America and Europe: Clash of the Titans?

C. Fred Bergsten

From Foreign Affairs, March/April 1999

Article preview: first 500 of 5,079 words total.

Summary:  The euro's launch will transform the transatlantic relationship for good by placing Europe on an equal economic footing with the United States. If Washington does not face up to this and tackle outstanding trade and monetary-policy issues with its European partners soon, its current concerns-such as ballooning trade deficits and rising protectionist pressures at home-could spiral out of control. A good starting point for cooperation would be a joint initiative to limit fluctuations in the dollar and the euro. Trade negotiations between Europe and the United States also need a shot in the arm to get commerce flowing freely. An effective U.S. partnership with Europe is essential to avoid a showdown and maintain global leadership.

C. Fred Bergsten is Director of the Institute for International Economics and was formerly Assistant Secretary of the Treasury for International Affairs and Assistant for International Economic Affairs to the National Security Council. Copyright (c) 1999 by C. Fred Bergsten.

CONTINENTAL DRIFT

The launch of the euro offers the prospect of a new bipolar international economic order that could replace America's hegemony since World War II. The global trading system has already been jointly run since the early days of the European Common Market, which enabled Europe to integrate its commerce and exercise power equivalent to that of the United States in that domain. Now Euroland will equal or exceed the United States on every key measure of economic strength and will speak increasingly with a single voice on a wide array of economic issues. The euro is likely to challenge the international financial dominance of the dollar. Moreover, the end of the Cold War has sharply reduced the importance of U.S. military might for Europe and pulled aside the security blanket that often allowed both sides to cover up or resolve their economic disputes for the greater good of preserving the anticommunist alliance.

Economic relations between the United States and the European Union will therefore rest increasingly on a foundation of virtual equality. The United States will either have to adjust to this new reality or conduct a series of rear-guard defensive actions that will be increasingly futile and costly -- like the British did for many decades as their leadership role declined. The EU will either have to exercise positive leadership, which it now can do, or become highly frustrated at home and a spoiler abroad.

Partly as a result of these seismic shifts, transatlantic economic interdependence and joint responsibility for global leadership have grown rapidly for both economic superpowers. Europe and America therefore need to devise new strategies and institutional arrangements to manage both their bilateral economic relations and global economic issues. Such strategies can be constructed with or without a "common European foreign policy" that embraces traditional security issues; Europe itself has integrated far faster economically than it has politically. Japan will also be a partner in some elements of this collaboration. But until that country and the rest of Asia recover from their prolonged economic woes -- which may take half a decade or more -- transatlantic relations will be the crucial pivot for global as well as bilateral economic progress. And since Japan did not play a very forceful international role even prior to the Asian crisis, the timing or even the possibility of its full participation in the core leadership group remains highly uncertain.

The EU and the United States have yet to develop the required new approaches, however. Recent official discourse has focused instead on a range of narrow, highly technical, and even bureaucratic issues: bananas (which the United States as a country does not even directly export), testing procedures for pharmaceuticals, the appropriate representation of Euroland, which international committee should devise reform of the global financial system, and many other relatively minor matters. At their December summit, the two superpowers could agree only to consider new winemaking standards. Although the two sides need to address disputes over lesser issues -- ...

End of preview: first 500 of 5,079 words total.