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Informal General Affairs and External Relations Council 2-3/5/03: Contribution on the issue of EU-USA Relations by Professor Helen Wallace and David Andrews

MENDING THE TRANSATLANTIC PARTNERSHIP

The transatlantic relationship is at an impasse.  The basic premises and reciprocity that once informed this political consensus no longer carry much weight on either side of the Atlantic.  Yet the further deterioration of the Atlantic framework would only serve to reinforce American impulses towards unilateralism, to fuel existing European distrust of the US, and to weaken the multilateral framework for international relations that has served both Europe and America so well for the past half century.

The situation is precarious.  The political crisis within Europe, and between Europe and the United States, regarding Iraq has not yet affected the economic relations that bind the Atlantic community.  But there is no guarantee that this will remain so, and pressures to involve the economic dimension in the ongoing dispute will only grow—with potentially severe and long lasting results.

The immediate aim of European policy must be to keep the economic relationship insulated from the current political crisis.  The longer-term aim must be to use the economic relationship as a lever to refashion a more positive political relationship with the United States.  Some of the same political genius that facilitated intra-European reconciliation at the end of the Second World War will be needed to reconstruct Europe’s relationship with America, include a willingness to think creatively and to harness economic tasks to political ends.  Preliminary suggestions towards this end follow.

ANALYSIS
• From its consolidation in the 1950s, the Atlantic partnership has always involved an implicit bargain:  Europe extended legitimacy to US foreign policy activism (or unilateralism) in exchange for US support of arrangements guaranteeing European regional security and prosperity.

• With the end of the Cold War the circumstances that sustained this arrangement no longer obtained, and more recent changes of government and generation in both Europe and the United States unmasked significant underlying strains in the Atlantic framework.  The crisis over Iraq merely confirms how great these shifts have been.

• Current American priorities are the political, military and hard security issues.  The US is preoccupied with terrorism and “failed states;” Europe is no longer the focus of American geopolitical strategy.  Accordingly, many within the Bush administration regard the existing Atlantic framework as an intrusive distraction. 

• Conversely, for Europeans the priorities focus on political economy and soft security issues.  As Europeans acutely recognise, economic instability and weakness fuel political instability; European policy priorities tend to reflect this realisation.  The enlargement of the European Union, a huge foreign and security policy achievement, is a prime example.  Enlargement is aimed at overcoming the continent’s dangerous and dysfunctional historic divisions.  The ‘new’ Europe is a reworking of the ‘old’ Europe, not an alternative to it; the challenge for all Europeans is to ensure that this new Europe delivers on its potential.

• Because of these differing priorities and preferences, many Europeans regard the existing transatlantic bargain—trading the legitimisation of US foreign policy for assurances of US military protection and limitations on US demands for access to European markets—as no longer suitable.  Changed circumstances make acting on this judgement a tempting prospect.  The absence of an immediate and credible military threat to western European security has discounted the value of the American security guarantee, while the introduction of the euro has resulted for some Europeans in a new sense of economic insularity and autonomy.

• With important actors on both sides disenchanted by the Atlantic framework while the European and American economies remain bound together by deep ties, the partnership has reached a critical moment.  Permitting the political bacillus to spread into economic relations would be disastrous for Europe’s peoples, Europe’s governments, and European integration; preventing this should be a chief policy aim.
 

PRESCRIPTION
• The immediate aim of European policy must be to keep the economic relationship insulated from the current political crisis.  

The extent to which the Atlantic economies are bound to one another is generally under-appreciated.  The US is the EU’s major trade partner, and vice versa, but “trade” represents only about 20% of Atlantic commerce, with far more economic activity passing through foreign affiliates based on opposite sides of the Atlantic.  Were the overall Atlantic economic relationship to become endangered, the consequences would be severe.  Despite the attention they generate, current US-EU trade disputes account for less than 1% of transatlantic commerce; allowing that proportion to expand would threaten the livelihood of millions of Europeans (and Americans).

• The longer-term aim must be to use the economic relationship as a lever to reconfigure a positive political relationship with the United States. 

Upgrading the economic relationship will be the key to restoring the transatlantic relationship.  The alternative—a major political initiative—is currently untenable.  Any major political proposal floated by the EU at this juncture will undoubtedly be received in Washington with extreme scepticism.  Nor is it clear that “Europe” is in any position to mount a coherent diplomatic initiative in the near future.  Nevertheless, creative efforts to develop a new framework for transatlantic relations could be developed within Europe and explored informally with US counterparts, especially if they promised to upgrade the underlying economic relationship.  Two such proposals are examined below.

1. Trade and investment. 

There are a variety of policies that have divided the Atlantic community, and have assumed totem status in Europe (e.g., the Bush administration’s rejection of the Kyoto Protocol and the ICC) and vice versa in the US (e.g., European attitudes towards GMOs).  Throwing additional resources at these questions is likely only to add fuel to the flames.  A preferable alternative is to upgrade the common interest in areas where there is already substantial agreement, or the basis for substantial agreement.  One such area is trade and investment policy.

Despite the Bush administration’s imposition of tariffs on steel, soft lumber, etc., the overall orientation of US trade policy remains substantially multilateral.  Indeed, Washington’s pay-outs to various special interests are consistent with past American trade policy in the run-up to a new multilateral agreement—offering short-term concessions to protectionist industries in order to buy their acceptance of longer-term liberalisation.  Thus trade policy offers a significant point of entry into American politics, including the politics of the Bush administration; and Commissioner Pascal Lamy’s relationship with USTR Robert Zoellick is an under-exploited aspect of the transatlantic relationship. 

This could change if European political authorities offered Lamy greater room for manoeuvre.  Currently, leading trade officials on both sides of the Atlantic are intellectually respected but politically exposed actors; despite removing some irritants, neither Lamy nor Zoellick has been able to deliver trade agreement of genuine political consequence.  But if European political authorities were to authorise a substantially wider brief for Lamy—either within the context of the Doha Development Round or in a separate, transatlantic initiative—the transatlantic dynamic could be very positively influenced.  An initiative that represented the creation of substantial new economic value might not only produce immediate and substantive effects in the domain of trade and investment, it could elevate the position of Atlanticists within both European and American politics.

Progress is needed on two fronts.  First, the EU and the US administration need to give strategic attention to breaking the deadlock in Doha in order to give substance to the issues of global stability that must be at the core of a genuine Development Round.  Second, momentum must be maintained in reinforcing the multilateral and bilateral mechanisms of the trade and investment relationship. 

Two recent studies spell out the economic weight of the relationship:  Mark Pollack et al., The Political Economy of the Transatlantic Partnership (European University Institute, Florence, 2003), and Joseph P. Quinlan, Drifting Apart or Growing Together: The  Primacy of the Transatlantic Economy (Center for Transatlantic Relations, Washington D.C., 2003).  Both these reports make specific policy suggestions; the EUI study, for example, addresses ways in which a transatlantic trade dispute resolution mechanism might be framed.  A preliminary edition of this report has been enclosed with this memorandum.
 
2. Money and Growth. 

The global economy is going through a rough period, with disappointing growth prospects and worrying signals on both sides of the Atlantic.  The difficulty of identifying the critical ingredients of and remedies for this situation notwithstanding, some palliatives need to be found to prevent the situation from deteriorating further.

The creation of the euro provides Europe with a powerful tool but, as with trade policy, it is a tool better employed in co-operation with the US than in opposition to it.  The single monetary policy, and the resources of the European System of Central Banks, should be deployed as a carrot rather than a stick in the transatlantic relationship, with the offer to respond jointly to problems that threaten the welfare of citizens of both Europe and America.

One such problem is likely to be an eventual correction of the dollar’s value.  The US current account deficit is large and growing, threatening a precipitous drop in the value of the dollar.  While a slow and measured depreciation of the dollar is probably necessary to unwind the US deficit in an orderly fashion, a rapid and disorderly depreciation would be calamitous for both the US and the EU. On the European side, a rapid and substantial rise in the value of the euro against the dollar would snuff out the prospects for early economic recovery in a number of member states.  On the US side, Washington has relied on foreign capital inflows to compensate for low domestic savings rates, and a crash in the dollar’s value would bring that policy to a rapid end.

This mutual vulnerability creates a common interest in developing arrangements for co-operative exchange market intervention by US authorities and the ESCB.  Unfortunately, the positive institutional characteristics that mark the US-EU trade relationship are not replicated in the monetary realm.  On the US side, the very existence of a common interest in market intervention arrangements is likely to be denied by political officials in the US Treasury.  On the EU side, the relationship between EMU’s political authorities and the ESCB are poorly specified in the treaty, and no informal traditions have been developed to compensate for this formal weakness. 

Nevertheless, the beginnings of a run on the dollar could provide a rapid education for both European and American monetary authorities in the benefits of co-operation.  The content of such arrangements would have to be worked out discreetly by representatives of the ECB and American counterparts from the Fed and UST, but the EU’s political authorities should be prepared to suggest (once again, discreetly) their willingness to support such arrangements.  And in any event, Europe’s national political authorities should resist the temptation to comment publicly on such arrangements except through prescribed EU channels.

CONCLUSION
There is no quick fix for the deep problems that bedevil the transatlantic partners.  Nonetheless it is evident that further drift in the Atlantic relationship, with accumulating tensions and frictions, would be damaging to both sides and would further prejudice much needed efforts to improve global stability.  Both the EU and the US need therefore to work urgently on those parts of this agenda where cooperation is possible and could yield practical dividends.


David Andrews, Senior Research Fellow in Transatlantic Relations, Robert Schuman Centre for Advanced Studies, European University Institute.

Helen Wallace, Director, Robert Schuman Centre for Advanced Studies, European University Institute.


Fiesole, 19 April, 2003

European University Institute
Robert Schuman Centre for Advanced Studies
Via dei Roccettini, 11    I-50016  San Domenico di Fiesole   
Tel: +39 055 4685 751    Fax: +39 055 4685 776

 


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