Turkish entry into the European Union, he put his finger on a strategic and cultural sore spot. The French president, Nicolas Sarkozy, speaking for the majority position in Europe, was quick to respond: Turkey may one day enjoy a privileged relationship with the EU, but full membership is out of the question. Turkey is not European geographically or culturally.

19

Aging and Demographic Change in European Societies: Main Trends and Alternative Policy Options, Rainer Muenz; Hamburg Institute for International Economics Persons 60 years and over as a percent of the total population up to 2050. Germany: 22.9 percent (2000), 30 percent (2020), 41 percent (2050); Belgium: 22.1 percent (2000), 30 percent (2020), 38 percent (2050); Denmark: 19.9 percent (2000), 28 percent (2020), 36 percent (2050); Spain: 21.8 percent (2000), 28 percent (2020), 44 percent (2050); France: 20.7 percent (2000), 29 percent (2020), 38 percent (2050). Source: Eurostat. World Population Prospects: The 2006 Revision Population Database UN Department of Economic and Social Affairs.

20

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dearly. It would seem that old Europe is not only reluctant to draw immigrants from Africa and Asia, but has reservations about immigrants from new Europe.22 It clearly needs to emulate the United States in this regard. And even if it does so, it is doubtful that Europe will ever acquire the cachet of the United States to draw scientific and technological talent to it. A few years ago, the German government made a bid to attract IT professionals from India and announced a policy that was migration friendly. But there were few takers.

Competing with Americas Soft Power

So what does and what can India expect from a loosely governed, economically slowing, demographically aging and contracting, and professionally unattractive Europe? On the face of it, the answers are obvious. While the Indian government might want to seek mutually beneficial situations with the European Union, the Indian business, academic, and technology communities might have already made up their minds. Will there be a resurgence of Europes soft power? It is very unlikely that Europe will hold very much attraction to many other than those seeking the menial jobs immigrant communities in Europe are largely confined to. Europe has also largely shown itself as incapable of reinventing itself as the United States has done into a more egalitarian union, where people are judged not by the color of their skin but by the content of their character.23 How then could Europe compete with the United States enormous soft power and aspiration value? To compound its situation, Europeans have a tendency to pontificate that does not go down well with India. Tharoor has this to say about it: Another important impediment to India-EU relations is that Indians dont like anyone lecturing to them. One of the great failings in the EU-India partnership has been Europes tendency to preach to India on matters, such as human rights, that Indians believe they can handle on their own. A democracy for more than six decades (longer than some EU member states), India regards human rights as a vital domestic issue. Neither Amnesty International, Human Rights Watch, nor any European institution has exposed a single human-rights problem in India that Indian citizens, journalists, and NGOs have not already revealed and handled within Indias democratic political space. Given this, the EUs effort to write human22 Moments Before the Union, Old Europe Gets Cold Feet, Shada Islam, YaleGlobal, March 3, 2004: What sours the EUs pre-enlargement mood is immigration. As future EU states look on in dismay, governments in old Europe are engaging in a frenzied 11th-hour bid to pull up the drawbridges, creating a Fortress Europe to keep out hordes of new Europeans from seeking jobs and a better life in the more affluent West. Despite initial promises that their doors would remain open to the 72 million new Europeans joining the bloc in May, the 15 countries of old Europe have opted for some form of restriction work permits, quotas, social welfare curbs to dam the anticipated flood of poor Roma gypsies as well as Polish, Czech, Slovak, and other workers.

I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin, but by the content of their character, Martin Luther King, I Have a Dream speech, August 28, 1963 in Washington DC.

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rights provisions into a free-trade agreement with India, as if they were automobile-emissions standards, gets Indians backs up.24 Low GDP growth rates lead to slower growth in tax revenues and higher social security and welfare spending, in turn leading to increasing deficits and debt levels, making for a poisonous cocktail to induce economic stupor. Fareed Zakaria best described the crisis in the euro zone: Europes core problem is a lack of growth. Italys economy has not grown for an entire decade. No debt restructuring will work if it stays stagnant for another decade. The fact is that Western economies with high wages, generous middle-class subsidies, and complex regulations and taxes have become sclerotic. Now they face pressures from three fronts: demography (an aging population), technology (which has allowed companies to do much more with fewer people), and globalization (which has allowed manufacturing and services to locate across the world).25

Inherent Contradictions
In the coming years, the issue of reforming the world governance system will come to the fore, as the newly emerging countries of Asia, Latin America, and Africa will rise economically and militarily. It is only but natural to expect them to seek commensurate political power. At present, there are three global high tables: the permanent members of the United Nations Security Council (UNSC), the G7, and NATO. All three are Eurocentric in character. The only outsiders in these three forums are China and Japan who have places in one each. Countries like India, Brazil, South Africa, and even Germany and Japan have been showing some impatience with such a restricted system. Within a few decades, the global GDP and power rankings will undergo substantial changes. Five European countries rank in the top ten of the worlds largest national economies in GDP (PPP). This includes (ranks according to the CIA) Germany (5), the U.K. (6), Russia (7), France (8), and Italy (10). Goldman Sachs forecasts that in 2050, Europe will have only Russia, Germany, and Britain left among the top ten economies, at 6th, 9th, and 10th position respectively. China, the United States, India, Brazil, and Mexico will be the top five. Consequently the Americas will have three in the top ten, while Asia will have four.26

24

New India, Old Europe, Shashi Tharoor; http://www.project-syndicate.org/commentary/tharoor38/ English CNN Fareed Zakaria GPS-November 10, 2011

25 26

The engines of Asias re-emergence India, China, and five other economies will account for 45 percent of the global GDP by 2050, according to a report by the Asian Development Bank (ADB). Asias rise will be led by China, India, Indonesia, Japan, the Republic of Korea, Malaysia, and Thailand, the ADBs report, Asia 2050 - Realizing the Asian Century, said. In 2010, these seven economies had a combined total population of 3.1 billion, or 78 percent of Asia, and a GDP of $14.2 trillion. These seven economies alone will account for 45 percent of the global GDP, the report said.

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Table 1 makes it apparent Table 1 that even in 2020, the Rank Country 2020 GDP US$billion PPP shift in economic weight 1 China 28,125 is too significant to be 2 United States 22,645 ignored. Quite clearly, 3 India 10,226 4 Japan 6,197 the restructuring of the 5 Russia 4,327 world order and world 6 Germany 3,981 system cannot be avoided 7 Brazil 3,869 for much longer. The 8 United Kingdom 3,360 9 France 3,215 changes will necessarily 10 Mexico 2,839 have to be at the cost Source: Euromonitor International from IMF, and other sources. of Europe. How can countries like the U.K. and France, whose GDPs will be a third or less than Indias, or about half of Japans, be included in the UNSC as permanent members while India and Japan out of it? In recent years, there has been some discussion on expanding the UNSC and the G7. NATO, by its very acronym, defies expansion. But while expansion will make these restricted forums more representative, it might detract from their effectiveness. Right now, four countries are knocking on the doors of the UNSC for co-option as permanent members. These are India, Brazil, Germany, and Japan. China is openly opposed to the admission of Japan, but more circumspect about its opposition to India. Russia and even France may oppose Germany. Only Brazil stands alone without any opposition. But supposing all these four countries make it to the expanded UNSC, the internal dynamics will be still tilted in favor of Europe and North America. That is NATO plus Russia. As it is, the P-5, with each member armed with a veto, often finds itself unable to take a view of events or act decisively. An expansion of members with veto power will only complicate matters. Quite clearly, the effectiveness of the UNSC depends on its compactness. To be more representative, the P-5 might have to shed some members like the U.K. and France, but they are unlikely to go away quietly. Mere expansion recalls Groucho Marxs celebrated comment; I dont care to belong to any club that will have me as a member. The G20 has recently emerged as a forum for discussing the economic and financial future of the world. But because of its size, it has remained merely that, a forum. The actual power to influence world economic and financial management is still vested with the G7. Now, if a G7 were to be truly representative of the respective economic and financial muscle vested with the big economies, then Italy and Canada almost surely will not have a place. Will they go uncomplainingly? While NATO represents an unchallenged congruence of military power, it derives its legitimacy and power from the role its leading nations play on the other two high tables. It must be noted here that since the three rapidly rising powers, namely China, India, and Brazil, are commensurately arming themselves with
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modern weapons like aircraft carriers and nuclear submarines, NATO might not be able to have a free run in terms of expeditionary operations. Besides, the new dynamics fostered by irregular warfare in distant countries like Iraq, Afghanistan, and Somalia are making such expeditionary capabilities quite redundant. Few in NATO have the cash to spare for prolonged conflict. So while there is no attempt to demand expansion of this high table, even by other circumstances, the menu on it is becoming limited.

A Changing America
It is very clear that while the United States will be the engine of world growth for the foreseeable future, mostly possible by its sheer scientific superiority and climate conducive to innovation, it will be closely followed or even overtaken by an entirely new cast of countries. In less than 100 years after the end of WWII, only the United States will remain in the top ten countries in the world by the size of their economies. Rising countries like India, now linked increasingly by large and prosperous overseas communities flourishing in the United States, will find themselves having to increasingly hitch their wagons to the American star. Within itself the United States, too, is changing.27, 28 The United States now has an African-American president. The national political leadership is now increasingly a kaleidoscope of nationalities that gives countries of origin a new reason to feel solidarity with the United States. Americans of Indian origin occupy two gubernatorial mansions and many more are in executive branches of governments. Many more still occupy high positions in academia and industry particularly in the new sunrise sector. Changing demographics also leads to changing attitudes, which themselves reflect a rearrangement of national goals and policies. As a group, Americans of Indian origin are the most prosperous of the many nationalities that

27

A new report from the Pew Research Center projects that immigration will propel the U.S. population total to 438 million by 2050, from 303 million today. Along with this growth, the racial and ethnic profile of Americans will continue to shift with non-Hispanic whites losing their majority status (U.S. Population Projections: 2005-2050). The report also provides considerable detail on the countrys future ethnic makeup. With little immigration and low fertility, the non-Hispanic white population is projected to edge from 200 million to 207 million between 2005 and 2050, while the three other major racial and ethnic groups will see much more growth. The share of non-Hispanic whites is slated to slip from 67 percent to 47 percent over the 45-year period. Indeed, they would decline in number by 2050 if not for immigration. With the majority population holding steady, the significant growth must come from some other group and it does. This is where the assumptions about immigration levels become crucial. Under Pews assumed immigration and fertility rates for major ethnic groups, the number of Hispanics will rise from 42 million to 128 million, and Asians from 14 million to 41 million.

28 Five myths about white people, Charles Murray, The Washington Post, February 20, 2012. You dont need to see a young black family in the White House to understand that American demographics are changing. In the 2010 census, non-Latino whites made up 64 percent of the population, down from 69 percent in 2000, 76 percent in 1990 and 80 percent in 1980. In 2011, non-Latino whites for the first time constituted a minority of children under age 2 the harbinger of a nation in which whites will be a minority. Thats no myth.

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have made the United States their home.29 Clearly the pull towards the United States will be far greater than any attempt by the Indian government to balance ties. As in any democracy, the government has to reflect the desire and will of the people. The United States overarching strategy for foreign policy now is to embrace multilateralism, offer dialogue instead of lectures, listen as well as talk, and play up Americas multi-cultural, tolerant, immigrant-friendly model of society. On the other hand, the talk from Europe is about unity and the need to defend common interests. If we can just speak with one voice, goes the refrain, we will count. Reinforcing this, Lady Catherine Ashton recently said: If we pull together, we can safeguard our interests. If not, others will make decisions for us. Its really that simple.30 Well, its not that simple really. The prospect of Europeans speaking and acting as one is indeed very bleak. In the next few decades, as India and others will seek changes in the world order, they will increasingly come into conflict with Europe. Already during the recent contest to fill the place vacated by Dominique Strauss Kahn at the IMF, muted doubts were heard from India and China about the desirability of having a Frenchwoman, Christine Lagarde, replace a disgraced Frenchman. This is the first time the choice of an IMF president from Europe was even challenged. Quite clearly, the next time around it will not be so easy, particularly at a time when Europe has shown itself as incapable of managing its own finances.

The Future World Order

It should now be evident that the new rising countries will supplant Europe in the new global pecking order. This does not bode well for political relationships of any lasting nature in the future. The United States has made clear that it wants greater engagement across the Pacific. Asias combined GDP, despite the slowdown to a crawl in Japan, is still the highest in the world. By 2020, over 60 percent of world GDP will be credited to the continent. Citibank has forecast that by 2050, India and

29 According to the 2010 U.S. Census, the Asian Indian population in the United States grew from almost 1,678,765 in 2000 (0.6 percent of U.S. population) to 2,843,391 in 2010 (0.9 percent of U.S. population), a growth rate of 69.37 percent, making it one of the fastest growing ethnic groups in the United States. A joint Duke University University of California, Berkeley study revealed that Indian immigrants have founded more engineering and technology companies from 1995 to 2005 than immigrants from the U.K., China, Taiwan, and Japan combined. A UC Berkeley, study reported that one-third of the engineers in Silicon Valley are of Indian descent, while 7 percent of valley hi-tech firms are led by Indian CEOs. Indians, along with other Asians, have one of the highest educational levels of all ethnic groups in the United States. Almost 67 percent of all Indians have a bachelors or higher degree (compared to 28 percent nationally and 44 percent average for all Asian American groups). Almost 40 percent of all Indians in the United States have a masters, doctorate, or other professional degree, which is five times the national average. Indian Americans own 50 percent of all economy lodges and 35 percent of all hotels in the United States, which have a combined market value of almost $40billion. In 2002, there were over 223,000 Asian Indian-owned firms in the United States employing more than 610,000 workers, and generating more than $88billion in revenue. 30

Catherine Ashton High Representative / Vice President Joint Debate on Foreign and Security Policy European Parliament Strasbourg, March 10, 2010

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China will top GDP charts, posting figures in excess of $80 trillion each.31 As their role in the world economy enlarges and becomes dominant, both China and India will demand changes to accommodate their aspirations and interests. While Chinas relationship with the United States will remain adversarial, it will increasingly seek to balance the United States with the EU. India, whose relationship with China is not likely to move even midway along the spectrum from adversary to friend and ally, might be drawn increasingly closer to the United States. Finally, while Europe remains inflexible, the United States has shown an ability to change within, and by choosing the path less traveled by, has chosen one that will make all the difference in the end.32 Mohan Guruswamy is chairman of the Centre for Policy Alternatives and a Distinguished Fellow at the Observer Research Foundation, New Delhi. He was educated at Harvard University and has held senior positions in industry and government in India.

31

http://www.citibank.com/transactionservices/home/sa/2011q1/cab/docs/presentations/day2_3_ Economic_outlook.pdf.; The Top 10 Largest Economies in the World (in trillion 2010 PPP USD) pp 45. Global Economic Outlook and Growth Generators; William Lee; Citi Investment Research and Analysis.

32 Two roads diverged in a wood and I - I took the one less traveled by, and that has made all the difference, Robert Frost.

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Cooperation as a Result of Crisis

The Future of the Japanese-European Relationship
by Satoru Mori

Assumptions About Europe

hat are some of the assumptions about Europe and its prospects going forward? With or without the ongoing euro crisis, Europe will continue to be a global player on the world scene in the coming decades. Nevertheless, the EUs political clout or its diplomatic competence will depend on how the financial crisis will unfold. In other words, the outcome of the crisis will have a profound impact on the international political viability of Europe. The following are some speculative assumptions about how the situation in Europe might unfold.

Financial /Economic
On the monetary side, the following outcomes can be theoretically anticipated: 1. Dissolution of the euro 2. Formation of a fiscal union among euro zone states 3. Temporary ejection of fiscally challenged state(s) from the euro zone or its temporary suspension of all or part of its fiscal autonomy, accompanied by the formation of a fiscal union among remaining euro zone states. We are most likely to see the third outcome because the roots of the current crisis are structural and it is unlikely for economically leading states like Germany to redress this structural problem through ad hoc fiscal transfers. The long-term economic structural problem for Europe is the economic disparity that exists among northern and southern European states that share a common currency. Labor productivity in southern European countries compared to northern European countries has been relatively low,1 but the rate of wage increase has been higher in the south. This meant that industries would increase employment in the advantageous north while reducing employment in the south. In order for a
1

Eurostat, Labor Productivity Annual Data, at http://appsso.eurostat.ec.europa.eu/nui/show. do?dataset=nama_aux_lp&lang=en (downloaded on February 1, 2012).

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common currency to function among countries with varying labor productivity and wage increase, fiscal transfers from northern to southern Europe had to be enabled, and laborers should have been able to move easily from southern to northern Europe. The euro zone did not fulfill these two conditions, but the euro was able to function since its inception in 1999. Why? Southern European economies survived because private capital flowed from northern to southern Europe where inflation rates were high.2 Private capital from banks in northern Europe flowed into southern European countries like Greece, and consequently financed their expansionary national debts. The global financial crisis of 2007-2008 exposed this fundamental structural problem because it virtually stopped the southward private capital flow. Various measures such as reducing the Greek national debt, instituting fiscal austerity, increasing the resources available to the European Financial Stability Facility (EFSF), strengthening the coming European Stability Mechanism (ESM), and coordinating for IMF rescue packages are all important stopgap measures to avert the expansion of the current sovereign debt crisis. But these measures do not address the fundamental problems related to the economic structure underlying the euro zone. Germany, along with France, is now taking charge to tackle the crisis, but even if they were to succeed in averting the expansion of the debt crisis in the short term, it would probably be difficult under current conditions to maintain a common currency among all of the current euro zone members in the medium to long term unless the economic structural problem is resolved either economically or politically. One of the conditions under which Germany would agree to allow the European Central Bank (ECB) to buy bonds of fiscally challenged states is to impose legally-binding fiscal austerity measures on the euro zone states. However, if all euro zone states were to move towards fiscal consolidation together, then the GDP of these states would certainly shrink, making it more difficult for countries with low labor productivity to thrive and also meet the target ratio of deficit/GDP. Consequently, there will be a continuing need to sustain southern European countries fiscally, and thus, Germany will eventually have to make a hard choice about whether or not to embark on a committed fiscal transfer (i.e. become a semipublic goods provider) and move towards making the fiscally challenged states either submit to third-party fiscal control or leave the euro zone until they become eligible for a full membership again in the future. On the other hand, citizens in fiscally challenged states may increasingly feel repelled by the idea of externally imposed fiscal discipline and the resulting austerity. If the Germans demand fiscal

Eurostat, Harmonized Indices of Consumer Prices (HICPs) Annual Average Rate of Change, at http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tsieb060 (downloaded on February 1, 2012).

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discipline or refuse to make fiscal transfers,3 and if some of the fiscally challenged governments are either overwhelmed by their frustrated national constituencies or cannot achieve the necessary domestic reforms, then we may see the latter leave the euro zone. It is of course uncertain whether all or some of the peripheral states (Greece, Italy, Portugal, Spain) would exit the euro zone in the next several years. Much will depend on public sentiment and political leadership in those countries.4 It is still likely that perhaps only Greece will undergo a temporary suspension of fiscal autonomy. However, if some of the peripheral countries were to exit the euro zone due to unforeseen circumstances, then it would also create an opportunity for the remaining states to move toward a tighter fiscal union. Perhaps the remaining euro zone states might form a new core in which they would have a common monetary policy, exchange rates, and fiscal policy. This new core may provide economic cooperation to other EU member states based on a different rationale it would no longer be about financing national debts, but it would be more about investing in the improvement of labor productivity and enhancement of economic competitiveness of the EU. This would create a mechanism in which the core would become a vehicle for assisting economic and fiscal reform in the non-core EU states, and reinstating those states that fulfill conditions for the core membership. Such a mechanism would allow leading states like Germany to share the responsibility of sustaining the economic future of the wider Europe along with other core states like France, the Netherlands, and Finland. This would mean that there would be a reconfigured two-tiered monetary system within the European Union (a smaller euro zone and a larger non-euro zone).

Political
Whether or not we may see a reconfigured two-tiered monetary system within the EU is of course uncertain, but the political consequences would differ before and after a new equilibrium is reached. Before a new equilibrium is reached, we may see stronger German leadership within the EU, and the EUs attitude towards global affairs may become somewhat passive due to ever-complex intra-EU consultations. During the time that financial issues remain unresolved (perhaps over the next five years or so), the leaders of EU
3

German ruling and opposition parties have agreed not to increase Germanys share of guarantees to the ESFS and to demand the ECB to stop buying national deficit bonds (SMP - Securities Markets Program). France, on the other hand, is more positive towards extending financial assistance to fiscally challenged states. Disruption of the Italian economy would be far more serious than the Greek financial crisis. Italys national debt is said to be around 1.9 trillion and amounts to more than the total national debts of Portugal, Ireland, Greece, and Spain combined (approximately 1.3 trillion). Japanese banks and insurance companies hold Italian bonds in the order of hundreds of billions of yen. An Italian financial collapse would have grave global consequences.

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member states would devote much of their time and attention to intra-EU affairs centered on financial issues. Germany will probably take the lead in handling many of these issues, and thereby further expand its political voice within the EU.5 In the process of muddling through the current debt crisis, the political consequences of German unification will come into full effect. Germany will no doubt do its best to avoid appearing dominating because that has precisely been one of the major objectives of post-World War II German policy in Europe. Although Germany already has a strong voice within the EU, it could nevertheless become more active in forging support for its preferred line of policy on divisive issues, and more EUwide decisions will require German approval. As is already seen in the German effort to draft rules on fiscal discipline in a possible new treaty, we might see a very slow and subtle process of evolving German leadership in Europe during the next several years. Such a phenomenon would initially progress primarily with regard to economic matters, but German leadership could spill over to political and security issues. If German leadership were to become more conspicuous in multiple issue areas, perhaps in the next five to ten years, then countries like Britain and France could gradually become somewhat cautious regarding a German-dominated EU. A diplomatic contest over leadership and political influence may ensue within the EU. Britain and France might seek an informal partnership with each other on many European issues, and they may also individually reach out to extra-regional actors like the United States, China, Japan, Russia, and India on various global issues and non-European issues. As a result, it would take longer for the EU to reach a common position on international affairs, and the substance of EU positions on global issues, for instance, could become the dependent rather than the independent variable in international affairs. Momentum for EU expansion will likely fade into the background under such circumstance. However, this does not mean that the EU will lack cohesion permanently. Germany and France, along with other euro zone members, will likely continue negotiating on the scope and conditions of a fiscal union. If relevant countries are able to strike a grand bargain on a renewed euro zone with strict fiscal obligations (perhaps in the next five years) and the modalities of a fiscal union (perhaps in the next five to ten years), there will emerge a new political and economic equilibrium. A new European core could emerge and it would be relatively more cohesive on many issues if it were to acquire the necessary decision-making institutions. Priorities may still diverge among the core states, but a common fiscal policy would compel these countries to seek efficient consensus-building and reach a compromised decision on many issues. In other words, the prerequisite for a fiscal union is solid commitment
5

Since unification, Germany has had to deal with problems associated with the East German economy and society, but with the advent of the euro, it has achieved a strong economy sustained by exports among other economic factors. Germany has been benefiting from the euro because the common currency has been covering countries that were less economically viable than Germany and thus the euro was a relatively depreciated currency compared to the Deutsch mark. This allowed Germany to increase its export comparatively more than it could have had it maintained the Deutsch mark.

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to interstate cohesion, and thus, subsequent policy coordination should be relatively easier after forming a fiscal union. Since a negotiated position on various issues among the core states would have the full backing of leading continental European states like Germany and France, it would frequently become the nuclei of common EU positions on those issues. Although the EU may have a slightly more hierarchical structure, its position on various issues would carry significant weight in the international arena.

Europes Impact on Japan

The unfolding situation in Europe creates five potential challenges and three potential opportunities for Japan.

Challenges
First of all, the immediate challenge for Japan posed by the unfolding situation is the possible contraction of trade and investment relations with the EU. In terms of trade, the EU is Japans third largest trading partner after China and the United States the total amount of imports and exports to EU in 2010 was approximately 134 billion (13.4 trillion) and 10.5 percent of Japans total trade.6 Japans direct investment position with regard to EU at the end of 2010 was 148 billion (14.8 trillion) and roughly 22 percent of total outward direct investment.7 There are 3,370 Japanese companies operating in the 27 EU member states, of which 705 are manufacturing companies that generate roughly 400,000 jobs in Europe. Many Japanese manufacturing companies are based in the United Kingdom (186), Germany (132), and France (105). On the other hand, EUs direct investment in Japan is worth 60 billion and is the second largest direct investor in Japan.8 If fiscal adjustments in the EU area were to result in a longer recession, then trade and investment will diminish and negatively impact the Japanese economy. The Japanese economy would also be affected indirectly by contraction of trade between the United States and the EU as well as East Asia and the EU. These phenomena, in turn, would have deleterious effects on Japans trade relations with the United States and East Asia. A secondary effect of a more serious economic slowdown in Europe would be Japans increasing trade dependency on China. The structure of Japanese trade has changed dramatically over the past decade. In terms of exports and imports, the United States and the EUs shares have shrunk and Chinas share has increased as shown in Table 1. Future trade patterns are
6

Ministry of Finance of Japan, Trade Statistics of Japan, Historical Data on Top Ten Trading Partners, (in Japanese) at http://www.customs.go.jp/toukei/suii/html/data/y3.pdf (downloaded on February 2, 2012). Bank of Japan, Direct Investment Position, breakdown by Region and Industry, (in Japanese) at http:// www.boj.or.jp/statistics/br/bop/ (downloaded on February 2, 2012). Ministry of Foreign Affairs of Japan, Japan-EU relations Briefing Book, (in Japanese), October 2011, p.5.

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uncertain, but Japans shrinking trade with the EU, accompanied by diminishing trade with the United States, could accelerate this trend even further, allowing China to dominate Japans trade relations. Since Chinas strategic trajectory is still uncertain, this pattern of heavy trade dependence on China could create two kinds of risk to Japan. First, China could become more effective in applying economic pressure on Japan over contentious bilateral issues such as natural resource development in the East China Sea and overlapping claims over the Senkaku Islands. It is worth mentioning here that China has also been actively purchasing Japanese government bonds in order to avoid risks emanating from the euro, and this may create the same effect increasing Chinese financial presence in Japan.9 Second, if a major economic disruption were to occur in China, Japan would sustain a heavy blow. External and internal imbalances have resulted from Chinas rapid growth in the past three decades. China has increased its lending in response to the global financial crisis, and as a result, inflationary pressure has increased. Other unsustainable socio-economic conditions remain as risks to the Chinese economy, and hence Japan will become more exposed if China were to dominate Japans trade relations in the coming decades. Thirdly, a weaker euro and a weaker U.S. dollar will further appreciate the yen and create substantial difficulties for Japanese manufacturers and exporters. This is of course already happening, but if this trend were to continue in the long run, its impact on the Japanese economy would be substantial. Major Japanese manufacturing companies are already relocating their bases of operation to foreign countries in Asia, and the hollowing out of Japanese industry could be accelerated by the weakening of the two major currencies.10 Fourth, if European defense industries suffer from reduction in defense expenditure in European countries that are adversely affected by the current crisis,11 they could become more active in arms sales to emerging countries. So far, the EU has refrained from lifting the ban on arms sales to China. However, if EU states reduce their defense expenditure and decide to axe their defense procurement programs, then European defense manufacturers will have to consolidate and seek markets elsewhere in the world. A clearly attractive market will be Asia, and China will be at the top of the list. If the EU were to decide to lift its ban on arms sales to China

Tatsuo Ito, Imbalance Seen in Japan-China Deal, The Wall Street Journal Online, February 2, 2012 at http://jp.wsj.com/Economy/Global-Economy/node_385494/(language)/eng-US; Tom Orlik, Chinas Yen for Japanese Government Bonds, The Wall Street Journal Online, February 9, 2012 at http://online.wsj.com/ article/SB10001424052970204136404577210613841720428.html?mod=WSJ_Heard_LEFTTopNews. It must be noted that the recent increase in outward relocation of manufacturing industries from Japan is being caused by a number of other factors, such as high corporate tax and labor costs, strict restrictions on greenhouse gas emissions, the slow conclusion of free trade agreements, and insufficient electric power.

10

11 For recent trends see, The International Institute for Strategic Studies, The Military Balance 2011, Routledge, 2011, pp.78-80.

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for the sake of saving its own defense industrial base,12 this would create a major challenge for Japan and the United States in the western Pacific. On the other hand, if the EU were to maintain its ban on arms sales to China while allowing its defense industry to make contracts primarily with Chinas neighbors, then the EU would contribute to the maintenance of military balance in East Asia. Finally, if European states reduce their defense expenditure without meticulous EU-wide consultation, the continents ability to participate in international crisismanagement missions could be compromised. If NATO or European force structure lacks consistency and balance, its ability to cope with military contingencies in possible flashpoints like the Eastern Mediterranean or Persian Gulf region could be degraded in extreme cases.13 If a military contingency outside of Europe for example the Persian Gulf would not be met with the same effectiveness and efficiency as in the past, disruption of energy flow from this region and the hindrance of Japanese commercial shipping with Europe could become more likely. Japan will surely contribute as much as possible to a Persian Gulf contingency, but an effective response will require the participation of highly capable and integrated European as well as U.S. forces.14

Opportunities
The current economic crisis is creating strong incentives for both Japan and Europe to enhance bilateral economic relations. Japan and the EU have agreed in the JapanEU Summit meeting in 2010 to establish a Joint High Level Working Group for the conclusion of a Japan-EU Economic Partnership Agreement (EPA). Necessary consultations are now being carried out to determine the scope of a Japan-EU EPA.15 Japan and the EU are continuing their dialogue on regulatory reform to improve business environments and thereby increase trade and investment.16 Japan and the EU are also working towards concluding mutual recognition agreements,
In addition, if China were to increase its economic presence in Europe during the current crisis through its contributions to financial stability funds, it could subtly exercise influence to persuade key EU states to lift the ban on EU arms sales. Perhaps the United Kingdom could be a vocal opponent due to its relatively un-entangled position.
13 12

Some problems associated with unilateral defense expenditure reductions by NATO European members have been pointed out. Richard Weitz, Transatlantic Defense Troubles, Strategic Insights, Vol.10, Issue 3 (Winter 2011), pp.67-82.

Japan will want to contribute to crisis-management operations, but due to its fiscal and political constraints, the provision of deterrence capabilities in East Asia would likely consume all of its defense efforts. This would become even more true if U.S. defense expenditures undergo substantial reduction in the next decade.
15 Japan is seeking zero EU tariffs for automobiles (now 10 percent) and liquefied crystal televisions (now 14 percent), whereas the EU is seeking Japanese nontariff reforms related to guidelines for advanced car safety technology, government procurement, medical equipment, air transportation, food safety, financial services, and so forth. 16

14

Japanese concerns include EU commercial customs, working visa, technical regulation and standards, conformity assessment, intellectual property, financing reporting standards, etc. European concerns include Japanese regulations on inward investment, the immigration re-entry approval system, automobile and food safety, and agricultural products, among other things.

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and advancing mutual assistance in the areas of antitrust and customs. The JapanEU Business Round Table has also facilitated public and private sectors to engage in joint dialogue and identify new areas of cooperation. Japan has a strong incentive to maintain an economically vibrant Europe, as is seen by the fact that the Japanese government bought 20.5 percent of EFSF bonds for sustaining Ireland in January 2011, and 20 percent of the bonds for assisting Portugal in June 2011. In addition, if the Arctic sea routes were to become usable in the next two decades, marine transportation between Europe and Japan may become more expedient. This could further ignite enthusiasm for trade between Japan and Europe. The current crisis will also drive both Japan and Europe towards cooperation in technological innovation and protection because both sides will strongly seek resilient sources of economic growth. Joint ventures in private sector green technology is already progressing, but this trend may accelerate in the coming decades if European states boldly invest in research and development of new industrial sectors.17 For the same reason, cooperation on the protection of intellectual property will also progress. As both the EU and Japan will be increasing trade and investment with China, agreement on anti-counterfeiting and its compliance monitoring will continue to be a common area of interest.18 Finally, Japan, together with the United States, will probably increase their consultation with the EU on China policy. Since Japan and the United States will not be able to ignore the EUs relations with China, they will have to explain more, and more frequently, to the EU about their positions on China in order to mutually understand each others concerns. This could lead to a more intense or possibly institutionalized consultation on China among Japan, the EU, and the United States.

Effects of European Characteristics on Japans Strategic Calculus

How will Europes strengths and weaknesses affect Japan setting objectives and building strategies? In order to address this question, it would be appropriate to first define the general strategic direction of Japan. The primary strategic objective of Japan is to manage the rise of new powers like the so-called BRICs (Brazil, Russia, India, and China) in the international system. Since Japan will have to cope with the consequences of its aging population and stagnant domestic politics as well as simultaneously seek new sources of economic growth, it is vital for the country to maintain a stable external environment by enabling the peaceful reconfiguration of power in the current international system. In other words, Japan would like to see emerging states develop a status quo orientation and become integrated into the existing order. This will require these
17

For example, Japans Mitsubishi and Frances Peugeot-Citroen are jointly working on electric automobiles. Japans Sharp and Italys Enel Green Energy are jointly developing solar energy. The so-called Anti-Counterfeiting Trade Agreement (ACTA) was agreed in principle by Japan, EU, the United States, Canada, Mexico, Switzerland, South Korea, Singapore, Australia, New Zealand, and Morocco in October 2010. It was opened for signature in May 1, 2011.

18

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emerging states to 1) adopt and comply with various existing international rules and norms that stipulate rightful external conduct and domestic governance shared among advanced market-based democracies, and 2) negotiate new binding rules of conduct. Managing Chinas rise will be its central concern. Emerging states will no doubt try to avoid being bound by international rules and obligations because they have no interest in being constrained by them. This means that advanced market-based liberal democracies like Japan, the United States, and most certainly the EU will have to deter emerging states from taking unilateral actions that alter the status quo or contravene existing rules, and also jointly engage in intense bargaining with those states in order to make them adopt and comply with existing rules and negotiate new ones. Compelling emerging countries like China to adopt and comply with international rules will most certainly require Japan, the United States, and the EU to provide incentives in the form of international cooperation and deterrence in the form of security cooperation.19 It would be more advantageous for leading states to bargain with rising states as soon as possible, since the formers leverage or relative power could diminish with the passage of time. If Europes revival is slow to materialize, then Japan would have to reconsider the scope of international rules and agreements that it will attempt to make the rising powers adopt and follow. In essence, Japan, the United States, and Europe will have to compromise more to non-liberal democratic rising states if the pace of renewing their national strengths were to remain slow. This is probably the most fundamental problem that advanced market-based liberal democracies are exposed to in a globalized system where financial shockwaves recur at shorter intervals.

Strengths
One of the EUs strength is that it upholds values that Japan shares, such as democracy, rule of law, human rights, and market-based economy. Common values could facilitate the formation of shared positions and collective bargaining with the rising powers. Japan as a rule-promoting status quo power will continue to see the EU as a reliable partner on many international issues. Therefore, on many issues ranging from climate change to the protection of human rights, Japan will seek partnership with Europe to promote rules that enshrine these values. Indeed, the Japanese government is now seeking to conclude an agreement on political cooperation with the EU. It will become a keystone instrument that will identify common objectives that Japan and the EU can jointly pursue in the coming decades. A second strength of the EU is its sheer size and its extensive economic relations with rising powers such as China. The EUs share of world GDP is roughly 30
19

For a more detailed discussion please see, the Project on Japans Strategic Horizon and Japan-U.S. Relations, Japan as a Rule-Promoting Power: Recommendations for Japans National Security Strategy in an Age of Power Shifts, Globalization, and Resource Constraints (A Final Report), The Sasakawa Peace Foundation, October 2011, available at http://www.horizonproject.jp/?lang=en.

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percent and it has a population of around 500 million. In 2009, the EU was Chinas largest trading partner. Chinas trade with the EU amounted to $364 billion and approximately 17 percent of Chinas total trade.20 Whether this will suffice as an effective leverage over China is, of course, uncertain. However, if the EU continues to maintain significant economic presence in China, then Japan, as well as the United States, will increasingly see the EU as a major partner in their China strategies because the EU could hold bargaining power vis--vis the Chinese on certain issues. Cooperation with the EU to make China adopt and comply with various rules and norms on external conduct and domestic governance will be essential, and in that regard, Europe will be Japans indispensable partner. Conversely, if Europes economic relations with China were to contract in the future, Europes relevance in Japanese and U.S. strategy on China will probably diminish accordingly. A third strength is the proclivity of European political elites to strive for integration. One of the most impressive aspects of the project of European integration has been its enduring momentum in the face of even public opposition in some countries. It is true that referenda in some countries have sometimes failed to ratify of certain European instruments, but even with the end of the Cold War and the rising prospect of economic difficulties, nothing has unraveled at the most fundamental level. It appears that European political leaders understand clearly that in the age of globalization and the rise of emerging states, their political and economic influence in the world would be best advanced through the EU framework. As long as this remarkable trend continues, Japan will continue to see the EU as an important coalition-building partner.

Weaknesses
Possible European weaknesses could be 1) its lack of cohesion among its member states with regard to foreign and security policies, 2) high exposure to financial shocks and lingering economic disparity, and 3) a relative lack of sensitivity for Asian security. These three could be compounded to make Europe vulnerable to Chinese influence. Once again, Japans main concern would be the strategic orientation of Europe vis--vis China. During financial and economic crises, European countries may become particularly vulnerable to Chinese economic penetration. China will likely contribute to European financial rescue packages because a healthy European economy is in the interest of Chinese exports. It is quite natural for China to provide financial assistance to fiscally challenged European states. China will obviously calculate risks and would likely initially channel its assistance through the IMF to the ESFS and the ESM, but it could, at some point, decide to extend direct financial assistance to fiscally challenged states as it has done with regard to Spain in 2011. This will
20 Data compiled by Japan External Trade Organization (JETRO), China Data File 2010, JETRO, 2010, pp.141, 153. (JETRO is the semi-official arm of Japans Ministry of Economy, Trade and Industry.)

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simultaneously mean that these fiscally challenged states will become susceptible to Chinese influence to some degree. It has also been reported that France and Spain are supportive of the idea of lifting the arms embargo to China whereas Britain is opposing it.21 If the EU economy were to suffer from a more serious crisis and Chinese financial assistance were to increase its significance, then the EU would face a difficult decision.22 Ideally, Japan and the United States should step in to increase their financial assistance to Europe under such a circumstance, but if Japan and the United States are unable to provide sufficient assistance to Europe due to their respective domestic problems, then the lifting of the arms embargo by the EU could become a reality. Furthermore, even if the EU-wide decision were to hold for the ban on arms sales to China, and European governments adhere to that decision, certain private sector companies in Europe could export regulated technologies to China. This kind of illegal behavior among European companies could become more likely if their economic survival is put at risk by a lingering economic recession. Also, if European companies were to lose their markets in the United States or other advanced countries, then they could become more risk-acceptant because they would have nothing to lose from punitive sanctions by U.S. and other foreign authorities. Obviously, European private companies and individuals engaged in illegal arms sales would have to face the consequences of violating the law in their respective countries, but they may take that risk for their own survival. Of course, Japan has had its own problems of technology export regulation, but if certain NATO military technologies were to fall into the hands of China by legal or illegal means, then this would constitute a grave threat to Japanese security. It is unclear what kind of arms China would want to acquire, but weapons system technologies comprising its so-called anti-access/area denial (A2/AD) strategy would likely be among its priorities. Thus, if China succeeds in winning support to lift the EU arms embargo, or if it gains access to sensitive technology through illegal channels, then Japan as well as the United States will have an even more difficult time maintaining deterrence in the western Pacific region. Strategically speaking, Japan and the United States would have to devote much more in the way of resources on territorial and Indo-Pacific defense. As a result, Japanese and U.S. efforts to engage in future stability operations in, for example, Africa, Central Asia, or the Balkans would be relatively limited. Japan and the United States would expect the EU to take more of the burden and responsibility in these regions.
21 Sally McNamara and Walter Lohman, EUs Arms Embargo on China: David Cameron Must Continue to Back the Ban, The Heritage Foundation WebMemo #3097, January 18, 2011, available at http://www. heritage.org/research/reports/2011/01/eus-arms-embargo-on-china-david-cameron-must-continue-toback-the-ban. 22

China is in indeed beginning to flag the possibility of EUs lifting of the arms embargo once again through a China Daily opinion article. Keith Bradsher and Liz Alderman, China Considers Offering Aid in Europes Debt Crisis, The New York Times, February 2, 2012.

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Politically speaking, if the EU decides to lift the arms embargo, it would become difficult for Japan and the United States to cooperate with the EU on Asia strategy. What would appear to be a de facto security partnership between the EU and China will likely force Japan and the United States to revise their strategies. The United States could become less enthusiastic about not only defense technology cooperation but sharing the burden of European defense. Japanese trust of Europe would certainly diminish, and its political/diplomatic cooperation with the EU would likely become limited on many issues, at least temporarily, because Europe would appear to be making money by putting Asian security at risk in the eyes of the Japanese public. Since the above-mentioned scenario would be a strategic nightmare for Japan, it makes it all the more important for that nation to increase its economic and defense industrial ties with Europe and develop mutually beneficial relations so that such a possibility is averted.

Europes Role in Japans Future

The previous sections have identified challenges, risks, and weaknesses of Europe, but these are all based on quite pessimistic scenarios rather than predictions. Japan will continue to view Europe as a reliable partner to tackle various global political issues, as a promising source of economic growth, and as a viable global security provider. Japan and Europe, together with the United States, have a common interest in integrating rising states into an international order based on rules and norms that enshrine liberal democratic values. Thus, Japan is firmly committed to sustaining and further developing mutually beneficial relations with Europe as a member of the advanced market-based liberal democratic community. Nevertheless, if Europe undergoes a major financial adjustment during the next five years or so and then subsequently reaches a relatively stable equilibrium (i.e. a new core based on fiscal unity) perhaps in the next decade as described in Section I, then Japans dealings with Europe could differ during these two periods.

Japans Choice of Alliances and Partners

Europes financial and economic crises in and of themselves will not affect Japans choice of alliances, partners, and relationships. Japan will continue to maintain a strong alliance with the United States, and develop and enhance security cooperation with countries such as South Korea, Australia, India, Indonesia, Vietnam, Singapore, and the Philippines. If Europes crises were to spill over to the United States, and consequently the United States were forced to further reduce its defense expenditure, then Japan would probably have to accelerate the process of developing security partnerships with the above-mentioned third countries in order to maintain, as much as possible, a favorable balance-of-power vis--vis China. In this context, and it is highly uncertain at this point, perhaps Japans relationship with Russia might take a more
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positive turn. The Kremlin could decide to take bold steps for the resolution of the Northern Territories dispute because both Japan and Russia share a common concern: the expanding Chinese navy in the western Pacific. Japan will surely accelerate efforts to improve security cooperation with major players like Australia and India as well. In short, Japans choice of partners will depend much on how the United States is affected by Europes crisis.

Europes Role in Japans Future

Japans national interests are best secured in a world where freedom, democracy, and the rule of law are abundant and in an open international economic system based on market principles and open global commons. Japan will continue to view Europe as a natural partner in building such a world.23 Nonetheless, as the EU undergoes economic adjustments in the next several years, Japans relations with Europe will probably become more centered on economic issues. Even though Japan will actively engage the EU on political and security issues as well, the relative lack of cohesion of the EU and its rather introverted orientation could convince Japan to place more emphasis on approaching individual European states rather than the EU as a whole in these areas. On the other hand, if the EU were to reach a new economic and political equilibrium as described in Section I (i.e. a two-tiered monetary system within the EU led by a core fiscal union), then Japan will probably enhance its consultation with core EU states on a wide range of issues. During the adjustment period, Japan will actively engage the EU economically for strategic reasons. Economically, Europe will continue to be one of the major markets that will be capable of consuming Japans high value-added products. Strategically, Japan will also want to reduce the possibility of Chinas financial and economic penetration into Europe, and also avoid the lifting of ban on arms sales to China. Therefore, Japan will strive to conclude a Japan-EU EPA. This effort will be supplanted with cooperation on intellectual property rights protection and mutual regulatory reform. If Europe and Japan succeed in further strengthening their economic ties during the current crisis, Europe will continue to be among Japans most important economic partners in the decades to come. With regard to security issues like contingencies outside of Europe, Japan may have to deal more with individual states rather than the EU. When fiscal challenges loom large in Europe, European states would understandably become more hesitant about employing their military forces in crisis-management missions outside of Europe. Furthermore, European countries may come under the strong influence of Germany, especially during the adjustment phase, for reasons mentioned in Section I. For instance, Germany might demand a UN Security Council resolution under Chapter 7 of the UN Charter as a precondition for any out-of-area military
This basic recognition has been affirmed in Shaping Our Common Future: An Action Plan for EU-Japan Cooperation, a keystone document adopted at the Japan-EU Summit in Brussels in 2001. Available at http://www.deljpn.ec.europa.eu/modules/relation/agreement/.
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operation. This kind of argument would become particularly potent when fiscal austerity is necessary in many European states. Some European countries would follow Germanys lead, but there may be others like Britain that might be more forthcoming. Under such circumstances, rather than consult the EU, Japan and the United States would probably have to approach individual European states for necessary consultations. In other words, the relevance of the EU as a representative entity could diminish temporarily due to lack of cohesion on extra-European contingencies. Individual states, rather than the EU, would likely be seen as playing more crucial roles in managing international security in the eyes of Japan and probably the United States. With regard to global issues, Japan would prefer to see the EU advance reform of global institutions such as the UN and the IMF, efforts to tackle global warming, and the promotion of human rights. However, if fiscally challenged states become dependent on rising countries with problematic human rights records, they might become hesitant about advocating the protection of human rights. This will in turn mean that Europe will become more divided on human rights issues. On issues like climate change, certain European states lacking the economic vigor to invest boldly in the development of non-fossil fuel energy might have second thoughts about reducing CO2 emissions. If certain European states were to weaken their resolve to tackle climate change, then the EUs credibility as a coalition-building partner could diminish. Germany would be expected to play a crucial role in maintaining momentum for the initiative, but economically lagging states may have difficulties going on board. As a result, it would take longer to forge a consensus on climate change-related issues. In short, if Europes positions on global issues become fragmented, then Japan would see the EU as playing an important role, but it would also see the EU as a somewhat less reliable coalition-builder on the global stage. Once Europe reaches a new political and economic equilibrium after the adjustment phase perhaps in five to ten years then a new core or a strengthened center of gravity could emerge in Europe to overcome some of the weaknesses mentioned above. The EU members could disagree on many issues, but a new core based on a fiscal union could provide anchoring positions on divisive issues. As mentioned earlier, Japans primary strategic objective in the coming decades would be to establish a legitimate rules-based order in which both leading states and rising states share common international rules and norms that stipulate rightful external conduct and domestic governance based on liberal democratic values. This will require Japan to provide deterrence in the western Pacific and also engage in intense bargaining with key rising powers so that they will adopt and comply with existing international rules and negotiate new rules and agreements that regulate the exercise of national power. A reborn and a more united Europe, together with the United States, will play a crucial role in this strategy. Economic and financial crises may fall upon the group of advanced market-based liberal democracies in the future, but Japan, the United States, and Europe must jointly realize the necessity of mutual assistance and the grave consequences
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that could result if mutual assistance does not materialize. Maintaining trust and cohesion among the advanced liberal democracies will be the key to navigating through a turbulent age of globalization and power shifts Japan will look to Europe as an indispensable partner. Dr. Satoru Mori has been a professor of U.S. foreign policy in the Department of Global Politics, Faculty of Law at Hosei University since 2008. Prior to that, he was a research fellow at the International Center for Comparative Law and Politics at the University of Tokyo. From 1996 to 2001, he was a foreign service officer assigned to the Treaties Division, Japanese Delegation to the OECD in Paris, and the First Middle East Division.

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Worth a Second Chance?

Europe as a Model and Partner for Brazil
by Marcus Vincius de Freitas

How the Mess in Europe Affects Brazil

hat the European Union1 one of Brazils largest trading partners will be like after the euro crisis remains a mystery. The euro, not Europe, is in crisis. Brazil, a survivor of many economic crises, is an example that such crises should inspire Europe to reassess and renew its role on the world chessboard and build more resilience into its integration process. Getting back on track, however, has been much slower than expected and shows that Europe still faces many internal doubts about its future. This crisis is not the euros fault alone. It is also the fault of the lack of leadership, common vision, and discipline in fiscal matters. The euro, despite having deprived individual countries of flexibility in setting monetary and fiscal policy, has been essential to expedite financial exchanges and lower transaction costs in Europe, with a positive impact on economic growth in the last decade.2 However, the lack of fundamentals, such as a unified fiscal policy, uniform banking regulations, and a more solid and more democratic governance, have backfired, a direct result of the we want integration, but not so much approach. The crisis has increased the divide between North and South, East and West, between more and less endowed economies. The latter have greatly benefited from the transfer of community funds.3 This divide may be the root of future crises if Europe fails to address this challenge. The Brazilian debate on the future of Europe is still superficial, but has a particular concern for the impact the crisis will have on its growth rate. Brazilian companies,
1 Brazil was one of the first countries with whom the EU has established diplomatic relations. Since the EU-Brazil Summit in Lisbon in 2007, Brazil has been recognized as one of its main global interlocutors by the EU-Brazil Strategic Partnership in order to strengthen co-operation and develop a deeper dialogue. Issues such as climate change, the international financial crisis, and regional situations have created a positive, yet developing relationship. 2 Around 330 million people live in the eurozone, where the average inflation rate stands at 2 percent. 3 Those member countries failed to put these funds into productive use, spending on public or private consumption (Greece, Portugal) or booming the residential construction sector and over-sizing the exposure of banking sectors (Ireland and Spain).

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already operating on the continent before the crisis, have been revaluating whether it would make sense for them to continue operations. On the other hand, the crisis has been an incentive for Brazilian companies willing to integrate their production chains to acquire crisis-affected assets. For quite some time, Brazil and Latin America were off the European radar, considered more of an Iberian matter, with Portugal and Spain playing an important interlocutory role. Despite some initiatives, discussion of closer economic cooperation has moved at a turtles pace on both sides of the Atlantic, particularly due to Brazils insistence on the reduction of European subsidies on agriculture, still an unresolved matter. As a consequence, trade has not been as intensive as it could be, despite the fact that Europe buys Brazilian manufactured goods. The European crisis has had an impact on Brazil in three different areas:

the spill-over effect from Europes trade reduction with its current number
one trading partner, China, now Brazils main trading partner, too;

the decrease in exports to Europe due to protectionist measures; and an overall impact of the European crisis in worldwide growth, which has

affected the Brazilian GDP, reducing the expected growth from 3.5 percent to 2.5 percent in 2012.4

According to the World Trade Organisation (WTO),5 Brazilian exports were reduced by almost 17 percent in the last quarter of 2011 and the first quarter of 2012, as a result of the European crisis and slowing growth in China.6 The administration of President Dilma Rousseff has pursued countercyclical measures to address the situation, in an almost desperate effort to raise consumption as a driving force to generate growth in a bearish market. When it comes to investments, there has been a dual scenario. The expansion plans of Brazilian companies that were already operating in Europe before the crisis have been adjusted. An example is Marcopolo,7 which opted to shut down operations due to the slow growth. On the other hand, as the crisis continues, many Brazilian multinational corporations have gone bargain hunting in Europe. As a result, Brazilian policymakers should secure the protection of Brazils ever growing interest in European companies in order to integrate supply chains. European investors
4 The Brazilian GDP expanded 0.20 percent in the first quarter of 2012. In 2010, the GDP growth reached 7.5 percent, the highest in the past 25 years. However, it slowed down to 2.7 percent in 2011, with expected growth at 3.2 percent in 2012. New Brazilian Central Bank projections foresee it at 2.5 percent for 2012. 5 World Trade Organisation, World Trade 2011, Prospects for 2012, July 2012, http://www.wto.org/ english/news_e/pres12_e/pr658_e.htm. 6 World Trade Organisation, Brazil Country Profile WTO Report, July 2012, http://stat.wto.org/ CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=BR. 7 Marcopolo, a major Brazilian bus body producer, shut down its operations in Portugal in 2009 as a result of its poor performance in the European market.

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have sought profits from their operations in Brazil, a country with a comparative advantage over the other BRICS due to its positive response to the crisis and to its democratic stability.8 This has prompted European companies to expand investments, despite the infrastructure challenges and the cost of doing business in this emerging market. Europe will remain an important player in world affairs and globalization, despite the bumpy road ahead. The European integration model, however, which had been considered the most appropriate for a region like South America, is no longer perceived as a model. Nonetheless, together with the United States and China, Europe will still play an essential role in globalization, even though it will be the third voice in that troika.9 Since globalization seems an irreversible trend it should be remembered that Europe was globalized long before the term became widely recognized and will continue after the dust of the current crisis settles, the Old Continent will be much stronger, with a promising future. It will, however, need to make adjustments to become one true federation, with one common voice and goal. Europeans will need to expand the mandate of the European Central Bank (ECB)10 and reassess their perspective on the preponderance of Germany as the key player of its future. Germany, on the other hand, will need to become more flexible, particularly in terms of its financial policy. This new Europe will not be as relevant to Brazil, China, or the United States unless there is a concerted effort to change.

What Went Wrong in Europe?

Transparency, a growing lack of popular support reflecting a fatigue towards Brussels, and a disregard for local communities have been the EUs greatest challenges during the crises. The integration process has concentrated too much power with elites in Brussels and has failed to foster a common, federal identity. This tension between federalism, opposed by some, and commercial pragmatism, expected by many, has been a driving force that at times expedites the pace of integration, but also restrains it from deepening. Reconciling such conflicting views remains the fundamental challenge to further integration.

8 An investment concept yet to be proven feasible as a political bloc, this term was coined by Jim ONeill of Goldman Sachs in 2003 to refer to the emerging economies of Brazil, Russia, India, and China, forecasting that such economies by 2050 would be larger in United States dollar terms than the G6 (United States, Germany, Japan, United Kingdom, France, and Italy). In 2011, upon invitation by the BRIC countries, South Africa joined the bloc. 9 The financial G20, relevant as it may be, has yet to become a more organized body for collective action, so the reason the troika composed of the United States, China, and the European Union will still remain the most relevant players of the international system. 10 The ECB was conceived to maintain price stability in the eurozone, applying the no bail-out principle, whereby no states within the system would be financed if needed. Though a temporary success, this has been proven unsustainable in the long run.

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The euro was introduced as a tool to achieve integration. This was done without all the necessary instruments in place in order to ensure success. Glaringly absent was a common fiscal policy to ensure austerity and sound financial practices by the governments, whose unique histories, cultures, demographic identities, and different perspectives on state sovereignty, have produced heterogeneous needs and goals. The common currency should have played an important role in encouraging convergence. However, the eurozone failed. Under the umbrella of the common currency, it included differing ethics and perspectives on the future. As in an orchestra, the countries wanted to play the same song, but they were on different pages. The entire process demonstrated a lack of strong political leadership11 for a common vision. The European crisis provided evidence for the inexistence of preventive tools to address the issue of moral hazard in public debts, with neither the ECB nor the European Commission (EC) equipped to solve financial imbalances. When developing such, they resorted to traditional International Monetary Fund (IMF) policies to reduce fiscal deficits and stimulate growth and international competitiveness, without the necessary access to loans or monetary policy instruments generally available under normal IMF interventions. The ECB was not designed to act as a lender of last resort, only as an instrument for inflation control. This has added instability and volatility to world financial markets, with investors becoming more risk averse, especially to sovereign debts. The delay in solving the Greek problem, a weakness of the European leaderships ability to control the situation12 and address the challenges, has imposed heavy costs on Ireland, Portugal, Spain, and Italy. Though the adjustment measures may be considered excessively difficult to meet, there is no other real alternative to austerity in handling the crisis.

Lessons Learnt from the Crisis

Three important lessons should be taken from the euro crisis:

inflexible labor laws and major welfare benefits have reduced the speed and
competitiveness of an economy;

the depreciation of currencies and the increase of labor productivity in

the United States and Japan should be matched immediately with the application of similar policies; and

11 Several countries have changed their heads of government during the crises, not as a result of an ideological shift, but mainly because of the incapability by those in office to deliver better responses to the situation. 12 The IMF 2012 World Forecast has shown that the European financial problems and weak recovery has delayed world economic growth. International Monetary Fund, IMF Survey, July 2012, <http://www.imf.org/ external/pubs/ft/survey/so/2012/NEW071612A.htm>.

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 loose fiscal policies have led to irresponsible public spending in countries

not used to an abundance of financial resources, enhancing moral hazard challenges.
The crises have shown that Europe has been losing its capacity to innovate and compete in the global market due to the high cost of business. The cost of the welfare state in Europe is also a relevant lesson. Since Europe does not enjoy the benefit of the demographic bonus, like Brazil currently does, the low fertility rates will force it to open up borders to immigration in order to secure growth and sustain the welfare state set up after World War II despite some domestic opposition. This inflow of foreign workers will be necessary for the preservation of the current standard of living. Labor flexibility has been a stumbling block for European capitalism, with an overregulated labor and business environment. Europe is still not considered as friendly a place for business as the United States, Japan, or even China. This situation has diverted Brazilian investments and companies to other regions where regulations are less burdensome, while companies still prefer to do business in markets in which they are familiar. A more pragmatic approach is needed to establish rules enhancing competitiveness in the European labor markets, with easier immigration rules to attract foreign talents.

The New Brazil and Europe

Independent from what takes place in Europe, there is an ongoing tectonic shift in geopolitics, with power moving slowly from West to East and a direct impact on world order. With a world globalized in a multipolar framework, Brazil and Europe share common values and perspectives on the preponderance of soft power as a substantial instrument of foreign policy. The European Union has reacted positively to some of Brazils calls to reform the Bretton-Woods institutions and the United Nations Security Council, two substantial challenges towards repositioning the global system. Peaceful coexistence with neighbors and increased cooperation in technology-sharing and collective security are driving forces of such relations. However, global governance, with the accompanying growth of multilateral dialogue, constitutes the most pressing item for Brazil, a country that has undergone a profound transformation in the last two decades and is now seeking an everincreasing role on the global chessboard. While a newcomer, Brazil has the sixth largest economy in the world13 and has become an economic and political powerhouse. A South-North Atlantic Alliance, with a closer association between the so-called New Brazil currently, a rule taker willing to become a rule-maker and Europe a unique global player that still lacks the traditional attributes of a power, particularly in military terms is
13 Brazil has claimed the United Kingdoms previous place as the world sixth largest economy in 2011, due to its 2.7 percent growth against the U.K.s 0.8 percent. The five largest world economies in 2011 were the United States, China, Japan, Germany, and France.

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essential for the South American country to play in the big leagues and actively contribute to building a better global society. In spite of global financial difficulties, Brazils positive economic results have increased its recognition as a global player in a multi-polar world, particularly at the G20 level. The presidential diplomacy of Lula da Silva, a typical Weberian charismatic authority, had an important role in the process. During Lulas term, Brazil, no longer haunted by economic turbulence and political instability, incrementally became a more relevant global player. It sought an active role in global governance, either in the quest for a permanent membership at the United Nations Security Council, an old diplomatic claim, or in its several appointments, though unsuccessful, for key leadership positions in major international organizations. Though Lulas assertive foreign policy failed at times,14 it raised Brazil to a new status on the global chessboard. Brazil, together with the other BRICS, has confronted the traditional dominance of the United States and Europe, pursuing a path to influence global decisions, particularly with the economic challenges currently in place. Brazils access to abundant natural resources and energy has made its currency one of the hardest in a world hungry for such assets. As labor abundance and exports have enabled China to become an economic powerhouse, natural resources should serve as an important source of revenues and power projection. Brazil is different from the other emerging powers since it faces no major threats of war, domestic disruption, or nuclear claims. Its borders are settled. They have been unchallenged for more than 140 years. A demilitarized South America has allowed heavy reliance on soft, instead of hard power, to assert influence in a region that still resists Brazilian leadership. Whether or not this is durable will be determined by the sustainability of its economic performance. Brazil is now widely recognized as an important actor with more prestige, and this prestige plays a critical role. As Morgenthau put it, what others think about us is as important as what we actually are. Hopefully, such prestige may create a self-fulfilling prophecy whereby the country makes the necessary adjustments to meet global expectations. Considering its developing background, on political and ideological terms, the Brazilian foreign policy establishment may occasionally have a hard time internalizing the responsibilities of a great power and the corresponding behavior and level of accountability.15

14 While setbacks, the Honduras ordeal with President Manuel Zelaya and the joint mediation attempt with Turkey regarding the Iranian nuclear activities should be considered as justification to not play a more global role. The concepts were correct. The homework and the job done were not. 15 This third worldism perspective may explain why Brazil, during its last term as a non-permanent member of the UN Security Council (2010-2011), continuously abstained in many issues presented for vote.

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A New Phase in the Bilateral Relationship

Brazil has a long historical relationship with Europe. From Portugal, where the colonizers originated, to Germany, source of one of its largest immigrant populations, and to the U.K., initially responsible for the Brazils industrialization, Europe has been a source of inspiration and economic, commercial, and political synergy. This bilateral cooperation is ever more relevant today. The financial and euro crises have inaugurated a new geopolitical phase, with Europe and the United States stepping sideways to accommodate new powers. In this new order, Europe, with only two states armed with nuclear weapons yet a military power larger than China and India combined will continue to rely heavily on soft power as its main foreign policy instrument. Brazil has greatly benefited from the Chinese ascension, the most relevant phenomena of the early 21st century. Their hunger for commodities has made China Brazils largest trading partner since 2008. Chinese imports have helped decrease dependence on traditional markets, like Europe and the United States, and addressed the needs of a growing middle class.16 With added prestige on the international scene, based solely on economic performance, Brazil has sought global activism, particularly in international organizations, to affirm that a contested regional leadership should not be regarded as a deterrent for global emergence. Though unlikely to upset the international system, Brazil has sought to become a traditional power with a global role. This temporary economic bonanza is still a new thing for Brazil. Historically, the country has relied primarily on foreign savings to support domestic growth. The discovery of offshore oil should expand its revenue sources, hopefully allowing several sectors in the economy to access domestic savings that were previously unavailable. An increase in military power will be necessary to protect offshore resources. The resource curse, with the predation of natural resources, is a concern, even though the dimension of the country and the multi-layered level of industrial base may be an antidote. The political definition of the use of such resources should have a long-term perspective for the welfare of future generations. Thus, petroleum exploration is expected to reach a dual target:

to provide economic resources for development consolidation; and to serve as a tool of foreign policy to address energy security needs of major
world powers.
Whether oil can address both issues is still to be determined.
16 Governmental income transfer programs, such as Bolsa Familia, added 40 million new consumers into the domestic market. Brazilian industrial output was not sufficient to meet demand, with China playing an important role in reducing inflationary pressure.

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By introducing structural changes in the oil exploration regime from concession to partition the current Brazilian government clearly signals its firm belief that oil should serve as a tool to increase its international weight and strengthen ties with key partners, particularly China, United States, and Europe. By becoming a reliable supplier for their energy needs, Brazil should counterbalance the instability of North Africa, Middle East, and Russia. The new Brazil faces crucial challenges ahead: an expensive welfare state, a major dependence on commodity exports, an overvalued currency, and high interest rates, if compared to international standards. Yet, despite these unfavorable aspects, the country has low unemployment, rising wages, rule of law, high agricultural productivity, and ever increasing foreign direct investment, greatly supported by a growing middle class. Europe will remain an important market and partner for Brazil due to cultural ties and a common agenda yet to be built. Should Europe not resolve its financial and, more importantly, its identity crisis, Brazil, as an emerging global power, might be tempted seek improved relations with other partners. It is important to stress that the Rousseff administration has not been as engaged internationally as its predecessor. This level of disengagement, due to the poor performance of domestic growth, should not remain a policy goal, particularly now where Brazils inputs are expected on several squares of the global chessboard. The Brazilian experience has proven that crises have invariably had a short-term negative impact with positive long run results. The current crisis should be a new moment for Europe to rethink its positioning strategy in the global scene. A common agenda for Brazil and Europe for the near future should be developed including:

education and immigration; trade; and collective security.

Education and Immigration
The Rousseff administration has launched the Science without Borders Programme17 for thousands of Brazilian students to attend universities abroad and pursue further advanced degrees. European Union member states should become major recipients of Brazilian students for research and graduate education. By outsourcing a part of its higher education to countries with better educational systems, Brazil expects to become more competitive upon the return of those
17 The program still needs improved regulation, particularly by opening up all areas of human knowledge and developing an easier process to recognize foreign certificates and diplomas. The bureaucracy may actually kill the program.

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trained abroad. Taiwan, South Korea, and China have successfully pursued a similar strategy over the last 50 years. The more Brazilians live and study in Europe, the more the ties will increase, with a positive outcome for the future of this transatlantic relationship. Unemployment has reached worrisome levels in Spain, Portugal, France, and Italy. Aside from being a social problem, unemployment is a waste of the best talents. Brazil should be able to attract more European brains in the current situation, due to its strong growth and the lack of a skilled workforce. A steady increase in European immigration to Brazil has been observed since 2008, a first since the early 1940s. As Brazil opens up its borders for European immigration, a bilateral agreement should be worked out to open the borders for workers on both sides and to foster greater economic interaction.

Trade
For every $2.00 invested in Brazil from Europe, there is $1.50 invested back by Brazil.18 The European crisis has represented a unique opportunity for Brazilian capitalism to become more competitive internationally, with Brazilian companies acquiring crisis-affected assets and businesses in Europe in order to integrate production chains. Brazil and Europe should pursue deeper economic integration and capitalize on new opportunities to be developed jointly, crossing investments and creating new markets for technologies, particularly energy, which Brazil has in abundance. A closer partnership would accelerate more joint ventures and economic growth. Joint developments should take place in the pharmaceutical industry, particularly for the development of tropical disease medicines.

Collective Security
In the aftermath of the Libyan intervention, Brazil proposed a new approach for UN operations, the so-called Responsibility While Protecting. This concept focuses on the need to improve the monitoring and assessment of UN Security Councilsanctioned use of force and the need to exhaust all peaceful means before using it. Countries operating under a UN mandate should set up the necessary tools to protect civilian populations throughout the intervention process. In the meantime, the Brazilian defense system will need greater improvements to be deemed more effective. Cooperation programs with technology transfers are essential for Brazil to rebuild its defense industry, particularly to secure the regional commitment of South America remaining a peaceful zone. Brazil and Europe

18 According to the Brazilian Central Bank, Brazilian investments in 2011 reached $202.5 billion, an increase of 7.4 percent in relation to 2010. The European Union is ranked as the number one recipient of Brazilian foreign direct investment.

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should establish mutually beneficial procurement policies to advance Brazils defense of offshore assets and to improve military actions under a UN mandate.19 The Cold War has been over for more than two decades, but not much has changed in the world chessboard. When it comes to the UN Security Council, Europe should consolidate its voice. Do France and the United Kingdom represent themselves or are they the voice of the European Union as a whole? European over-representation in many international organizations constitutes a major concern for emerging countries in the process of reassessing global governance.

Conclusion
The challenges Europe has faced have a direct impact on the role it will play in the world in the years to come. Europe and the West are steadily declining in importance and power, with Asian countries, particularly China, playing an increasingly powerful role. In order to remain relevant, Europe should consolidate its integration process, and continue to build a single Europe, with unified foreign, security, and fiscal policies. As the new global chessboard is set, Europe will need to decide on the depth of its integration process. The European identity should prevail over the national. A European with no regrets approach should be the driving goal of member countries to forge such identity. Europe must pause and review what has gone wrong. A divided house will remain Europes Achilles heel and its greatest challenge. Europeans will need to rediscover the benefits of integration, survive the current troubles and learn to live with current and future German preponderance. A One Europe Policy should be pursued as the driving force. Historical differences, though important, should be left behind in order to address the challenges of a much more competitive world. Constructing a true European identity is a work for generations. EU countries should understand that, if isolated with their small territories, aging populations, limited access to energy, and declining competitiveness, they will not be able to survive in the global market. The new Brazil is not entirely dependent on Europe for its future growth. However, if Europe plunges, the promise of a continuous economic prosperity for Brazil and the other BRICS will undoubtedly take a hit. Crises come and go. So do governments. Policies and institutions, however, should be long lasting. Their strength is essential for longevity. Brazil should look to Europe as a vital partner in building the new world order, with increasing influence over emerging countries, who should take over more responsibilities in the international arena.
19 The so-called Buy Brazil Act, whereby government procurement should favor Brazilian-made products, is counterproductive for a country seeking a more active role in international trade. This act is another evidence of the trend Brazil still faces of falling into third worldism views of economic growth. Also, Brazil historically has not been a free trader due to attempts to protect its domestic industry.

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Brazil is growing up. And so is Europe. Marcus Vinicius de Freitas is a professor of law and international relations at The Armando Alvares Penteado Foundation in Sao Paulo, Brazil. A former Organization of American States Fellow, he holds an LL.B. from the University of Sao Paulo, an LL.M. from Cornell University, and a masters. from The Johns Hopkins University School of Advanced International Studies (SAIS).

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Looking Elsewhere
Turkeys Reaction to the New European Sclerosis
by Soli zel

Europes Complacence

uring a recent TV interview, Turkish Prime Minister Recep Tayyip Erdoan jokingly referred to a conversation he had with Russian President Vladimir Putin. Following questions from Putin regarding Turkeys desire to enter the EU, Erdoan replied, Include us in the Shanghai Cooperation Organization, then we might give up on the EU. A quip is a quip, but in the context of the EUs declining appeal for and influence over Turkey it is worth noting. Officially Turkeys quest for EU membership continues. The Minister for EU Affairs, Egemen Ba, spends a lot of time and energy to keep the flame alive even if, at times, he cannot conceal his exasperation with his European counterparts. The minister also has a hard time, like the rest of his cabinet colleagues, defending Turkeys recent record on freedom of expression and freedom of the press as well as many of the outlandish, if not outrageous, court decisions that make a mockery of the concept of the rule of law. Rare are the moments these days when the possibility of EU membership provides the framework for debate on any big political issue. Apart from the die-hard integrationists, who have a difficult time finding an audience for the EU process, membership related issues are of little if any interest to the Turkish public. Undoubtedly the deep political crisis of the EU, going beyond the eurozone crisis, accounts for much of the sagging interest in becoming a member of a no-longerso-attractive club. However, the disenchantment of the Turkish public with the EU preceded the severe economic crisis that shook the Union to its core. In Turkeys view, the EUs handling of Cyprus, coupled with the French determination to block the process at all costs, did not give the Turkish candidacy a fair shake. As the Turkish economy performed beyond expectations and the country prospered in new markets, the importance of the EU in Turkeys economic growth seemed to recede. On political matters, Turkey moved on some of its most pressing issues, such as the Kurdish problem, mainly independently of the accession process. In the meantime, with the EUs complacence, Turkish democracy began to suffer setbacks, although the process of demilitarization/civilianization went forcefully ahead.
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Furthermore, the developments in the Middle East that culminated in the profound transformative turbulence of the Arab Spring greatly elevated Turkeys profile as a consequential actor in the regions developments. As geopolitical considerations moved to the fore and Turkey had to rejuvenate its alliance relations following the failure of its high profile engagement with Iran, Turkish-American relations became closer. The EUs crisis arguably stemmed from the paradox of economic integration/ political fragmentation.1 If and when it manages to finally overcome the crisis, the nature of the Union and its structure will be different and possibly will reflect a more flexible arrangement. Despite enviable economic performances and a rising geopolitical profile, the benefits that Turkey would draw from continuing integration with the EU are not exhausted. In particular, the developments of the past five years have shown that the aspirational force of EU membership, as well as the disciplining framework of the Copenhagen criteria (Hungarys current politics notwithstanding) is essential for the deepening and further institutionalization of Turkish democracy. Similarly, if the current crisis leads to a more flexible arrangement in the Unions structure, absorbing a country the size of Turkey might be easier, giving an opportunity for EU members to reevaluate the Turkish file. The economic, political, and strategic benefits of further integration are there for all to see. In addition, EU-Turkey relations could easily move forward if they too reflected a more flexible arrangement, even if the member states politics do not inspire much confidence for such farsighted and imaginative openings on the part of the Union. Ultimately, the record of European history still allows one to hope for a breakthrough.

The European Challenge

In a review essay he wrote on the 20th anniversary of the 1989 revolutions in Europe, Timothy Garton Ash made these haunting observations: The year 1989 was one of the best in European historyWorld history using the term in a quasi-Hegelian sense was made in the heart of the old continent... Twenty years later, I am tempted to speculate that this may also have been the last occasion at least for a very long time when world history was made in Europe. Today, world history is being made elsewhereOf Europes long, starring role on the world stage, future generations may yet say: nothing became her like the leaving of it.2 Ash spoke to the widely shared perception that Europe was unlikely to be one of the master builders of a new world order. The economic crisis of 2007-2008 made it all the more apparent that power shift from West to East and to other emerging, dynamic parts of the world in the economic realm was a firmly established reality.
1 Ziya ni and Mustafa Kutlay, Ekonomik Btnleme/Siyasal Paralanmlk Paradoksu: Avro Krizi ve Avrupa Birliinin gelecei (The paradox of Economic integration/Political fragmentation: The crisis of the euro and the future of the EU), Uluslararas likiler Dergisi, Bahar 2012 2 Timothy Garton Ash, 1989, New York Review of Books, v. 56. Number 17, November 5, 2009

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In a world where vibrant nations are increasingly more forthcoming in their demands to be heard in the discussion of global issues, Europe appears weak, incoherent, devoid of energy and unwilling to engage collectively with the pressing issues that were on its own agenda, let alone the world. While at the turn of the century, some authors and analysts could speak of a new era when Europe would set the standard and be the frame of reference for the rest of the world, the realities of the crisis gave other, far more unpleasant messages. For one, the current integration model and the inflexibility that went with it is unlikely to continue. A new model would therefore be necessary to construct. The tense relationship between national policy and international (union-wide) cooperation would have to be recalibrated. So would the balance between the core and the periphery as well as the newly emerged division between north and south. In short, since the time Ash made his observations, the European Union of the worlds imagination appears to have foundered. One can understand the former Brazilian President Luiz Inacio Lula da Silva when he said, the world does not have the right to allow the EU to end because what Europeans achieved after World War II is part of the democratic heritage of humanity. Yet Europe either lacked or just couldnt generate the energy or the imagination to own up to its own successes and achievements; let alone find the political courage, will, and drive to adapt them to the harsher realities of a new era. In fact, the second European sclerosis revealed problems that went even deeper than the economic crisis that proved devastating for the countries in the periphery whether they were profligate or not prior to 2008. But perhaps far more ominously, the crisis brought forth latent social and political problems that eerily reminded observers of a dark era of European history some 80 years ago: eroding democratic consensus, inept or weak mainstream parties, class as well as generational divisions that harden, the opportunistic rise of racist or ultranationalist parties, and the scapegoating of immigrant communities both for the economic and social ills that affect societies. The financial crisis created a rift within the Union that would be hard to fix. It divided the Union between those in the eurozone and those that are out. Given the importance of the financial and economic crises for the entire Union, the eurozones ills and the need to attend to them immediately took precedence. Devising proper policies without having the political framework within which to carry them out, started to afflict the Unions capacities. Parallel structures have emerged. Since its inception, the euro has at times been viewed as instrumental in the creation of a two-tier Europe, dividing the EU into core and peripheral members. Within the eurozone, the crisis created a second, geographic category of divisions: on one hand, states such as Greece, Spain, Portugal, and Ireland, all situated at the periphery of Europe and suffering from economic fragility, were forced to redefine their relationship with the European establishment and their richer counterparts.
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On the other hand, the delays and wide disagreements between partners made the adoption of a bailout plan a torturous and arguably not finalized affair. The eurozones lack of consensus and political will became apparent as much as the absence of proper mechanisms to deal with a crisis of this magnitude. As Paul Krugman suggested, the current financial crisis reflected the EUs complete inflexibility. Krugman further argues that the German recipe of austerity, as the only possible policy for a crisis of this magnitude, has exacerbated both the economic and social-political malaise of the eurozone. If historical experience is a reliable guide, then we should expect the full repercussions of the 2007-2008 crisis to reveal themselves over an extended period of time. Already the revolt against a German-promoted policy of austerity and austerity alone has begun. The Greek electorate appears radicalized. The French electorate made its discontent clear, and in the Netherlands, the promise of more austerity broke the coalition government. In Spain, a government recently elected with strong popular support for its promise of austerity measures can no longer insist on policies that are responsible for 25 percent overall unemployment (50 percent among youth). For societies that are uncertain of their future and feel threatened by a world in which Europe is unlikely to be a primary actor in its own right, such figures and realities could help undermine the liberal democratic order as well. The resort to technocratic governments in Greece and Italy raises doubts about the efficacy of democratic governance. However, the resentment that the public feels against strong economic actors over which they have no control intensifies. This latter dynamic in turn makes the democratic systems and mainstream parties increasingly more vulnerable to attacks by radical right parties that are no friend of the post-war liberal/social-democratic order defining Europe. Given that the Union is having difficulty dealing with as vulnerable a country as Hungary, whos current government has taken strides towards electoral authoritarianism, the project indeed seems to be under a lot of strains. As Ivan Krastev recently put it in a brilliant essay, the revolt against the elites flows from the fact that most ordinary citizens now see the political and social changes of the neo-liberal decades as having advantaged the elites at everyone elses expense The result is that, at the fringes of European societies, at least, there are now deeply mistrustful, conspiracy-minded, uncomfortably intense, and significant minorities who are scared of the future. Fear in politics on such a scale has consequences we know all too well.3 Under such circumstances and when all systems show alarm signals, it is difficult for the EU to set an example or continue to be a potent source of aspiration or attraction for countries in its vicinity. Finally, the crisis and the way it was handled, which brought to light the deep fissures in issues of governance, priorities, proclivities, and propensities, exposed
3 Ivan Krastev, Europes Paradox, American Interest, February 2012

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the Union as an amalgamation of disparate peoples rather than a people unified under a common European identity. The German question, or rather the fear of German domination of the continent, reemerged to the detriment of the need to find common solutions to aggravating problems. What renders this predicament even more alarming than it needs to be is the fact that actually the reverse of those fears is true. At a time when leadership and a sense of direction are both necessary for the European Union to move forward, the most populous country in Europe, which produces about a third of the EU GDP and is situated at the geographic dead center of the continent, does not assume the role of leadership. In fact, a German analyst concludes a recent paper with the following statements: Germany is not becoming Europes hegemon. But the euro crisis has revealed a leadership vacuum at the top of the EU that Germany has tried momentarily to fill, after much hesitation and with a lot of unease. This leadership by default has been circumspect and there is no sign that it will extend beyond economic policy, especially not to foreign policy. Germany has gained more influence in Europe, but it has little will to lead. The entire setting of Germanys postwar institutions and of its political culture is opposed to moving the country into a position of exerting power over others. 4 Germany in the end may have no choice but be engaged and begin to change what some observers call its Lutheran approach to hopefully be more empathetic to the plight of others in economic matters. Already there are signs that the Bundesrepublik is moving in the direction of a fiscal union. If France can finally compromise on its cherished sovereignty and Germany can muster the political courage to show more solidarity with other members and loosen its purse, the political crisis may finally be overcome. Should that be the case, and a preference for growth-oriented policies are finally adopted, the Union ought to be able to ride this storm and restructure itself painfully and slowly within a decade. After all according to the Global Competitiveness Report, three of the top five, or six of the worlds top ten most competitive countries are in Europe (Switzerland, which is not a member of the EU, is one of them). Of the top 100 companies in the world, one-third are from Europe. France, the iconic anti-globalization nation is number four in drawing global investment after the United States, China, and Hong Kong, and its transnational companies are globally competitive. In short, if it can handle the social and political fallout from the economic crisis and heed Krastevs advice that the only way to save the European project, then, is to reinvent it, the Unions economic future can still inspire optimism. Yet Germanys and more globally the Unions reluctance or inability to be engaged collectively in strategic matters is unlikely to change, creating problems of a different order. Defense budgets are being slashed everywhere. At a time of gradual
4 Why Germany is not becoming Europes hegemon?, FRIDE, Policy Brief 126, April 2012

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U.S. disengagement from Europe, the Europeans cannot count on Washingtons attention or largesse. When it comes to security issues in their own neighborhood, the Europeans will mainly have to fend for themselves. A new and fresh approach to political and strategic matters is arguably the precondition for the EU to maintain a position of influence in the emerging global order. The countries that make up the wealthiest economy in the world cannot continue to be helpless by-standers when to their south a transformation of historic proportions is taking place. Nor could they afford not to manage relations with a seemingly robust yet vulnerable Russia and ensure that it remains true to its European as opposed to Asian calling. In these circumstances, it is in the interests of all of Europes major powers to build a solid foundation from which to engage with the rest of the world. The European Council on Foreign Relations in their 2011 report argued that it is certain that the new European order cannot simply be a return to a concert of powers in which the EU, Russia, and Turkey draw territorial red lines around the states in their respective neighborhoods in an attempt to avoid conflict between major powers.5 Instead, the report suggests, the new European order should aim to develop a concert of projects: a way of developing multilateral arrangements for discussing and managing the continents security in the interests of all. The best way for the EU to achieve these goals is through initiating an informal security trialogue between the EU, Turkey, and Russia. Although there are bilateral channels established with both Russia and Turkey (after all, there is massive overlap between NATO and EU membership), these would not be enough to re-legitimate the European order. The authors of the report underline that such a choice would encourage Turkeys post-Kemalist ambition to be a regional power but would also integrate it into a common framework. Paraphrasing Lord Ismay, they opt for a new institutional order in the continent that keeps the EU united, Russia post-imperial, and Turkey European. Zbigniew Brzezinski, on the other hand, calls for a cooperative larger West, extending from North America and Europe and by eventually embracing Russia and Turkey through Eurasia all the way to Japan and South Korea.6 This would enhance the appeal of the Wests core principles for other cultures, thus encouraging the gradual emergence of a universal democratic political culture. In this scheme, the United States must play the dual role of being the promoter and guarantor of greater and broader unity in the West, and Turkey is called upon explicitly to play a critical role since it is one of the pivotal states on the new world order. Brzezinskis argument forcefully brings forth the necessity of treating the case of Turkey and Turkey-EU relations primarily in the context of the trilateral relationship.
5 Ivan Krastev and Mark Leonard, with Jana Kobzova, Dimitar Bechev, and Andrew Wilson, The Spectre of a Multipolar Europe, European Council on Foreign Relations, 2010 6 Zbigniew Brzezinski, Strategic Vision: America and the Crisis of Global Power, Basic Books, 2012

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Turkeys Case
Most everything that happens in the European Union affects Turkey. The current cooling of relations does not change this essential fact. It is also true that the lure of the European Union today is much weaker given its economic predicament. Turkey by itself created more private sector jobs in the past five years than all the EU states put together.7 The Turkish public undoubtedly has a strong feeling of Schadenfreude but still it is remarkable that support for EU membership does not fall below 40 percent. This is particularly true in light of the fact that the EU reneged on promises given to the Turkish part of Cyprus, and that some EU members have been crass and behaved improperly towards Turkey. Less visible but no less true is the fact that what happens in Turkey bears upon the prospects of the Union, mostly, but not exclusively, in political and strategic terms. In fact, given the anemic economic conditions in the Union, Turkeys energetic and resourceful economy coupled with its young population proves to be an important engine of growth for the European economy. The EU provides in principle the necessary framework within which Turkey can actualize and complete its modern transformation. Turkey, in turn, offers the Union a number of advantages as a market, robust strategic player, and mediator between Europe and its own neighborhood. In short, it presents itself as a source of rejuvenation for an aging and weary Union. Even if, as Ian Bremmer argues, Turkeys relations with the European Union are frozen, Ankara is actively expanding its international influence. NATO membership gives Turkey a voice in Europe and influence in Washington. Its per capita income [is] nearly double that of China and four times that of India. Many in the Arab world look to Turkey as a dynamic, modern Muslim state. Add to this its position at the crossroads of Europe, Asia, the Middle East, and the former Soviet Union, and Turkey is the very model of a modern major pivot state.8 For all these reasons, the current crisis and the future shape, institutional arrangements, and inclinations of the European Union are of primary concern for Turkey. Not only is Turkey a candidate for membership but it has been in a Customs Union with the EU since 1996 (the only country so far to be in the customs union without being a member), enjoys strong economic ties with member countries, and is an integral part of the EUs economic and human landscape. Whatever government is in power, Turkeys economy is and will remain anchored in Europe for the foreseeable future. Though its share has dropped, the EU is still overwhelmingly Turkeys largest trade partner. Trade between the two is 120.3 billion, making Turkey the EUs sixth largest trading partner as of 2011, ahead

7 According to Eurostat figures, EU-27 employed nearly 212 million people in the first quarter of 2007. The figure dropped to about 210.5 million in the first quarter of 2012. The respective figures for Turkey are 19.191 million and 22.730 million. 8 Ian Bremmer, The Future belongs to the flexible, Wall Street Journal, April 27, 2012

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of Japan. Whats more, over two-thirds of foreign direct investment in Turkey originates from EU member states. Although the customs union with the EU is much maligned by certain circles in Turkey, the record of the past 16 years shows a positive balance in terms of trade creation, improved quality standards, and economic development. It is thanks to the customs union that many Turkish producers reached European, and therefore world, standards in industrial goods, and it is thanks to the customs union that the composition of Turkeys exports changed drastically, moving automotive, white, and brown consumer durables to the top of the export lists. The prospect of EU membership helped accelerate the process of democratization in Turkey as well. Long delayed reforms aiming at demilitarizing the Turkish polity were enacted. There was a marked improvement in human rights abuses and torture, minority rights, and freedom of speech and the press. Overall harmonization with the Union acquis reached 65 to 70 percent. In foreign policy as well there was close to complete overlap until recently. In some way Turkeys seemingly idiosyncratic policies towards its neighboring regions were of kindred spirit with the approaches associated with the EUs neighborhood policy. In fact, one of the side effects of the slowly deteriorating relations between the EU and Turkey, apart from the latters worsening performance in keeping up with the Unions democratic criteria, has been the weakening of that accord in foreign policy.

The Ebbs and Flows of Turkey-EU Relations

As major EU member states became less enthusiastic about enlargement and blocked accession negotiations with Turkey while hiding behind the Cyprus problem, they have inadvertently nudged Turkey towards a more independent foreign policy. It must also be said though that AKPs Ankara was more than ready to move in that direction both by force of circumstance and by the force of its own geopolitical ambitions. In the wake of the ill-fated U.S.-led invasion of Iraq, Turkey was already being drawn toward its immediate neighborhood. The Middle East, particularly the regional Arab state system, was traumatized as a result of the U.S. war. Turkey could not ignore this development or remain aloof to this predicament. Therefore by force of geography, history, and, increasingly, economic interests, it intensified its engagement with the region. Ankara still remained committed to EU accession and continues to be a staunch NATO ally, speculative commentary to the contrary notwithstanding. So Turkeys activism with the Middle East accelerated just as EU accession lost its immediacy due to the waning interest of both parties, and the effects of the economic crisis were felt more clearly. At the same time, the ruling Justice and Development Party (AKP) began to devise a foreign policy to create a wider space for autonomous or independent action for Turkey in surrounding regions. From 2004 to 2011, Turkey aspired to pursue an independent foreign policy, sought to be a leader for the countries of the wider region, and challenged the United States and the EU on a number of strategically important issues. The new strategy evolved with
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Turkey acting as what Philip Robins9 aptly terms a double-gravity state that relates both to the Euro-Atlantic community and to its Middle Eastern neighborhood. Nothing illustrates the trend more vividly than Turkeys growing economic ties with its Middle Eastern neighbors. In 2011, nearly 26 percent of Turkeys exports went to the Middle East and North Africa, compared with 13 percent in 2000, while total exports have risen nearly five-fold.10 The regional context changed drastically once more in 2011 with the Arab Spring and the withdrawal of U.S. troops from Iraq. Since then, Turkey has scaled down its perceived ability to act unilaterally in the neighborhood, recognizing that, when faced with historic change and instability all around, partnering with its allies is essential. The Arab Spring has pushed Turkey back into the Western fold and away from alternative alliance patterns, which it seemed to be in the making only a few years earlier, be it in the Middle East or in the sovereigntist global south.11 The U.S.-Turkey dimension of the partnership is already functional. A retrenching United States needs reliable regional allies. After the U.S. withdrawal from Iraq, Turkey fits that bill, and the two allies are in constant consultation about Iran, Iraq, Syria, and the future of the states where regime change has already taken place. In turn, Ankara needs the support of the United States to deal with an environment that has radically changed, that holds many surprises for the future, and where Iran and Russia are forcefully reasserting themselves into the regional power game. While Turkish-U.S. relations are going through a period of renewal and chumminess, there is a great need to reinvent the security and strategic alliance between Turkey and the EU. The revitalization of this partnership is important with regard to Turkeys perceived power and status in the region. Turkeys EU membership prospects, no matter how distant and even impossible they might look today, makes her an attractive example for reform in the Arab world. Turkeys added value to the regions stability and economic and political development is intimately tied to the health of Turkeys EU relationship. It is not just Turkey that would benefit from a revitalized relationship either. Ankaras foreign-policy capacities are real, despite the setbacks registered in the wake of the Arab revolts. These setbacks also brought about a much needed correction to Turkeys assessment of the relationship between her ambitions and her capacities. The security partnership of the kind desired by Krastev and Leonard et al. or by Brzezinski would necessitate a new way of engaging with Ankara in parallel with accession negotiations, that the EU must devise. Tocci suggests a return to the old days of frequent meetings and discussion of foreign policy matter between the Union and Turkey. She goes further and argues that not only should these talks be intensified and be conducted under the CFSP accession chapter. They should also
9 Philip Robins, A Double Gravity State: Turkish Foreign Policy Reconsidered, British Journal of Middle Eastern Studies, 2006 10 Source: TUIK, Turkish Statistics Agency 11 Nathalie Tocci, A Trilateral EU-U.S.-Turkey Strategy for the Neighborhood: The Urgency of Now, p. 11

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be brought up to heads of state level i.e. through annual summits and above all down to sectoral levels.12 Furthermore, Turkeys accession would greatly contribute to the Unions global relevance. Europeans increasingly fear that they are becoming marginalized as power shifts away from the West. This is the first time in 400 years that European security has been a regional rather than a global question. Europe is now neither the central problem nor the seat of the central solution in the global order. Almost all member states are interested in what William Walker has called positional security, that is, where they stand in the world, who they stand with, and how to improve or regain their standing.13 The EU should find ways to engage Turkey more fully in the EUs common security and defense policy. Already, more Turkish soldiers and officials participate in EUled military and civilian missions than from many EU member states. As a regional power with one of the few economies enjoying vibrant growth, Turkey could contribute even more if practical measures allowed for deeper co-operation. This parallel track would also help to overcome the current deadlock in NATO-EU cooperation, which is caused in large part by the division of Cyprus and to which EU High Representative for Foreign Affairs and Security Policy Catherine Ashton and Anders Fogh Rasmussen, NATOs secretary-general, have separately been mandated to seek a solution. Turkeys active inclusion in the future of Europe will have influence on the future shape of Europe itself. This is particularly true in relation to pertinent but touchy questions such as whether Europe will have the ability to establish a genuinely multi-cultural society and whether it will be able to play the role of a global actor, influencing developments in the Middle East, and in other parts of the world. Hence, if the accession process resumes and its credibility is restored, this would not only give Turkey and its Western allies a strong hand in dealing with the surrounding instability and uncertainty, but it would also enhance Turkeys credentials in dealing with the region and facilitate Turkeys acting as an economic, cultural, political, and social hub in its neighborhood, benefiting the EU, the neighborhood, and itself. The first task at hand is to free Turkey-EU relations from the shackles of moribund accession negotiations. The trick is not to allow this search to lead to the trap of privileged partnership or the path of an alternative formula of relations with Turkey. Even though a clear definition for it has not been found yet, the privileged partnership formula aims to restrict the EU-Turkish relations to a few areas such as an extended customs union and common foreign and security policy and

12 Ibid. 13 William Walker, Where does Britain stand in the World?, in John Gittings and Ian Savis (eds.) Rethinking Foreign Policy, (Nottingham, 1996), pp. 7-8, cited in Krastev et al., op. cit., p. 28

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to permanently keep Turkeys status as an associate member or partner. The accession process should still follow its own path or stay in coma. Yet, we need to build up and take a side road that guides the relations to the final goal of membership nonetheless. Such a script necessitates that the Union as a whole be more determined to overcome the Cyprus debacle, which, in turn means that core members must make up their minds about Turkeys membership once and for all. Arguably, Turkish membership would be an easier development to handle if the Unions potential new structures are looser and more decentralized. Until the future EU structure and institutional arrangements are put in place, it is imperative to keep the vitality of the relations. Since Turkeys strategic orientation as a Western country has been reconfirmed in the wake of the Arab revolts, it behooves the European Union, provided that it remains true to its own values, promises, and goals, to ensure that Turkeys socio-political Westernness is also secured. That prospect should not be sacrificed at the altar of a fear-driven politics of bigotry particularly at the historical juncture of the Arab revolts and all the consequences these entail. Developing bilateral relations with separate European countries can be one of the main pillars of this new strategy. President Abdullah Guls four-day visit to Germany and three-day visit to Britain last year, and another three-day visit to the Netherlands in May signal the intention and efforts of Turkey towards enhancing the bilateral relations with these EU members. Similarly, some EU member states, primarily Britain and Sweden, continue to push for Turkeys accession and make great efforts to enhance their relations with Turkey. As recently as April 2012, the aim to strengthen their relations with Turkey was also expressed by the minister of foreign affairs of Portugal, by the foreign minister of Belgium, and by the prime minister of Finland during their respective visits to Turkey. On June 16, EU foreign ministers, including the Germanys Guido Westerwelle but with Frances Laurent Fabius conspicuously absent, signed a joint declaration calling for a revitalization of Turkeys membership process. They made that call in reference to the Unions economic and strategic interests. Similarly, the economic cooperation between Turkey and the EU countries need to also be enhanced within the institutional framework. Although 17 years have passed since Ankara signed a customs union agreement with the EU, Turkey remains outside of its decision-making mechanism. One of the major drawbacks of this is that Turkey fails to take part in the Unions free trade agreements with other countries. It would only be fair that Turkey be involved in the decision-making mechanism. Otherwise, what had been a beneficial arrangement for both parties cannot be sustained into the future. zi and Kutlay believe that the future architecture of the EU will be an a la carte architecture that would make the Union a more flexible entity. Calling for a fresh look by Turkey at the EUs own internal dynamics, they believe the EU and Turkey

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can develop zones of cooperation without letting their relations be hostage to the accession process.14 Turkeys geography and history make it a special case. As a historian of the Ottoman Empire, Paul Wittek, once wrote, the power that controls the Anatolian peninsula must be Janus-faced.15 So Turkeys politics, economy, identity, and strategic inclinations must take into account this imperative of being Janus-faced. Currently Europes latest sclerosis produces a strategic vacuum. Instead of generating energy, a self-doubting, introverted, and fearful Europe sucks it up. What Ash bemoaned 23 years ago need not come true exactly as he depicted. There can and must be more juice left in the old continent to move forward, albeit in a secondary role in a wider West. Finally Europes crisis and its withdrawal syndromes should not be allowed to damage Turkeys well-calibrated equilibrium in its geographical and cultural setting. That equilibrium depends on the wise management of the countrys multifaceted interests and its links to the surrounding neighborhoods. To succeed in maintaining this equilibrium is a big challenge, and it is not merely Turkeys to handle. Soli zel teaches at Istanbul Kadir Has University. He is a columnist for the national daily Haberturk and is senior advisor to the chairman of the Turkish Industrialists and Businessmens Association.

14 zi and Kutlay, op. cit., p.16 15 Paul Wittek, The Rise of the Ottoman Empire, Witteks The Royal Asiatic Society, London, 1938

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Appendix

Thomas Kleine-Brockhoff, The Power of Perception: Europes Gestalt as

a Foreign Policy Actor as Changed by the Euro Crisis was written for this publication in April 2013. originally published as an article for the EuroFuture Paper Series in October 2012 titled, Beyond the Euro Crisis: Implications for U.S. Strategy Chinas Global Strategy was originally published as an article for the EuroFuture Paper Series in November 2012 titled, How the European Crisis Impacts China European Union was originally published as an article for the EuroFuture Paper Series in March 2012 titled, India and the European Union: Dim Prospects European Relationship was originally published as an article for the EuroFuture Paper Series in March 2012 titled, Crisis Invigorates JapanEurope Cooperation, But for How Long?

Aaron L. Friedberg, Turmoil in Europe: Implications for U.S. Strategy was Qin Yaqing, Assessing the Competition: How the European Crisis Impacts Mohan Guruswamy, Dimming Prospects: Indias Fading Interest in the

Satoru Mori, Cooperation as a Result of Crisis: The Future of the Japanese Marcus Vincius de Freitas, Worth a Second Chance? Europe as a Model
and Partner for Brazil was originally published as an article for the EuroFuture Paper Series in September 2012 titled, Brazil-EU Relations: Beyond the Eurozone Crisis

Soli zel, Looking Elsewhere: Turkeys Reaction to the New European

Sclerosis was originally published as an article for the EuroFuture Paper Series in September 2012 titled, Turkey and the European Sclerosis

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