Croesus and Caesar: The essential transatlantic symbiosis

AVENGEFUL United States is snubbing its German allies for opposing the war against Iraq. Prickly France has become a porcupine sitting on America's lap; Moscow and Beijing have followed Paris' lead since the United States and Britain subdued Ba'athi Iraq. Some opine, and others worry, that a belligerent

This, however, will not happen. The EU will not seek to become another military superpower to contend with or threaten America. The defeat of Iraq will not lead to the end of the American era, with Europe as America's residuary legatee. Nor is the altercation between Europe and America properly cast as a spat between different visions of the social order-with Brussels and the European Commission representing the "paradise" of social democracy and Washington the "power" of the preponderant state. Europe, in fact, does not play Venus to America's Mars.

Amid much bluster on both sides, the paramount truth is that the two major centers are both powerful, but act in different spheres-and they desperately need each other. Neither can, or at any rate should, talk cavalierly of going it alone. Most specifically, America needs Europe's financial power, and Europe requires America's military protection.

America Needs Europe

THE MOST appropriate metaphor for comparing Europe and America, for those who insist on them, has nothing to do with planets. It rather compares Europe's Croesus to America's Caesar, the paradigmatic example of the power of Rome. Croesus, King of Eydia in the 6^sup th^ century B.C.E., accumulated vast wealth, and so does Europe today. America is a new Rome that bestrides the world politically and militarily, but rests on shaky financial foundations. Power requires wealth, and wealth cannot protect itself without power. In Washington, Americans berate Europeans for failing to share the burdens of military spending and for free-riding on American largesse. The Bush Administration vilifies most of its NATO allies for lacking military might and having to rely on American air and sea power to get their slender forces to any theater of operations. The so-called European "rapid reaction force" is not rapid, nor will it ever be much of a force. American pundits declare that only European rearmament will remedy this deficiency and restore equality to the link with the United States.

This view is as mistaken as it is common. Military clout is not the appropriate way to measure the European contribution to NATO or to America. With little fanfare, the Europeans (and their Japanese cohorts) have shored up American power against the force of financial tides, enhancing Washington's strength and resiliency. Without the help of Europe and Japan, the United States could not have undertaken or sustained its frequent international military operations. Lacking this financial shield, U.S. foreign and security policy would have been checked and doomed to failure. So it has been for decades.

European strength has always rested on monetary foundations. In the past, Holland and then Great Britain commanded the world economy and plucked imperial spoils as a willful child eats chocolate. These nations could finance operations overseas, run commercial economies at home and still expand their territorial orbits. As Niall Ferguson points out, Britain won contest after contest because its money market was deeper and more resilient than those of its rivals.1

The United States inherited this role after World War I and enlarged it after World War II, when the reigning American trade surplus emptied European coffers and American credit refloated capitalist growth. Brimming with wealth, the United States could finance both its military role and expand American private capitalism worldwide while contributing to Europe's rehabilitation. But the American financial reservoir ran dry in the 1960s: since then, the United States has not been able to bankroll its military and economic sectors at the same time.

So Europe (and Japan) has. Since the late 1960s, the Europeans have been called on repeatedly to bail America out economically, and they have done so. In 1971, Europe permitted the United States to go off the gold standard, devalue its currency and levy import surcharges against its trading partners without retaliation. Europe did not punish America for its breach of faith: instead it helpfully maintained the high value of the franc and the deutschemark. In 1978-79, American inflation rates rose above the interest rate, negating any incentive to save in the United States. This led, predictably, to a run on the dollar. Spurred by German Chancellor Helmut Schmidt, Federal Reserve Chief Paul Volcker moved to collar inflation with a high interest rate policy, and the dollar regained its footing. After the dollar had climbed to prodigious heights under Ronald Reagan (fostering a huge trade deficit in the United States in the bargain), Europe helped to engineer a soft landing in both 1985 and 1987 as the dollar returned to earth. This prudent division of Western labor represents a still underappreciated reason for the West's victory in the Cold War. The Soviets, in contradistinction, had nothing comparable to it.

Nor did Europe ever take advantage of American weakness when the United States ran into financial trouble. In 1987, the Europeans stood ready to help the Federal Reserve halt the collapse of the New York stock market on October 19. On that date the Dow-Jones Average suffered its largest one-day decline in history, plunging 22 percent in a single session. When the new Fed Chief Alan Greenspan lowered interest rates and ploughed $100 billion of liquidity into the financial system-floating struggling firms and the exchange itself-the Bundesbank did not devalue the deutschemark in response. Europe and Japan continued to hold funds in New York and did not raise interest rates to counter the inflationary effect of American credit. Germany asked the United States to cut its fiscal deficit but remained ready to support America even when forced in effect to import U.S. inflation. Japan also resumed buying dollars.

Such past services from Europe were, of course, self-interested in the larger sense, but that takes nothing away from their importance. Nonetheless, these services pale beside the tasks the European Croesus will have to undertake in the future. The United States is now running unparalleled trade and fiscal deficits. The trade deficit alone stands at more than $500 billion a year, almost 5 percent of GDP. America is now borrowing 5 percent of world savings, sucking $1.5 billion a day into the United States. The budget deficit, fanned by President Bush's tax cuts, may rise to $500 billion a year, reaching $2 trillion in the next several years. If foreign capital does not enter the United States in huge amounts, the dollar could go into free fall, resulting in renewed inflation. The Fed would then have to raise interest rates, and the American economy would likely plunge into deep recession.

This crisis could occur well before 2004, and President Bush's re-election would then be up for grabs. The political outcome in the United States could thus depend upon what politicians and politically influential bankers in Brussels, Paris, Frankfurt, London and Tokyo decide to do to help-or not help, as the case may be.

It is true that investing in America is still in Europe's own economic interest. Investments yield more in New York than they do in Paris. In the short term, though, Europeans and Japanese have lost money in the United States. The New York stock market has not gone up, and European returns on U.S. investments are cancelled by currency losses. As Europe enlarges, the expansion of the European market will draw money back to Brussels. In the longer term, however, U.S. growth will return, and Europe will want to share in its benefits. As the dollar falls, Europe will substitute new foreign direct investment for trade with the United States. If one takes even a casual glance at the size of such investments in the United States, one sees immediately that their value dwarfs that of commerce. This is not going to change radically or soon. Europe will still place large funds in the American economy. But enough funds, and on what terms?

Europe Needs America

AS A "peaceful power", Europe does not want, or at any rate should not want, to separate from the United States and rebuild its own major military capabilities. It needs American defense protection while integrating with a still unstable region stretching beyond east-central Europe to Central Asia. Robert Mundell, the father of the euro, believes that as many as fifty countries will eventually join the EU-even some from North Africa-and adopt the euro as their national currency. America, not Europe, will defend these expanded borders-and Europeans recognize that they must play their financial part to receive help in protecting their growing perimeter.

To be sure, the euro will probably rise to become a competitive world currency with the dollar, but this prospect ought not be feared. It will give America an opportunity to export to European markets in a major way. Washington will also then have a partner in providing liquidity to other nations through deficits in the balance of trade. Europe's economic power will probably grow, despite its demographic doldrums, equaling or even surpassing that of the United States. But this does not mean that Europe will shoulder the world's, or even its own, military burden-and the richer it gets the more it will need U.S. military protection.

Yet Europe as a pacific economic giant will not be inward-looking. It will seek to influence others to follow its peaceful mission. Other nations may well emulate its strikingly successful institutions and policies. By expanding, the new Europe will bring peace and prosperity to eastern Europe and perhaps even to Russia, but it will not police the world. The NATO link with the United States will still be essential in all of this. That is why it is both erroneous and self-defeating to claim that America does not need Europe or Europe the United States. America and Europe are essential and reciprocal counterparts to one another in the structure of world power.

Then there is the continuing threat of terrorism. This threat will not disappear now that the war with Iraq is over; terrorism may even spread, at least in the short run. Neither the technical revolution in military affairs that has occurred in the United States nor the growing imperial reach of America's conventional forces can vanquish terrorism. For that, the United States will need cooperation and the shared intelligence of many other countries, particularly those of an enlarged European Union. There are no superpowers in the war against terrorism-every nation can be a military theater where battles may be won, and Pakistan's cooperation may be as important as Russia's. International cooperation between the United States and Europe is essential to win the long bout against terrorism.

EUROPEANS and Americans alike have been predicting the demise of NATO and the end of U.S. and European cooperation since Suez in 1956. The alliance, however, has not collapsed-and it won't. In the last thirty years, Europe has carried the primary financial burden, allowing the United States to maintain an essentially unbalanced economy while acting as the world's gendarme. Europe has not built up its military strength, but instead has done something much more important: it has created the financial conditions that have allowed the United States to act.

Americans may complain about the recent actions of Monsieur Chirac and Herr Schroder, but if they insist on remaining oblivious to Europe's critical financial role, they only contribute to an atmosphere in which that role is weakened. And Europe, which will not act militarily on its own in any serious way, should stop squawking about the use of American force as though, cases aside, there is something wrong about it in principle. The Atlantic economic and military partnership serves both Americans and Europeans, and it will become firmer as the true basis of the relationship dawns on both sides of the Atlantic. One hopes this happens sooner rather than later, for Caesar needs Croesus, and Croesus needs Caesar, now.