c 

49 

in 

Paradise? 

Europe in the 

21st Century 

Steven Philip Kramer 

and 

Irene Kyrtakopoulos 

llilk IIIImlm IBI 
A popular Government, 

without popular information or the means of 

acquiring it, 

is but a Prologue to a Farce or a Tragedy; or 

perhaps both. 

Knowledge will forever govern ignorance; 

And a people who mean to be their own 

Go vernors, 

must arm themselves with the power which 

knowledge gives. 

JAMES MADISON to W. T. BARRY 

August 4, 1822 
TROUBLE IN 

PARADISE'~. 

EUROPE IN THE 

21 st CENTURY 

Steven Philip Kramer 

and 

Irene Kyriakopoulos 

McNair Paper 49 

March 1996 

INSTITUTE FOR NATIONAL STRATEGIC STUDIES 

NATIONAL DEFENSE UNIVERSITY 

Washington, DC 
NATIONAL DEFENSE UNIVERSITY 

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• Vice President: Ambassador William G. Walker 

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• Distribution Manager: Mrs. Myrna Myers 

• Secretary: Mrs. Laura Hall 

From time to time, INSS publishes McNair Papers to provoke 

thought and inform discussion on issues of U.S. national security in the post-Cold War era. These monographs present 

current topics related to national security strategy and policy, 

defense resource management, international affairs, civil 

military relations, military technology, and joint, combined, 

and coalition operations. 

Opinions, conclusions, and recommendations, expressed or implied, are those of 

the authors. They do not necessarily reflect the views of the National Defense 

University, the Department of Defense, or any other U.S. Government agency. 

Cleared for public release; distribution unlimited. 

Portions of this publication may be quoted or reprinted 

without further permission, with credit to the Institute for 

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of reviews and tearsheets would be appreciated. 

For sale by the U.S. Government Printing Office 

Superintendent of Documents, Mail Stop: SSOP, Washington, 

DC 20402-9328 

ISSN 1071-7552 
CONTENTS 

ACKNOWLEDGMENTS ........................ v 

PROLOGUE .................................. 1 

1. THE WELFARE STATE IN TRANSITION ....... 5 

2. CRISIS OF THE POLITICAL SYSTEM ....... 23 

3. THE DECLINE OF THE NATION-STATE ..... 39 

4. PROSPECTS ............................. 47 

ABOUT THE AUTHORS ....................... 77 

iii 
ACKNOWLEDGMENTS 

We would like to express our appreciation to Ed Allen, 

Matthew Baldwin, Theodore Couloumbis, Ellen Frost, 

C. Randall Henning, ,Josef Konvitz, Nicholas 

Kyriakopoulos, Kenneth Moss, and W. Kendall Myers 

for reading and commenting on the manuscript in its 

various states of development. We thank them for their 

suggestions and have incorporated many of them to 

clarify, amplify, and otherwise improve the text. 
TROUBLE IN 

PARADISE? 

EUROPE IN THE 21st 

CENTURY 

And that this place may thoroughly be thought 

True Paradise, I have the serpent brought. 

Donne 

PROLOGUE 

THE CHANGES 

When political observers talk about European security, 

they invariably refer to the challenges Western Europe 

faces on its peripheries from a renationalized Russia, 

conflicts in the Balkans, and Islamic fundamentalism in 

North Africa. Rarely do they imagine that the greatest 

dangers to the new Europe may come from within, that 

the kind of stability Europe has enjoyed since World 

War II could be merely a passing chapter in history, not 

a transcendence of history. Without suggesting that there 

is necessarily a worst case ending, this study will argue 

that there is indeed a series of crises converging on postCold War Europe that threaten its stability and that need 

to be addressed by European policy makers and taken 

into account by Americans. 
2 EUROPE IN THE 21st CENTURY 

The unparalleled stability of post-war Western Europe 

was based on several major factors: 

• A powerful external threat, the USSR, which 

unwittingly fostered European cooperation and 

cohesion 

• The United States, a willing and indispensable ally that 

guaranteed West European security 

• Economic prosperity 

• The success of a welfare state cum mixed 

economy, which brought to term the political and 

social polarization that characterized the interwar era 

and facilitated the consolidation and universalization 

of democracy all over Western Europe 

• The existence of a divided Germany and a 

Federal Republic that chose to tie itself to western 

institutions 

• Franco-German cooperation, which led to 

everwidening and deepening European integration 

that made unthinkable the prospect of renewed 

conflict among the states of Western Europe. 

But can these achievements, which seemed so secure, 

survive the end of the Cold War? This study suggests 

that there are serious reasons for doubt. 

The search for the sources of instability in Europe (if 

not throughout the world) should begin with a reexamination of the European political and economic 

map and its transformation over the last 6 years. During 

this period, the Berlin Wall was dismantled, a unified 

Germany emerged, the Warsaw Pact dissolved, and the 

Soviet Union ceased to exist. These events generated 

great public euphoria and created high expectations for a 

large political, social and economic peace dividend to be 

reaped by the whole western world. The last pace of the 

civic revolutions that proceeded unopposed in all of 

Europe was taken as a sign that the potential for 

significant near-term economic gains could soon be 

realized. This would be the result of large-scale 

demobilization and wholesale conversion of resources 

from the military to the civilian sector; indeed, credible 
KRAMER AND KYRIAKOPOULOS 3 

estimates show that the Soviet threat had accounted for 

about half of defense expenditures in NATO countries. 

It was thought that in the absence of such a threat a 

dramatic reallocation of resources within and across 

countries could easily follow. 

THE MYTH OF STABILITY 

In contrast to popular expectations, the end of the Cold 

War did not generate an immediate peace dividend or 

stability on the European continent. Ironically, it helped 

to highlight and intensify preexisting economic 

problems-but it did more than that. It created new 

political and economic uncertainty. Since the 1940s, the 

welfare state embodied postwar social peace. It came 

increasingly under attack as one impediment to Europe's 

ability to compete effectively in a truly global economy. 

Now, however it could be criticized for another reason. 

Once it ended, the Cold War might no longer be 

deemed politically and ideologically necessary as a 

means of promoting inter-European cohesion. This is 

even more so since political leaders on the national level 

have been unsuccessful in curing long-term economic 

stagnation. The result of their failure has been a crisis of 

the political system. This crisis is unlike any other, 

because it has been deeply affected by a revolution in 

information technology, especially television, and by the 

decline of the nation state. Weakened by this multiple 

crisis, European states also find it difficult to act 

collectively at the supranational level. The economic 

and social problems that have not been successfully 

resolved in Paris, Bonn, and Rome have proved just as 

intractable in Brussels, thereby casting doubt on the 

future of the European Union (EU) as a source of 

stability. Preoccupied by their own problems, the West 

European states individually and the EU as a collective 

body have been distracted from their main task of 

deepening European integration. If these trends 

continue, Europe's ability to contribute significantly to 
4 EUROPE IN THE 21st CENTURY 

international stability will be diminished. The 

implications would be negative for the shape of the postCold War world order and particularly adverse for the 

European continent. 
• THE WELFARE STATE 

IN TRANSITION 

Political philosophers once claimed that the basis of 

political democracy is virtue; today it is fashionable to 

think it is economic prosperity. Europe has been 

prosperous for centuries, a commercial and economic 

powerhouse commanding resources and capital and 

expertise to maintain its primacy. Following the 

devastation of World War II, political decisions were 

made that, unlike those of Versailles, encouraged 

Europe's recovery, with the Marshall Plan leading the 

way. Excessive reparations and beggar-thy-neighbor 

economic nationalism were avoided. The reach of 

modern industrial society penetrated into the rural world 

of most of Western Europe, creating a mass market. The 

rising tide lifted all boats: the war was followed by 30 

years of growth. 

In the wake of World War II, Western European 

countries sought ways to rebuild their domestic social 

and industrial infrastructure and mechanisms to 

integrate their economies. These developments went in 

parallel, largely complementing one another. 

Domestically, West European governments adopted a 

variety of economic intervention measures that helped 

shape the modern comprehensive "welfare state." 

National leaders, often coming from the anti-Nazi 

resistance, formulated plans for a social order that could 

resolve the bitter ideological conflicts of the 1930s. 

Socialists, liberals and conservatives agreed on the 

creation of a uniquely European mixed economy, 

blending the rules of the market system with the 

principles of distributive justice. This was to usher in a 

period of social peace, facilitating economic recovery 

and growth on the continent. European workers earned 

5 
6 EUROPE IN THE 21st CENTURY 

and then became accustomed to high wages, excellent 

social benefits, long vacations, and munificent 

unemployment benefits. These conquests were deemed 

acquissociaux, permanent gains. At the same time, the 

stage was set for economic and political cooperation 

across national borders. As a first step, six states agreed 

to place national industrial resources under a common 

European authority so as to deter future conflict, l The 

process that began with the formation of the European 

Coal and Steel Community, the European Atomic 

Energy Agency and the European Economic 

Community eventually led to the historic Treaty of 

Rome in 1957, formally creating the European 

Communities. In this way, just as the welfare state was 

meant to foster social tranquility at home, so would 

increasing economic integration promote peace across 

Western Europe. A stable Europe became an affluent 

Europe. 

The evolution of the European welfare state has been 

accompanied by a long series of economic achievements, 

leading Western Europe into great affluence and 

prosperity. By the early 1990s, Western Europe had at its 

command more resources held by its 12 member states 

than the United States, in terms of gross domestic 

product (GDP); after the admission of three more 

members in 1995, the European Union of the 15 enjoys 

an even larger aggregate income, twice the size of 

Japanese GDP. Per capita incomes in Western Europe 

have reached, and in some cases surpassed, the 

American one. The Europe of the 15 constitutes the 

largest single trading bloc, accounting for over 25 percent 

of total world trade; by comparison, the United States 

share stands at one-fifth, while Japan's remains much 

smaller at about 12 perent. The collective economic 

prowess of the member states of the European Union is 

represented by a single entity in international trade fora 

and negotiations. In the world of finance, the European 

Currency Unit (ECU) has become much more than an 

administrative accounting convention; financial assets of 
KRAMER AND KYRIAKOPOULOS 7 

all kinds are now denominated in ECUs and the EU's 

planned monetary union will solidify the position of the 

ECU as a premier international currency. 

But there is cause for concern. Unlike the welfare 

system in the United States, Europe's welfare state has 

not been faulted for perpertuating poverty or for 

contributing to social ills. Rather, the viability of 

Europe's welfare state has been called into question in 

recent years as the extent and intensity of demographic 

change and population movements across Europe 

increased. A perception has formed that in financial as 

well as in political, social, and ideological terms, the 

European welfare state has begun to cost too much.2 In 

absolute levels of spending as well as in relative 

proportion, the resources required to sustain the welfare 

state in its present form can no longer be easily 

reconciled with emerging European policy priorities. 

The causes are domestic as much as international. 

BUDGETARY COSTS 

Internally, the European welfare state has been 

characterized by high and rising expenditures on social 

protection. The budgetary implications of this trend are 

revealing and disturbing. The cost of expenditures on 

social well-being may be approximated by public outlays 

on health, education, income security, housing 

assistance-namely, expenditures on a variety of social 

services. By the mid-1980s, the cost of social protection 

spending was claiming about 17 percent of the gross 

domestic product (GDP) on average throughout the 

European Community (European Union since 1993); the 

highest relative proportion, close to 28 percent of GDP, 

was in the Netherlands, the lowest, about 13 percent, in 

the United Kingdom. By contrast, public spending on 

social protection services accounted for only 11 percent 

of U.S. GDP and even less (just over 10 percent) in the 

case of Japan.3 
8 EUROPE IN THE 21st CENTURY 

Since then, the cost of social protection has risen 

even more. In one of the newest EU members, Sweden, 

public outlays allocated to social protection amount to 

almost 35 percent of GDP. The Dutch share is a close 

second at 32 percent. Even in the least generous budget, 

that of the United Kingdom, the one with the lowest 

spending, in relative terms, expenditures on social 

protection services have risen to almost one quarter of 

GDP. Similar cost pressures have been evident in the 

United States, but U.S. spending on social protection has 

not exceeded 18 percent. Japan's share, by comparison, 

has been held in check.4 

Without doubt, the most significant cost pressure is 

the result of demographics in conjunction with social 

norms and preferences. Across the board, Europeans 

place a high value on old age security; over a third of 

public spending on social benefits takes the form of 

payments to provide for such protection. Next, the cost 

of medical care amounts to about a quarter of total 

public spending. These two categories, old age 

protection and medical care, together account for nearly 

60 percent of social protection payments.5 As matters 

stand, the demand for social protection can only 

increase. Improvements in health technology, universal 

access to health care, and low fertility rates have 

contributed to the aging of Europe's population, thereby 

increasing the tax burden associated with higher pension 

and medical care costs. As a result, Europe's senior 

citizens have become major beneficiaries of the welfare 

state, a situation very much resembling budgetary 

realities evident in the United States as well. But while 

demand for social services is increasing, the sources of 

revenue to finance expansion are becoming more scarce. 
KRAMER AND KYRIAKOPOULOS 9 

DEFICIT SPENDING AND 

INDEBTEDNESS 

European governments have resorted to borrowing in 

order to bridge the gap between public expectations and 

resource constraints. I,arge fiscal imbalances have 

generated additional longer term economic costs 

associated with deficit spending, now practiced by 

virtually all members of the European Union. Recent 

data on general government deficit reflect heavy 

economic burdens across all Western Europe. In some 

countries, deficit spending has been chronic and 

relatively high: in Greece, Italy, and Belgium, 

government deficits in the early 1990s reached 13, 10, and 

7 percent of gross domestic product, respectively. Even 

Germany's public finances have been affected by the 

reunification process: the German government's deficit 

accounts for over 5 percent of the GDP. Moreover, the 

persistence of the imbalances between sources of 

revenue and claims on resources over time is reflected in 

overall government indebtedness: in the early 1990s, 

general government debt expressed as a proportion of 

the GDP exceeded 130 percent in Belgium, and was over 

125 percent in Italy and Greece. France, Germany, and 

the United Kingdom have lower government 

indebtedness ratios, at 53, 59, and 52 percent 

respectively, but even these are high by contemporary 

standards.6 By way of comparison, the U.S. 

Government's indebtedness (the world's largest debtor 

nation in absolute terms since the mid 1980s) is reflected 

in a debt-to-gross domestic product ratio of around 70 

percent. 7 

LIMITS OF DEMILITARIZATION 

In the face of these realities, the end of the Cold War 

and the re-emergence in Europe of a common economic 

and political space were greeted with enthusiasm and 

euphoria for their implications on public finances. The 
10 EUROPE IN THE 21st CENTURY 

long-standing anticipation of the European left for a 

peace dividend associated with demilitarization of the 

economy was joined by the expectation of the right that 

expansion of capitalism would generate profits, jobs, and 

economic growth. So far, however, the financial benefits 

of the peace dividend and of capitalist expansion into 

east and central Europe and Russia fall short of earlier 

predictions. 

Demilitarization is proceeding apace, but defense 

spending was never as important an element of the 

public budget, especially the budgets of the larger 

European economies, as in that of the United States. 

During the buildup of the 1980s, expenditures on defense 

claimed about 6 percent of American GDP; in most of 

Western Europe, 3 percent was close to maximum. As a 

result, defense cut-backs would be expected to release 

more resources to the civilian economy, in relative 

terms, in the United States than in Europe. Thus, the 

potential to finance the expansion of the welfare state 

through demilitarization of the West European 

economies was always much more limited. 

As to capitalist expansion through the creation of 

market economies in Europe as a whole, it will take 

place over a much longer period of time than initially 

expected. At present, it is the lack of economic 

expansion together with high unemployment rates that is 

the main economic and political problem on the 

European scene. 

TAXATION 

Europe's welfare state could continue to be financed by 

greater reliance on taxes. Taxation, however, seems to 

be ranked worse than a solution of last resort. West 

European citizens bear a tax burden that is already 

perceived to be high. While international comparisons 

of tax burdens should be approached with caution, it 

appears that taxes constitute a much higher proportion 

of national income in Western Europe than in both the 
KRAMER AND KYRIAKOPOULOS 11 

United States and Japan. In the latter two, taxes equate 

to about a third of aggregate economic activity. Among 

members of the European Union, by contrast, taxes can 

claim a much higher proportion of national income, in 

some countries (such as the Netherlands and Sweden) 

amounting to around half of total income. Thus, 

proposals for additional increases are bound to be 

unpopular. 

Even if there were less political resistance to higher 

taxes, increased taxation would be counterproductive 

during the present period of low growth unless its 

recessionary effects could be offset by more 

expansionary monetary policy. However, membership 

in the European Union in effect subjects monetary 

policy to constraints imposed by the EU's exchange rate 

mechanism. This means that member states cannot 

choose their monetary targets to meet domestic 

concerns; instead, domestic monetary policy is made 

within the larger context of the European monetary 

system. 

ECONOMIC GROWTH 

In the past, Western Europe used economic growth to 

finance expansions and extensions of a variety of social 

protection programs. Economic growth is, by far, the 

most effective antidote to most economic problems. But 

economic growth is no longer what it used to be. 

During the 1960s, Western Europe's real gross domestic 

product grew at rates approaching 5 percent annually. 

In the 1970s, rates were closer to 3 percent per year. 

During the 1980s, real growth fell below 3 percent. Since 

1990, economic growth has been around 1 percent.8 

Western Europe's economic performance has 

deteriorated and has remained below potential for a 

considerably long period of time, with adverse 

implications for living standards in general and public 

spending in particular. If economic growth remains low, 

European governments will be extremely limited in their 
12 EUROPE IN THE 21st CENTURY 

ability to find sources of revenue to finance expansion, 

or even to assure maintenance, of social services. 

UNEMPLOYMENT 

But the most fundamental and visible threat to Europe's 

welfare state is high and persistent unemployment. The 

direct, accounting cost of rising joblessness is reflected in 

increased outlays on unemployment insurance. In 1992, 

about 6 percent of social protection funds were spent on 

unemployment compensation.9 Of course, the indirect 

economic costs of unemployment are much larger in 

terms of output foregone. As to social and political 

ramifications, unemployment remains the most explosive 

public policy issue in all of the EU's member states as in 

all advanced industrialized democracies. 

Europe's difficulties with job creation became evident 

in the early 1980s and have worsened since. The 

prospects remain bleak and have significant political 

implications. Unemployment rates of over l0 percent 

persist across the European Union; for Europeans under 

25 years of age, the rate is over 20 percent. In Spain and 

Ireland, close to a fifth of the labor force is without 

work, according to official statistics. Among the larger 

economies, Germany's unemployment rates were close 

to 9 percent at the end of 1995, edging upward since then. 

In France and the United Kingdom, unemployment has 

exceeded 10 percent of the labor force since 1992. The 

situation in Italy is similar, if not worse, l0 This picture is 

the reverse of what prevailed in the 1970s and early 1980s, 

when unemployment was an American problem; today, 

it appears that the U.S. economy is operating much 

closer to full employment, while Europe's workforce is 

significantly underutilized. 

Why has European unemployment increased so 

dramatically? There are no clear answers, but among 

competing explanations some deserve greater attention 

than others. Economic conservatives on both sides of 

the Atlantic blame labor market rigidities, which are the 
KRAMER AND KYRIAKOPOULOS 13 

result of social practices and legislation that make entry 

into and exit from the employed labor force very 

expensive for employers. Flexibility in terms of 

employment (and labor market) is high, according to this 

view, if employers can fire and hire to meet production 

needs (more hours or more employees during booms, 

fewer during recessions). Since the cost of hiring and 

firing is high (because of the social protections afforded 

workers), employers try to minimize changes to their 

payroll. For their part, European workers have a high 

reservation wage, counting on generous unemployment 

benefits, and choose to wait out a recession. But the 

waiting has been too long. Long-term unemployment 

has gone up, indicating that structural change rather than 

temporary or cyclical adjustment may be at work. 

A more powerful explanatory factor has to do with 

the limits of national fiscal and monetary policies. In 

part, the current unemployment situation may be the 

result of European anti-inflation measures of the last 

decade, particularly in connection with the exchange 

rate mechanism of the European Monetary System 

(EMS). To maintain EMS parities, member countries 

essentially gave up control of domestic monetary policy 

and followed the anti-inflation monetary policies of the 

German Bundesbank.ll Since national governments 

could not and would not use exchange rate adjustment 

to address domestic imbalances, economic expansion 

could be pursued only through fiscal policy. This course 

of action has led to high budget deficits, as discussed 

above. As a result, traditional macroeconomic policy is 

no longer powerful. 

The European monetary crisis in the fall of 1992 

demonstrated the nature of the dilemma faced by 

national governments: policies consistent with the 

European exchange rate mechanism can be at odds with 

national (that is, internal) priorities. This time, domestic 

considerations had to be weighed against pan-European 

monetary imperatives. Unwilling to pay the price in the 

form of higher interest rates, the U.K. Government 
14 EUROPE IN THE 21st CENTURY 

decided to opt out of EMS, triggering a series of similar 

decisions elsewhere that eventually led to reforms in the 

structure of the exchange rate mechanism. 

While the search for measures to address joblessness 

continues, the range of policy options seems to become 

more limited. Thus unemployment remains a problem 

without easy or even apparent solutions, economic or 

political, and consequently is a major challenge to the 

very existence of the European welfare state. 

WINDS OF PRIVATIZATION 

The ideological premise on which the European welfare 

state has been erected has become much less solid in the 

post-Cold War era. Strength in unity, a sine qua non 

during the period of East-West antagonism, implied 

(indeed, required) economic measures to promote 

collective well-being. In Western Europe, the tradition 

of state intervention to achieve this goal has 

encompassed active government participation in 

industrial enterprises as well as direct spending by the 

public sector on a variety of social services. But the end 

of military, political, and economic bipolarity has 

generated strong winds of privatizafion on a global scale. 

The evolution and future course of privatization in 

Europe are larger and much more complicated issues 

than perhaps anywhere else in the industrialized world 

of advanced democracies. State intervention in 

economic activity to attain specific goals enshrined in 

national legislation has been part of the European policy 

landscape for a long time. In the post-World War II era, 

the most comprehensive approach to state intervention 

was developed in France through planification, best 

known as "indicative planning:" economic goals such as 

growth rates, investment priorities, and other 

macroeconomic aggregates formed de facto policy 

targets; targets were quantified and often made explicit 

for policy implementation purposes; and an apolitical 

agency, the Commissariat General du Plan, was in charge 
KRAMER AND KYRIAKOPOULOS 15 

of execution. This approach was itself based on the 

foundations of "colbertist" practice and St. Simonian 

theory. Scandinavian countries have a|so developed 

their own brand of state intervention in economic 

activity, characterized by centralized control, 

numerical economic targets and implementing 

legislation. But other countries in Western Europe, 

including the United Kingdom, have followed similar 

approaches. The fundamental premise on which 

European economic "statism" has been based combines 

centralized government policy to achieve democratically 

derived economic targets. As a concept, privatization is 

at odds with European economic tradition in so far as it 

involves substitution of market forces for state direction. 

In Europe, privatization of government-controlled 

organizations or enterprises is conceptually similar to 

deregulation as defined and implemented in the United 

States (e.g., in telecommunications, banking, and 

airlines) but may also entail outright sale of state-owned 

assets (British Airways, France Telecom, etc.). To the 

extent that state ownership of industrial enterprises is 

more common in Europe, the potential revenue from the 

sale of such assets is also greater. Given the budgetary 

situation of many West European governments, it is not 

surprising that privatization is now held to be the 

solution of first choice. Gauging the potential for 

deregulation in Western Europe is a complicated matter; 

however, if one considers that the public sector accounts 

for about 45 percent of economic activity in the larger 

European countries (and may exceed that figure in some 

cases), then the possibilities seem large. By contrast, the 

U.S. and Japanese public sectors account for about onethird of total economic activity. For this reason, 

privatization is a much more powerful policy concept in 

the European context than across the Atlantic. 

Some government functions and activities are 

contracted out; many others can simply be eliminated. 

Such outright abandonment of traditional services to the 

dicta of the market offers ways to create public savings. 
16 EUROPE IN THE 21stCENTURY 

In a larger sense, however, the result may simply be 

shifting the resource cost to the private sector. The 

extent to which a net gain is realized depends on 

whether efficiency is improved without impairing 

income distribution. But with the focus on cost 

reduction, less emphasis is placed on the distributional 

consequences, even though they can be significant. If the 

national health service can be privatized and thus run at 

a lower cost to the public budget, there seem to be 

fewer reasons left for not doing so; after all, there is no 

competing economic system to which the dissaffected 

could turn. In this climate, the ideological foundation of 

the welfare state is not only open to question but subject 

to stringent cost-benefit analysis. A new, post- Cold War 

era calculus reveals costs that are growing continuously 

just as benefits are perceived to be falling. 

The European welfare state may have become a 

victim of its own success. Conceived and put in place to 

promote social peace and solidarity in one-half of a 

divided continent, it succeded in distributing prosperity 

in a socially acceptable manner throughout Western 

Europe and also within each nation state. But the 

generation most responsible for developing and installing 

the socioeconomic structure now taken for granted in 

Western Europe is being replaced. The average West 

European, about 35 years of age, has not experienced the 

conditions that led his grandparents to demand a 

comprehensive social safety net. Just as the end of the 

Cold War has erased the East-West division of Europe, 

so has time erased the memories of political turmoil 

accompanying the Great Depression and east-west 

socioeconomic antagonism of the 1930s, '40s and '50s. 

Why hold on to notions and norms of distributive justice 

formed in an era that has gone by? 

Instead, the average West European (affluent, well 

educated and much traveled) sees that the cost of 

maintaining traditional social services and programs 

continues to grow for reasons that seem less and less 

intellectually defensible. In fact, some of the reasons are 
KRAMER AND KYRIAKOPOULOS 17 

totally obscure, such as the reality that the national 

government's control over fiscal and especially monetary 

policies is slowly eroding; worse yet, expensive social 

services are claimed by increasing numbers of foreign 

nationals and political or economic refugees. In this 

setting, the plight of unemployment is accentuated. The 

most visible and politically explosive problem in 

Europe, joblessness, continues to be viewed by voters as 

a domestic problem, even though it now a pan-European 

problem, best described (and often explained) in 

regional rather than national terms: eastern versus 

western Germany; southern versus northern Italy; 

southern versus western Spain. Unable to rely on 

aggressive fiscal or monetary policy measures, national 

governments increasingly look either to the private sector 

or to Brussels for help. 

END OF ECONOMIC SOLIDARITY? 

Problems of uneven economic development and 

economically depressed areas of countries and regions 

within the European Union have been targeted through a 

variety of economic development funds and programs. 

An extension of the notion of distributional equity in the 

domestic setting, social solidarity across regions and 

within member states of the European Union was 

deemed imperative for social cohesion. This principle 

was firmly embodied in the Single European Act of 1987. 

In the commercial sphere, the Act formed a visionary 

blueprint for complete market integration before the end 

of the 20th century. In the political sphere, the Treaty of 

Maastricht was meant to establish a framework for a 

European Union into the 21st century. The common 

denominator was a "Peoples Europe," eventually to be 

governed by a Social Charter spelling out the rights of 

European citizens across national boundaries. The 

fundamental principle on which the People's Europe was 

to rest was social and economic solidarity. The financial 

dimensions of solidarity, or social cohesion, were 
18 EUROPEIN THE 21~ CENTURY 

concrete and quantifiable. In the preamble of the EEC 

Treaty, the member states had declared their aim of 

"reducing the differences existing between the various 

regions and the backwardness of the less-favored 

regions."12 The gulf between the poorest and most 

prosperous areas was to narrrow. This would be 

achieved through the so-called Structural Funds, 

including the European Social Fund and the European 

Regional Development Fund. Between 1987 and 1993, 

outlays for these purposes exceeded 14.1 billion ECU. 

Since 1989, the target of this assistance has been the 

stimulation of investment and job creation in the less 

developed (and least prosperous) regions of the 

European Union. 

But the costs of inter-European solidarity are also 

subject to review in the post German reunification era. 

M6st EU members, Germany among them, are balking at 

increased spending for solidarity purposes. To be sure, 

the admission of three rich states (Austria, Sweden, and 

Finland) will slightly ease the burden of the 12, but the 

financial burden to the EU is likely to increase 

dramatically in the future. France, Italy, and Spain 

strongly advocate efforts to increase EU involvement in 

the south in order to stabilize the Maghreb countries and 

prevent the spread of the kind of Islamic extremism now 

affecting Algeria. At the November 1995 Barcelona 

meeting, the EU agreed to such a program. Association 

agreements and eventual membership for the countries 

of Eastern Europe will involve immediate economic 

sacrifices by the Union in exchange for future economic 

and political gains. 

Yet, to maintain the status quo promoting 

distributional equity within the European Union, 

member states are currently considering cutting back aid 

to the developing world. This represents an additional 

policy dilemma: the cost of spreading the wealth 

internally within the Union could mean a lower 

European profile externally. Traditionally, the 

European Union (and its predecessor, the European 
KRAMER AND KYRIAKOPOULOS 19 

Community) has been, through its member states, the 

most generous donor of aid to the Third World, 

especially African countries; Europe's official 

development assistance is much higher than aid given by 

the United States. For the period 1990-1995, the 

European Union had pledged some $15 billion in 

financial aid, 13 but now some member states are 

considering reducing their contributions. Key among 

them is Germany, burdened by the high costs of 

absorbing its eastern regions. On the other hand, Britain 

(never quite committed to pan-European social welfare 

measures) prefers to reallocate aid toward bilateral 

commitments, such as with India. France is the only 

country to have voiced concern about the proposed 

cutbacks, pushing instead for a higher amount of aid 

toward African countries. 14 This is an indication, if not 

evidence, of diverging policy priorities and increasing 

inability to reach consensus on the allocation of scarce 

resources. Here, too, the implications for continued 

collective pursuit of West European well-being are 

troubling and bound to become more serious as the 

domestic (that is, national) claims on scarce resources 

multiply while, in the meantime, countries of the nonEU Europe are also seeking a share of Europe's wealth. 

In summary, the viability of the European welfare 

state into the next century, while still probable, is no 

longer certain. The gap between prevailing economic 

conditions and sociopolitical expectations is growing 

wider as a result of rising budgetary costs, growing fiscal 

indebtedness, a lower than expected peace dividend, 

anemic economic growth and weakened economic 

solidarity. The most immediate and acute problem, 

unemployment, is also the most explosive. The future of 

the European welfare state will depend on the extent to 

which the gap between expectations and reality can be 

narrowed. 
20 EUROPE IN THE 21st CENTURY 

NOTES 

1. A recent brief history of European integration notes: 

"The notion of a [united] Europe was part of a humanistpacifist dream which was shattered by the conflicts which 

brought so much destruction to the European continent in the 

first half of this century .... In [the] postwar period, the 

Community was primarily seen as a way of securing peace by 

bringing victors and vanquished together within an 

institutional structure which would allow them to cooperate as 

equals." See Pascal Fontaine, Europe in Ten Lessons 

(Luxembourg: European Documentation, Office for Official 

Publications of the European Communities 1992), 5. 

2. In a recent work dealing with the larger dimension of 

European economic (and political) integration, the cost issue is 

raised in a profound, almost apocalyptic title. Patrick Minford, 

editor, The Cost of Europe (Manchester University Press, 1992). 

In such a context, the cost of the alternative merits equal 

attention, even though it remains considerably more difficult to 

derive. What would have been the stream of net benefits 

accruing to Europe had it gone through the post World War 

II period without the welfare state? This is not merely an 

artificial but also a counterfactual question (if Europe did not 

exist what would be in its place?). A more interesting and 

narrowly focused question was treated in a White Paper 

published in 1985 by the European Commission on the "cost of 

non-Europe": strictly defined as the cost of border delays, 

technical barriers and protectionism in the form of public 

procurement, it was put at almost ECU 200 billion. In the 

same paper, it was estimated that a single market would add 

five percentage points to economic growth rates and create 5 

million new jobs (Fontaine, 12). If account is taken of indirect 

costs as well as of net positive spillovers, the "cost of nonEurope" rises even more. 

3. Estimates are for 1986. A Guide to the European 

Community, E.C. Delegation to the United States, Washington, 

1991, 17. 

4. Data from Facts lhrough Figures: A Statistical Portrait of 

the European Union, Eurostat (Brussels and Luxembourg: Office 
KRAMER AND KYRIAKOPOULOS 21 

of the Official Publications of the European Communities, 

1994), 16-17. 

5. Facts Through Figures, 16-17. 

6. The Economist, April 8th, 1995, 45. 

7. Economic Report of the President, February 1994, 362. 

8. Economic Report of the President, February 1988, 374 and 

Economic Report of the President, February 1994, 3't5. 

9. Facts through Figures, 16. 

10. Facts Through Figures, 8-9 and Economic Report of the 

President, February 1994, 393. 

11. For a critique of European monetary and fiscal policy 

under EMS, see Paul Krugrnan, Peddling Prosperity (W. W. 

Norton & Company, 1994), 182-194. 

12. The European Community in the Nineties, E.C. Delegation 

of the European Communities, Washington, 1992, 17 

13. Ibid., 21 

14. "EU Aid Program in Dispute," The Washington Post, 17 

February 1995, A29. 
2. CRISIS OF 

THE POLITICAL SYSTEM 

The solidity of postwar European democracies was 

based on two major factors: their success in achieving 

consensus on a new and successful model for economic 

prosperity and social welfare, and the requirements of 

maintaining solidarity during the Cold War. Neither of 

these factors is still fully relevant. European political 

leaders have been unable to find solutions to the 

problems of the economy and the crisis of the welfare 

state. There is no real programmatic difference between 

governments and opposition, between mainstream left 

and right. Politics reduces itself to the battle of ins versus 

outs, and alternation of power does not necessarily 

change policy or improve the situation. 

DECLINE OF IDEOLOGY 

One apparently great success of postwar European 

politics was the end of the harsh clash of ideologically 

based adversarial parties that characterized the interwar 

world. Agreement on the basic contours of the welfare 

state and mixed economy led to the appeasement of 

rancorous and sometimes violent conflicts over first 

principles; liberals, conservatives, and socialists differed 

only over nuance and tried to work the system to 

maximize the benefits to their constituent groups (which 

in any case had become broader as catch-all parties 

replaced class-based parties). "Acceptance of the mixed 

economy cum welfare state thus represented an illfounded act of faith that . . . [they] represented an end to 

history; that the economic system would continue to 

deliver the goods, which could then be redistributed to 

23 
24 EUROPE IN THE 21 st CENTURY 

promote 'equality.'"x By the 1980s, communism had 

either become Euro-Communist or had been 

discredited. The end of the USSR and the collapseof its 

Communist party was the culmination, not the cause of 

this phenomenon. Socialists in most of Western Europe 

had long since made their peace with the new economic 

order (witness the Bad Godesberg platform of the SPD in 

1959). In the 1980s, some of the socialist parties found 

themselves in an "identity crisis." They attempted to find 

a raison d'6tre in their foreign policy, by criticizing 

American conduct of the Cold War and occasionally 

glorifying Third World radicals, but this was not very 

meaningful then and would be even less so now. The 

French socialists, who had been out of government since 

the onset of the Fifth Republic in 1958, cherished the 

belief that they constituted a genuine alternative to the 

right and could make a "break with capitalism". It took 

only a few years of power (from 1981 to 1984) to dispel 

this illusion. Thus, socialism and communism, which 

had once constituted a kind of religious faith for their 

adherents lost their special identity. Socialist parties 

became simply parties of government and perhaps for 

this reason, no more immune to corruption than other 

parties. 

So long as the new sociopolitical framework of 

Europe guaranteed unlimited prosperity, the end of 

ideology seemed a blessing. Unlike the 1930s, the crisis 

of the last decades has been a slow, incremental process. 

The rub was that once the system began to sputter, there 

was no real policy alternative presented by mainstream 

parties. The resulting crisis of political systems was a 

slow one, and this slowness and the tenacity of existing 

political institutions are as noteworthy as the existence of 

the crisis. Popular discontent with governments in a 

democratic regime usually leads to alternation of power, 

but alternation of power will not produce relief if the 

new government follows policies similar to those of the 

old. When that happens, citizens increasingly tend to 

abstain from the political process, look to extremist 
KRAMER AND KYRIAKOPOULOS 25 

parties or support new or nonestablishment political 

parties and movements, and may even go to the street. 

Ideology, which appeared to depart from politics 

through the front door, returns through the back door. 

In the last analysis, established parties can founder and 

the system can even collapse. 

There is a widespread unhappiness with goyernments 

and politics throughout Europe, with political crises at 

varying stages of development in different countries: 

• In the United Kingdom, the Conservative Party 

held on to power in 1992 only because of residual 

fear of the policies of a Labour government. Infighting in the Conservative Party, much of it based 

on opposition by hardened Eurosceptics to even a 

tepid commitment to EU deepening, a series of 

embarrassing resignations of Tory ministers tainted 

by scandal and a devastating defeat in local elections 

in May 1995 have left the Major government gravely 

weakened. 

• The Socialist Party in Spain is in a similar 

situation. Felipe Gonzalez' charisma has been tainted 

by unemployment of over 20 percent and a long 

series of scandals touching the PSOE; only the lack of 

a credible alternative has enabled that government to 

survive. The 1995 victory of the Popular Alliance in 

local and regional elections demonstrated the PSOE's 

unpopularity. Charges that Gonzalez must have been 

aware of government-inspired death squads directed 

against ETA terrorists ended Catalan support for the 

government and foretells opposition victory in 

general elections to take place following the 

conclusion of the Spanish presidency of the EU. 

• In Germany, the CDU/CSU-FDP coalition under 

Helmut Kohl was barely reelected in 1994. In that 

election, the voters of the former GDR gave the 

ultimate slap in the face to Wessie political leaders by 

voting heavily for the PDS to protest how unification 

was taking place. Since that time, the CDU as well 

as its SPD rival have both done badly in state 
26 EUROPE IN THE 21st CENTURY 

elections, while the FDP has fallen below the 5 

percent threshold in many state elections, thereby 

losing its representation. Both CDU and SPD are 

forced to think seriously about coalitions with the 

Greens, who have become more credible since the 

expulsion of their extremist wing. Disarray within 

the SPD, however, reduces its chances of winning a 

national election. 

• The "end of French exceptionalism," which 

occurred when the "end of ideology" finally hit 

France in the mid 1980s produced a remarkable 

convergence of the political class not only on defense 

and foreign policy but on economic policy as well. 

France developed a strong franc and worked to make 

EMU possible by meeting the strict standards 

outlined in the Maastricht Treaty. Unfortunately, the 

political leadership did not succeed in resolving the 

problem of unemployement and economic 

stagnation. This failure eroded the credibility of the 

political class which had already been undermined 

by a long line of political scandals. The French 

magistrates, like their Italian counterparts, have 

gained prominence by attacking corruption in the 

political class. They helped discredit the socialist 

government and then turned on its conservative 

successor. 

One consequence of this process was the rise of nonmainstream political movements and leaders. Le Pen, 

Villiers, and Tapie owe their success to the unpopularity 

of traditional politics and politicians and to their own 

effective use of television to support an antisystem, 

populist and personalist message, of either the left or 

right. Legislative elections in April 1993 may have 

prevented a reenactment of May 1968; they provided 

catharsis by virtually annihilating the governing 

Socialists. The fact that the referendum on the 

Maastricht Treaty barely passed despite support from 

virtually all major leaders constituted a vote of no 

confidence in the political class (though even more so of 
KRAMER AND KYRIAKOPOULOS 27 

Mitterrand). The Maastricht vote also indicated a 

reinforced tendency for much of much of the population 

to blame Europe for France's economic problems. For 

many French people, Europe has become equated both 

with the future and unemployment. Euroscepticism has 

become a tempting electoral ploy for ambitious French 

politicians looking for a way to break into the big time, 

not just for demagogues like Le Pen. As a result, 

especially in the year preceding presidential elections, 

France's mainstream politicians became far more reticent 

about European integration, so that the French 

presidency of the EU seemed like a caretaker operation. 

The election of Jacques Chirac as president was a 

result of the public's unhappiness with the status quo. 

Candidate Chirac succeeded in painting both the 

socialists and his RPR rival, Balladur, as part of the 

problem and ran a brilliant campaign which stressed 

voluntarism and the determination to deal with 

unemployment and the forgotten man. He marginalized 

Villiers; both he and Jospin benefited from Tapie's legal 

troubles and temporary exclusion from political life. 

The problem is that President Chirac could not fulfil 

the promises of candidate Chirac. Bringing French 

unem-ployment below 10 percent would have been 

difficult even if Chirac had a free hand to follow a purely 

French economic policy. But he did not have a free 

hand; he was committed to achieving EMU in 1999, 

which requires halving, rather than increasing, France's 

5.7 percent public sector deficit by that time. Chirac 

could abandon the strong franc policy and call on the 

Seguin team, which is waiting in the wings to replace 

Jupp6. But the consequences of breaking with France's 

long- term goal of EMU on domestic politics and on the 

Franco-German relationship are daunting. 

Pursuing the policy of the strong franc and EMU, 

however, is extremely risky, since it requires immediate 

and drastic cuts in the deficit of the French social 

security system. After a government reshuffling in fall 

1995, Prime Minister Jupp6 presented a program for 
28 EUROPE IN THE 21st CENTURY 

social security reform, accompanied by reforms of 

public service pensions, which raised the years of service 

required for retirement by some favored groups, like 

railroad workers, to match the rest of the public sector. 

The reforms were announced in a highly technocratic 

way; those affected were not consulted, not even.Jupp~'s 

political and trade union allies were included in prior 

discussion. The result was a wave of strikes in 

November-December 1995, spearheaded by railroad and 

Paris Metro workers, which paralyzed the capital and 

eventually the country. Although the strikes were "led" 

by antigovernment unions, with their own agendas, the 

great majority of the general public supported the strikes, 

feeling that the strikers represented their cause as well. 

These strikes demonstrated the opposition of the French 

people to giving up the social benefits they had acquired 

in the course of the last 50 years without a convincing 

case having been made by the government. Unlike May 

1968, this was a revolt by middle- class France anxious to 

protect its acquis sociaux, not by radicals. It demonstrated 

that the gap between the French elite, aware of the 

paramount necessity of succeeding in EMU, and the 

French public, concerned by unemployment and 

uncertain about the future, was even greater than at the 

time of Maastricht. The end of the strikes did not resolve 

underlying issues and the road to EMU remains full of 

obstacles. Yet without France, EMU would be 

meaningless and if EMU is postponed it may never take 

place. In short, Chirac may be caught in a box. He can 

only hope that movement in the right direction and the 

appearance of activism will suffice to avert a social crisis. 

The country most affected by the combined impact of 

long term economic problems and the end of the Cold 

War is Italy. The end of the Cold War had a special 

impact there. Whereas for most of Europe containment 

involved an external foe, in Italy it was also internal. 

The raison d'etre of Christian Democracy and its 

coalition partners was to keep the powerful Italian 

Communist Party out of government. "Hold your nose 
KRAMER AND KYRIAKOPOULOS 29 

and vote Christian Democrat!" The lack of alternation of 

power led to the corruption of the DCI as well as the 

other "democratic" parties which joined the governing 

coalition and shared the spoils. The main nonCommunist opposition party, the Socialists, lost their 

ideology and integrity in the process. With the end of 

the Cold War, the justification for the government 

coalition disappeared. Italian magistrates began an 

unprecedented exposure of the corruption of the 

political system which led to the disintegration of all the 

major government parties and the discrediting of their 

leaders. 

Italian communism was not the inheritor, for 

although the threat it represented to the right declined so 

did its own appeal. The initial beneficiary was television 

magnate Silvio Berlusconi, who filled the vacuum in the 

center by creating the Forza Italia political movement 

out of nowhere, until he was undermined by magistrates 

raising uncomfortable questions about his own business. 

Italy had been famous for its partitocrazia and the 

dominance of its political class. It is now a country with 

undefined political structures, between elections and 

perhaps constitutions, with at best a temporary 

government of technocrats. During the "First Republic," 

governments survived only by not challenging the forces 

of organized crime and the underground economy. 

They subordinated foreign policy to their allies, 

economic policy to Brussels and defense policy to 

NATO. The old regime survived and then failed 

because Italians had few expectations concerning their 

government and politicians. Now that the Italian state 

has virtually withered away, how can government act 

and reform take place? 

Japan constitutes an interesting analogue to the 

collapse of the Italian party system. The Liberal 

Democrats held onto office for just as long as the 

Chrisitan Democrats and for much the same reason-to 

keep the left out of power. The end of the Cold War led 

to a "revolution of contempt" directed against the 
30 EUROPE IN THE 21st CENTURY 

LDP-as well as against its fossilized Socialist opposition. 

Perhaps the most telling testimony of public disgust at 

the entire political class was the April 1995 selection of a 

movie scriptwriter and a comedian as governors of 

Tokyo and Osaka respectively. Both ran against a single 

candidate backed by all five major political parties. The 

growth of fanatic religious cults also indicates 

disaffection with establishment politics. 

The fragility of long-established political systems and 

parties at a time of popular discontent was nowhere 

better illustrated than in the 1993 Canadian general 

elections. Although Canada is not on the European 

continent, its level of economic development is 

comparable to Europe; its party system and its brand of 

welfare state are also more similar to Western Europe 

than to the United States. Canada is suffering from a 

level of national and provincial debt higher than that of 

most of Western Europe, which limits its financial 

options. In 1993, Brian Mulroney's Conservatives, who 

had been in office since 1984, were expected to lose and 

the Liberals were expected to return to power. What 

was stunning was the magnitude of the loss. The 

Conservatives won only 16 percent of the popular vote 

and lost all but two seats in the House of Commons. 

Thus one-and-one-half of Canada's two-and-one-half 

party system were demolished. But the Liberals, 

although the winners, were not the only beneficiaries of 

the Tory defeat. In fact, they won only 41 percent of the 

vote. The "loyal opposition" in Ottawa was a new party, 

the Bloc Ouebecois, the federal counterpart of the Parti 

Quebecois, and thus committed to Quebec 

independence. In the West, the Reform Party came out 

of nowhere to win 19 percent of the total national vote 

and only two fewer seats than the Bloq Quebecois. 

Thus, the governing Liberals were left-at least for the 

time being-as the only national party in a Parliament 

otherwise composed of regionalist parties. The life of 

both the Reform Party, a highly personalized grouping 

dominated by Preston Manning, and the Bloq 
KRAMER AND KYRIAKOPOULOS 31 

Ouebecois, whose raison d'6tre is tied to Quebec 

independence, is precarious. 

In summary, the decline of ideology in Europe led a 

growing consensus on basic policy issues between the 

mainstream parties of left and right. The fact that 

consensus thinking has proven inadequate to resolve 

basic economic problems is at the root of the 

vulnerability of these parties and of political institutions 

in general to growing public frustration. This has been 

all the more true because with the end of the Cold War, 

many long time governing parties are no longer 

indispensable as bulwarks against communism. The 

cases of Japan and Canada (to say nothing of the United 

States) suggest that the crisis of political parties and 

systems is not restricted to Europe but is a problem of 

advanced societies in general. 

THE MEDIA AND THE CRISIS OF 

REPRESENTATIVE GOVERNMENT 

The decline of the post-World War II European political 

system has been accentuated by the influence of the 

media. At the beginning of the postwar era, the typical 

West European government was essentially a 

representative government in which the autonomy of 

government was protected from the immediate pressure 

of the public. Between the citizen and the highest 

magistrates lay powerful institutions and organizations, 

including, naturally, the parliament and the institutions 

of the state, but also political parties and trade unions, all 

of which played a mediating role. These bodies had a 

sense of their corporate identity and responsibility and in 

no sense saw themselves as mere transmission belts of 

popular will. Even in the democratic era (one person 

one vote was attained in almost all West European states 

by 1945), government leaders also benefited from such 

attitudes and values, notably the deference accorded to 

public authorities. 
32 EUROPE IN THE 21st CENTURY 

In traditional parliamentary democracies, national 

leaders were elected indirectly. The prime minister was 

chosen by parliament, not the voters. The member of 

parliament himself was often chosen to stand for a 

particular distict either by the national party or by the 

local party organization and had no personal 

relationship to the district. In many countries, 

conservative parliamentarians were members of local 

elites elected by virtue of their family standing. Where 

electoral lists were employed, national party leaders were 

especially powerful, since they rank ordered the list, in 

effect, deciding who would be elected. The prime 

minister was likely to be a politician's politician, chosen 

by virtue of his performance in Parliament or record in 

the party apparatus, rather than a people's politician. 

The physical distance between MP and constituent 

during parliamentary sessions prevented much direct 

contact. The voter was informed about public events 

through the printed media, mostly the newspaper, but 

only the well educated or politically involved tended to 

read a serious newspaper. Left wing voters often showed 

the same kind of deference to their party leaders (who 

rarely came from the working class) that they had shown 

previously, if reluctantly, to their "betters." 

The development of radio, the first instantaneous 

form of mass communication, coincided with the rise of 

fascism, and Fascist leaders were quick to grasp the 

potential of radio to gain power and to continue to 

mobilize the population afterwards. Once they came to 

power, they destroyed the existing parliamentary 

structures and ruled as charismatic dictators. World 

War II ended their careers, but the rise of television after 

the war and the more democratic spirit that pervaded 

most European societies led to a slow transformation of 

political life. 

Political leaders appealed increasingly to the public 

directly. They were chosen (or maintained) in part on 

the basis of their ability to reach a national audience. 

Their personality (above all, the trust they inspired or 
KRAMER AND KYRIAKOPOULOS 33 

failed to inspire) became a significant factor as to 

whether their party won elections. Many voters were 

voting for Margaret Thatcher as a person and not just as 

the Conservative candidate, and the same thing could be 

said of Felipe Gonzalez or Willy Brandt. Nonetheless, 

the existence of the parliamentary system and powerful 

national parties slowed down the process towards the 

kind of populist appeal found in American politics at 

that time. In multiparty systems where governments 

changed often, the development of leaders oriented to 

the public was slowest. 

France developed in a somewhat different way. De 

Gaulle created a political system that favored the direct 

relationship between president and people (direct 

election of the President of the Republic after 1962, use 

of referenda by the President to go over the head of 

Parliament, etc.). France also had a heritage of weaker 

political parties than most other European countries. De 

Gaulle was quick to recognize the importance of 

television and retained firm control over it. Generally, 

however, especially after de Gaulle, the French president 

acted more like an elected monarch than a charismatic 

leader. The French public seemed to prefer presidents it 

could respect. The French State remained relatively 

effective, and the political class, despite a fair number of 

scandals, generally competent. The debate between 

Chirac and Jospin was conducted in a serious, almost 

technocratic way and avoided either ad hominem speech 

or discussion of sensitive areas of national security. On 

the other hand, the volatility of public opinion during 

the French presidential elections of 1995 (the rise and fall 

of Balladur, the rise of Chirac and his decline before the 

first round, and the rise of Jospin) cannot be explained 

without taking into account the role of the media. 

The political system of the United States differs from 

that of all European nations. Nonetheless, it is 

instructive to note the impact of media on American 

politics. The primacy exercised by television in the 

relationship of citizen to government is evident in the 
34 EUROPE IN THE 21st CENTURY 

United States, with enormous implications as to why and 

how candidates are chosen, the simplification and 

personalization of the political debate, the demand for 

quick action and quick solutions, the aversion to longterm planning, the tendency to replace the institutional 

power of parties with the power of an individual's 

fortune. Ross Perot showed that someone with money 

and a telegenic personality (in this case, telegenic in an 

antihero kind of way), could score 17 percent of the vote 

in presidential elections. His very lack of political 

experience was translated into a special qualification for 

the highest office in the land. Bill Clinton's victory in the 

1992 election was due largely to his effective use of the 

media during the campaign. 

By personalizing politics, television has made the 

issue of "character" central. Distance and cynicism or 

irony are antithetic to the perspective of television. By 

providing constant close ups of political life, TV 

magnifies the importance of personal blemishes. The 

separation of political and private life disappears. 

Candidates and officials are held most accountable for 

personal behavior everyone understands (especially 

anything touching on the seven deadly sins) or issues on 

which everyone feels an equal right to an opinion (like 

abortion). Their positions on complex issues, 

understood by few but affecting many, become almost 

irrelevant. 

By simulating the direct contact of leaders and the 

people (for the first time since early forms of social 

organization, where direct contact was possible because 

of the smallness of polity) television creates conditions 

for something approximating charistmatic leadership as 

described by Max Weber. But unlike the days of 

yesteryear, there are no established patriarchal 

hierarchies to resist it. "The charismatic hero does not 

deduce his authority from codes and statutes .... The 

charismatic leader gains and maintains authority solely 

by proving his strength in life . . . his divine mission must 

'prove' itself in that those who faithfully surrender to him 
KRAMER AND KYRIAKOPOULOS 35 

must fare well. If they do not fare well, he is obviously 

not the master sent by the gods." 2 

Will Europe resist "americanization" in this domain? 

Clearly the weight of traditions and culture and the 

power of existing institutions should present-and in 

many countries has presented-powerful obstacles to this 

trend. Yet Italy, where old and entrenched institutions 

have collapsed, has gone even further than the United 

States towards "mediatization" of politics. 

Italy provides an instructive lesson about the inherent 

weakness of the old model in a time of rapid change. 

Within a short time, Italy went from being a partitocrazia 

to a state in which a charismatic media personality, 

Silvio Berlusconi literally created out of thin air a 

"political party" simply to provide him with enough seats 

in parliament to govern. To be sure, Berlusconi was 

familiar with television, owning three of Italy's major 

networks (of which he was very loathe to divest himself 

when named Prime Minister). In the past, Italian leaders 

were creatures of a party; now at least one party is the 

creature of an individual. A referendum in June 1995 

aiming to divest Berlusconi's company, Fininvest, of two 

of its three national television channels was defeated. 

Fininvest, which gained its powerful place through 1991 

legislation that ended the state monopoly, even today 

controls about half of Italy's TV programming. 

Berlusconi pushed hard for June 1995 parliamentary 

elections because "fresh elections would postpone the 

referendum, and he has hedged his bet with frequent 

commercials on his channels telling Italians how to vote 

if the referendum goes forward." 3 The referendum 

resulted in a victory for Berlusconi, perhaps because 

some voters took seriously the threat that they might lose 

some of their favorite television programs. 

The importance of the telegenic personality is made 

apparent also by the rise of Gianfranco Fini. Fini's 

winning telepersonality has eclipsed the fascist past of the 

National Alliance and has made it acceptable to a larger 

number of voters even as a party of government. Forza 
36 EUROPE IN THE 21st CENTURY 

Italia's weakness is that it is based almost entirely on one 

man's charisma (and wealth) but lacks organizational 

strength. Fini clearly believes that he and the National 

Alliance have the organizational base needed to expand 

and can inherit the Forza Italia constituency when and if 

Berlusconi falters. The key to success is to appear to be 

Berlusconi's loyal supporter. With Italian politics 

divided between coalitions of the left and right, Fini will 

be well placed to become Prime Minister. 

It is not clear what Italian "postfascism" means today. 

Traditional fascism was nationalist and militarist; despite 

a few comments about Istria irredenta by National 

Alliance extremists, the movement does not talk about 

expansionism or the renationalization of defense. If 

anything, it shares the wider public fear of immigration 

(but unlike similar parties in other countries, Italian 

fascism and neofascism has never been especially racist). 

Fascism was strongly anti-Marxist but replicated many of 

the techniques of communism; today it is hard to be antiMarxist when there is virtually no more Marxism. The 

National Alliance wants to keep the left out of power, 

but has not elevated that desire to the level of a crusade. 

Above all, neofascism generally reflects a loss of 

moorings of many strata of society, a desire to preserve 

the nation state and national culture against the 

encroachment of supranational Europe and regional 

loyalties. But what does that mean in practice? What 

policies would a Fini-led government follow? Italy 

could refuse to proceed further toward European 

integration, but such a position, although it might 

gladden some members of Fini's old party, would not 

please most of the center right. Already Italy runs the 

risk of being relegated to the second circle of a 

multispeed Europe; to leave the EU entirely seems an 

economic impossibility for Italy. Increasing acceptance 

of the National Alliance as a party of govenment and of 

Fini as a minister and potential head of government have 

consequences outside of Italy, by providing an aura of 

respectability to similar parties in other countries, like 
KRAMER AND KYRIAKOPOULOS 37 

the Freedom Party in Austria. It leader, Georg Haider, 

must be taken seriously as a potential chancellor; the 

party received over a fifth of the vote in 1995. 

It is clear how politicians can use television to gain 

power. What is less clear is what it means for the 

process of governing. At a time when the public is 

irascible and volatile, opposition figures find it an ideal 

instrument for taking on the existing leadership, but they, 

too, are quickly used up by the media when they in turn 

come to power. The same accessibility to the talk shows 

that helped elect Clinton seems to have undermined his 

stature; Newt Gingrich has become old very quickly. If 

radio contributed to the rule of Fascist strong men, 

television may contribute to the weakening of all political 

leaders and leadership. 

Thus, television has greatly altered the nature of 

political life. It has eroded traditional institutions of 

representative government and the values that supported 

them and has personalized politics. It has made the 

pursuit of long term policies more difficult. The best 

guide to the relationship of leader and public may be 

mutatis mutandi, Thucydides' depiction of Athenian 

democracy after the death of Pericles. In that case, 

popular willfulness may replace political will, and 

continuity and rationality are at risk. 

NOTES 

1. Steven Philip Kramer, "Socialist Identity, Labour and 

the SPD," SAIS Review, (Summer-Fall 1987): 38. 

2. From Max Weber: Essays in Sociology, Garth and Mzlls, 

eds., 248-49. 

3. The New York Times, March 25, 1995, "Italian TV 

Empire Resists Breakup at Polls." 
3. THE DECLINE OF THE 

NATION-STATE 

The 20th century has witnessed the ebb tide of European 

dominance in the world. The great European overseas 

colonial empires, notably the British and French, have 

dissolved. Many of the states they created in Africa are 

being torn apart by ethnic, tribal, or clan conflict (no 

longer rationalized by the veneer of Cold War ideology). 

Multinational continental empires like Austria-Hungary, 

the Ottoman Empire, and the Soviet Union have failed. 

The end of the Cold War has led to the demise of several 

multinational states, like Yugoslavia and Czechoslovakia. 

The collapse of empires and multiethnic states is part of 

a broader process. In its heyday, Western Europe 

created a world in its own image, imposing artificial 

boundaries and often alien political regimes on Third 

World peoples and sometimes on East European 

peoples as well. The Cold War tended to preserve these 

structures. The end of the Cold War has unleashed 

centrifugal forces that tend toward the disaggregation of 

multiethnic or multireligious states where a sense of 

nationality did not gel. 

There is nothing astonishing about the decline or 

breakup of artificial states, but what does that imply for 

old established nation-states? Presumbly, there is some 

reason for complacency in historic European nationstates, but where is the nation-state that does not show 

fault lines in its historical past? What nation-state did 

not assimilate heterogeneous groups? In what state was 

this process not incomplete or somewhat defective? 

What nation-state is truly "natural" living within "natural" 

borders? In the last decade, many European states have 

39 
40 EUROPE IN THE 21st CENTURY 

felt the pain of history mercilessly probing along their 

developmental fault lines. This is not all. Each former 

imperial state received immigration from its former 

colonies, which was welcomed when cheap labor was 

needed, but which is certainly not welcomed now. The 

existence of large populations of Third World 

immigrants, especially Moslem, tends to raise feelings of 

vulnerability about national identity at a time when other 

factors have also called into question the model of the 

nation-state. 

There is no mystery about the primary reason for the 

decline of the nation-state in Europe-it has gradually 

ceased to be a largely independent unit for the economic 

life and security of its populations. What was once true 

for smaller states is now true for all European nations. 

After World War II, West European states, with the 

exception of France, abadonned their independence in 

matters of defense and relied on the United States via 

NATO. The rise of the European Union has meant that 

basic economic decisions are made in Brussels and 

financial decisions made de facto in Frankfurt. 

With the decline of the nation-state as a selfdetermined economic unit, the rationality of economic 

cooperation among regions of contiguous European 

states becomes greater, further undercutting the 

economic necessity underlying the nation state. 

Economic geography regains priority over old political 

geography. At a time of economic stagnation, prosperous 

regions may also become unwilling to subsidize poorer 

ones within their own country especially when there are 

ethnic or cultural or linguistic differences or where they 

feel that these poorer regions are simply on a permanent 

dole. 

Even in the important domain of cultural life, the 

autonomy of each nation has been overwhelmed by the 

flood of sounds and images from abroad, either from 

European neighbors or from the U.S. The rise of 

popular culture has contributed to the loss of selfconfidence and prestige of national cultures that were 
KRAMER AND KYRIAKOPOULOS 41 

traditionally elitist and based largely on the printed word 

and unique object. 

At the very moment when national cultures are thus 

at risk, they are in turn challenged by immigration, 

which raises questions about the validity or feasibility of 

former models of assimilation. The industrial economy, 

which assimilated workers to a common national 

culture, has been replaced by a service economy, which 

emphasizes individuation. The growth of consumerism 

is bolstered by a more sophisticated advertising approach 

no longer directed at everyman but appealing to 

particular interests. At the very minimum, the result is a 

widespread sense of anxiety concerning the relevance of 

national identity. 

At the same time, the end of the Cold War eliminates 

the national mobilization against the Soviet threat, which 

had tended to freeze sociocultural change and around 

which political life had focused. The decline of other 

traditional sources of political conflict, namely class and 

religion, spotlights latent ethnic and national issues. The 

result is a "return of history" in Western Europe. 

What is striking, however, is that while the 

development of the European Union and what it 

represents has undermined the economic reality on 

which the nation-state is based, that very devaluation of 

the nation-state has also undermined separatism. It is one 

thing to seek independence from a powerful state that 

refuses to accept your "difference" and ties you to its 

institutions. Such an independence was meaningful 

when states were really autonomous. It is quite another 

to seek independence from a state whose role is 

continually being undercut, where you have access to a 

European market and often to structural development 

funds and where, to an increasing degree, you think of 

yourself as European. Thus the existence of the Europe 

of Regions may simultaneously increase regional 

consciousness and defuse separatism. 

Belgium is an excellent example. If the European 

Union did not exist, it is easy to imagine that the loveless 
42 EUROPE IN THE 21 st CENTURY 

marriage of convenience between Flemings and 

Walloons could lead to a divorce, nasty or otherwise. 

Belgium was an artificial state created in 1830 and 

eventually given its international statute by the Great 

Powers. It was created as a marriage of convenience by 

two groups both on the rebound from a divorce with tile 

Netherlands: French-speaking liberals who resented the 

dominance of the Dutch lanaguage, and Dutch- speaking 

Catholics who opposed the Netherland's Protestant 

orientation. The former dominated the latter until after 

World War II, when the balance shifted. Belgium could 

have found itself in a civil war and been divided in two, 

were it not for the phlegmatic temperament of the 

population, the good sense of its politicians, the 

impossibility of dividing Brussels, the slow but 

inexorable process of devolution, and finally the rise of 

the European Union. Why divorce when the power of 

"Brussels, capital of the Belgian State" was being 

eclipsed by the growth of "Brussels, capital of the 

European Union?" Why divorce when the many 

powers of the state were being devolved on the Walloon 

and Flemish regions and the linguistic communities? 

Recent progress toward a beginning of a solution to 

the Northern Ireland question may not have been 

possible without the rise of Europe. The Republic of 

Ireland, by becoming part of Europe, has become less 

distinctively a provincial Irish Catholic state. It is 

unlikely, for example, that without EU membership the 

Republic would have enacted divorce in 1995. Ulster 

and Ireland can no longer be defined purely in terms of 

opposition to each other, since each is also part of the 

EU. Devolution for Scotland and Wales may happen if 

Labour comes to power. Spain, now a member of 

NATO and the EU, has been far more successful in 

containing Basque separatism than the Franco regime; 

moreover, giving autonomy to the Basques and Catalans 

has isolated the violent extremists. Of course, the rise of 

democracy after Franco's death was probably the key 
KRAMER AND KYRIAKOPOULOS 43 

reason why accommodations between Madrid and the 

regions could be found. 

The end of the Cold War not only produced a crisis 

in Italian political institutions but reopened the question 

of Italy's existence as a nation state. Italy came into 

existence between 1859 and 1870; just after unification, 

one Italian political leader declared, "We have created 

Italy, now we must create Italians." This enterprise has 

only partially succeeded. As Metternich said, Italy was 

only a geographic expression. It had never existed as a 

political entity, because the Roman Empire was a world 

empire based on a city-state and one of the last things the 

Roman Catholic Church wanted in the 19th century was 

an Italian state. Throughout the Middle Ages and 

Renaissance, the focus of patriotism in Italy was the citystate. The risorgimento was an ideal of the intellectual 

elites, but was given faint support by the masses. In the 

end, southern Italy was taken over by the kingdom of 

Piedmont-Savoy just as the GDR was taken over by the 

FRG. Italian unification produced some enthusiasm, but 

the aftermath witnessed reactions similar to those in East 

Germany today-only they have persisted for almost 150 

years. The north complained about the burden of the 

Mezzogiorno, the south retorted that unification had 

undercut its own industrial development. 

The collapse of the Christan Democratic Party in the 

elections of 1994 allowed the Northern League to receive 

117 out of 630 seats in the Chamber of Deputies and the 

neo-fascist National Alliance to win large numbers of 

votes in the South. The Northern League opposes the 

unitary Italian state but was divided between those who 

wanted a federal Italy and a minority who wanted 

independence. The main complaint of League voters 

was that a prosperous north was forced to finance an 

expensive central government in Rome and support a 

backward, mafia-ridden south. 

It is ironic but true that the same governing coalition 

that included a party that is not sure whether it believes 

in Italian unity (or at least whether it believes in a unitary 
44 EUROPE IN THE 21st CENTURY 

state) also included a party some of whose leaders have 

unfurled the banner of irredentism. For example, 

National Alliance leader Mirko Temaglia, president of 

the Italian parliament's foreign affairs commission, raised 

irredentist claims with regard to Istria, Dalmatia, and 

Fiume. Other Alliance members do not support 

changing boundaries but raise questions about the 

treatment of Slovenia's Italian minority. The two are 

consistent in the sense that the end of the Cold War has 

raised basic questions about Italy's identity as a nationstate. 

In a curious way, both the League and the National 

Alliance are regionalist parties. The League, as a 

regional party of the rich north, objects to Rome's 

redistributing of its taxes to the south. The National 

Alliance, which receives most of its votes from the south, 

and which is the de facto regional party of the south, 

must support the unitary state to maintain the flow of 

largesse from Rome. 

The end of the Cold War has also raised new identity 

questions for Germany. Germany had a unique history 

in the early modern period, in which sovereignty was 

shared between princes and the decentralized institutions 

of the elective Holy Roman Empire. The empire 

declined for centuries but did not disappear until 1806. 

From 1806 to 1866, the German Confederation 

maintained some of the supranational aspects of the old 

Empire. Following 1866, Prussia unified Germany "by 

blood and iron"; Bismarck's Kulturkampfwas as1 attempt 

to impose Prussian Protestant rule on an ambivalent 

Catholic south. But even the Wilhelmine Empire was 

not a unitary state, because the old princely rulers 

reigned in Bavaria and elsewhere. The only experience 

of a truly unitary state in Germany occurred under 

Hitler. This explains why the democratic successor state 

in the West rejected that model and returned to a nonPrussian, federal tradition, almost as if it were 

determined to replay the Revolution of 1848 and 

produce a happy outcome to the Frankfurt Parliament. 
KRAMER AND KYRIAKOPOULOS 45 

Postwar Germany's willingness to abandon many 

traditional attributes of national sovereignty to Europe 

may thus be based in part on a residual tradition of 

divided sovereignty dating back to the experience of the 

Holy Roman Empire and German Confederation. It is 

certainly also based on the experience of reconciling 

German interests and European interests in the postwar 

era. Since after World War II, Germany recovered only 

some of the attributes of sovereignty as a member of the 

WEU, NATO, and the EU rather than as a nation state, 

Germany has greater experience than more traditional 

nation states in functioning successfully in the new 

European environment. 

With the end of the Cold War, the FRG acquired the 

old GDR. Ironically, the FRG is now engaged in a kind 

of Kulturkampf in reverse, attempting to impose its 

postwar culture on an east that retains aspects of 

Prussianism and communism! The old FRG showed 

more sensitivity to the other European states than it is 

showing to the former GDR, perhaps because it wants to 

deny repressed aspects of itself incarnated by the latter. 

In any case, the cultural/psychological question of 

German identity will continue to trouble Germany far 

longer than the problem of economic integration of the 

two Germanies. 

It may be useful to compare the crisis of the federal 

system in Canada with what we have seen in Europe. 

Since the rise of modern Quebec consciousness during 

the 1960s, there has been a series of efforts to resolve the 

uncomfortable relationship of Quebec to Englishspeaking Canada. These have included Jean-Pierre 

Trudeau's efforts to create a bilingual Canada with its 

own repatriated constitution, subsequent attempts at 

negotiating a new constitutional accord between Quebec 

and the rest of Canada (which has become further 

complicated because of the rise of other forms of 

regionalism and ethnic identities); and finally, the Parti 

O uebecois' two unsuccessful efforts to initiate the 

process of Quebec independence through referendum. 
46 EUROPE IN THE 21st CENTURY 

But differences of opinion both within Canada and 

within Quebec have thus far stymied all these projects, 

with the result that Canada's energies are being sapped 

by continual constitutional crises. It can be argued that 

if Canada were part of the EU, a solution closer to that 

of Belgium would have been worked out between 

Quebec and anglophone Canada. If the Quebecois were 

less modern in their outlook, less secure about their 

identity and less concerned about their standard of 

living, perhaps they would have taken the same route as 

Slovakia. 

In conclusion, then, the development of the 

European Union has been a major factor in undermining 

the traditional nation-state. At the same time, it has 

provided a soft landing for the nation-state by providing 

a place for regional identity within European institutions. 

Without the European Union, and given a high level of 

economic distress, especially if unevenly experienced 

within European states, the problem of regionalism 

could become acute. Even with the existence of the EU, 

serious economic difficulties could exacerbate separatist 

or extremist sentiments. At the same time, the growth of 

regionalisrn has complicated the already complex 

equilibrium of a Europe that has ceased to be a Europe 

of States without arriving at a federal Europe (and which 

may never arrive there), thereby making decisive action 

even more difficult. 
4. PROSPECTS 

The decline of the welfare state, the crisis of the 

European political system, and the erosion of the nationstate are trends that could be largely independent of 

economic conditions and that have their own 

momentum. If they converge, they could herald an era 

of great but unhappy political and social change and 

therefore unwelcome instability. 

A truly apocalyptic scenario for Europe could unfold 

as a result of failure to arrest the processes described so 

far in this study. The implications of each of these crises 

would be sufficiently adverse to warrant action, but taken 

together, they could produce a negative synergy with 

overwhelming consequences. At some point, cumulative 

quantitative change could become qualitative and visible. 

The pressure to cut welfare state programs at a time of 

increasing unemployment would certainly undermine 

social stability, intensifying the impact of joblessness. A 

conflict of "haves" and "have-nots" could result, either 

along new, perhaps unpredictable, dividing lines or 

taking the old forms of class conflict. Massive labor 

unrest not witnessed for decades could reappear; the 

resulting economic and social friction might spread to 

several of Europe's regions, especially those burdened by 

persistent, long-term unemployment and continuous 

flows of political and economic refugees. The failure of 

mainstream political parties to manage problems of such 

magnitude could eventually lead to elections of extremist 

leaders as heads of government with unpredictable 

consequences for Europe, both internally and externally. 

The void created by a deep crisis of the nation-state 

and its political system would not contribute to the 

development of the European Union and might actually 

threaten its survival. At a time when power is divided 

47 
48 EUROPE IN THE 21 st CENTURY 

between the nation-state and Brussels, the vitality of 

nation-states is indispensable to the further development 

of European institutions. Only strong and healthy 

democracies can negotiate the complex process of 

transferring power from the nation-state to the EU; a 

large-scale crisis affecting Western Europe could lead to 

the collapse of the EU. 

While such a scenario may not be likely, it is 

certainly not improbable. If the existing economic, 

financial, and political trends were to continue 

unchecked, they could undermine European cohesion 

and thus erode popular support for further integration in 

the areas of social, economic, and foreign policy. Most 

importantly, the implications for European monetary 

union could be catastrophic. The single market would 

remain incomplete because the benefits likely to accrue 

from monetary union would not be realized. Monetary 

policymaking would continue to be exercised de facto by 

Germany's Bundesbank, further delaying Collective 

decisionmaking on financial matters and the formation of 

the system of European central banks envisioned in the 

Union Treaty. Such a development would exacerbate 

the perception (and contribute to the development) of yet 

another form of democratic deficit, this time associated 

not with the European Parliament (a relatively weak 

institution) but rather with the vital task of management 

of European financial resources. As a consequence, 

political friction might ensue: Franco-German 

cooperation, a necessary condition for European 

integration, could be endangered; if so, Germany's 

mooring to Europe could become less secure while 

France's willingness to strain its resources for the sake of 

monetary union might weaken. In the final analysis, 

failure to arrest the convergence of economic and 

political crises could conceivably rock the very 

foundations of the EU and of the Franco-German 

partnership on which postwar European arrangements 

have been based. 
KRAMER AND KYRIAKOPOULOS 49 

It would be tragic indeed if these were the prospects 

for Europe's future following the end of the Cold War. 

Fortunately, under a set of less extreme but more 

realistic assumptions, the future course of European 

integration into the next century may be much more 

positive and could become promising. 

The depth, extent, and intensity of Western Europe's 

integration and interdependence achieved over the 

second half of the 20th century suggest that the EU has 

reached a stage of considerable institutional and social 

maturity. The end of the division of Europe has brought 

with it tremendous change in the composition of 

demand for and supply of scarce resources. As an 

overwhelming exogenous shock, the end of the Cold 

War has upset traditional economic patterns, caused a 

reordering of trade and commercial alliances, and been 

accompanied by new population movements. If the 

impetus behind the current crises is economics, then it 

may be cyclical and temporary. In that case, a general 

unravelling of European society can be avoided and 

there may be time for Europe to adjust to new realities. 

The return of higher rates of economic growth for the 

remainder of the decade of the 1990s could be the single 

necessary and sufficient condition permitting a soft 

landing for the social and political status quo in all of 

Europe: economic growth would create jobs, boost 

income levels and generate tax revenues. What are the 

prospects for reinvigorating economic growth by means 

of trade, technology, EU enlargement and monetary 

union? 

GROWTH THROUGH TRADE 

Growth through trade is very much a European 

tradition; it has been tried and it has worked. Indeed, 

for the members of the European Union, growth through 

trade has been a key objective of the European 

Economic Community and, later, of the single European 

market, The original creation of a customs union 
50 EUROPE IN THE 21st CENTURY 

followed by the elimination of trade (and many 

nontrade) barriers has given rise to the present situation 

where intra-European trade among European Union 

member states is larger than trade between all of them 

and the rest of the world. 

External trade (between the EU and the rest of the 

world) has also grown significantly. The European 

Union is the world's biggest exporter, accounting for 

over one-fifth of total world trade. By comparison, trade 

represents a much lower level of economic activity in 

other regions. Exports from the United States and the 

whole Western Hemisphere combined account for less 

than half as large a share of world trade; intraregional 

trade across all of North and South America amounts to 

less than a third of the region's external trade. Even 

countries of the Pacific rim, with their exports 

combined, cannot challenge the EU's primacy as an 

exporter with global reach. 1 

Trade is what the Europeans do very well and they 

would like to do more of it-but so does everybody else. 

The creation of the North American Free Trade Area 

(NAFTA) was undertaken in the belief that it would 

expand trade. The APEC agreement aims in the same 

direction. At the same time, European countries that are 

not yet beneficiaries of EU membership also look to 

trade as the best means of promoting economic growth. 

And "trade, not aid" is a political phrase with significant 

economic content for all less developed countries. But 

at all times, one country's exports automatically 

constitute other countries' imports. Even under the most 

favorable conditions of worldwide and widespread 

economic growth, not all countries can enjoy export-led 

expansion at the same time. In the real world, increases 

in export shares by one region or bloc will be at the 

expense of the export share of another, at least initially; 

in the short run, the EU can increase its share of world 

trade so long as no one else can do likewise. 

If trade is conducted under zero-sum conditions, real 

or perceived, then friction is likely to ensue. Some 
KRAMER AND KYRIAKOPOULOS 51 

evidence of friction between the EU and non-EU 

European member states has already surfaced, largely 

with respect to agricultural products, as might be 

expected. Trade friction between the EU aald the United 

States has a longer history and is not unexpected, 

especially for annual trade flows in excess of $1 billion. 

But there is a widespread feeling in Europe that the 

Clinton administration is making economic policy the 

essential element of its foreign policy and has recently 

been engaged in something tantamount to economic war 

with Europe. 

Until recently, one source of the trade friction 

between the EU and its trading partners had been the 

complex system of European agricultural support 

policies (known as CAP, for common agricultural 

policy). Funded mainly through the EU's central budget, 

the CAP had been the largest expenditure component; in 

the late 1980s, agricultural support claimed almost 70 

percent of the EU budget.2 Since then, partly in 

response to trade-related pressures and the outcomes of 

the Uruguay round, and partly as a result of other 

internally competing claims, the EU is reducing its 

emphasis on agricultural subsidies. It has adopted a 

more restrictive pricing policy and is scaling down 

financial support for farm products; by 1992, the CAP 

absorbed less than 60 percent of the EU's budget and this 

proportion will further decrease. 

In terms of EU-U.S. trade, major areas of 

disagreement have involved procurement in 

telecommunications goods, services and construction; 

extension of the 1992 U.S.-Airbus decision to other 

aircraft parts; development of technical standards (for 

software, gas connectors, blood products, outdoor 

power equipment) and testing and certification 

proceedures; broadcasting; public procurement 

(including buy-American legislation); air transport 

services; eco-labeling; fisheries; and meat hormone ban, 

third-country meat certification and labels on the use of 

BST (a drug to promote cow milk production). In most 
52 EUROPE IN THE 21 st CENTURY 

of these disputes, negotiations between the EU and the 

United States have resulted in interim arrangements 

satisfactory to both parties, subject to further negotiation 

and compromise. However, there persists a difference 

between the two partners in their overall approach to 

trade disputes. 

There has been a persistent tendency on the part of 

the United States to prefer and attempt to resolve trade 

problems through bilateral agreements rather than 

through U.S.-EU dialogue exclusively. In addition, the 

Congress has intervened quite actively in trade matters in 

recent years, with initiatives ranging from adoption of a 

new and tougher "Super 301" procedure to proposals 

seeking to expand the scope of U.S. antitrust law. Such 

measures are unilateral in nature and not in harmony 

with multilateral rules adopted by GATT and OECD; in 

fact, Congress is generally reluctant to accept GATT 

panel rulings and to modify existing U.S. law 

accordingly. By contrast, the European Union places 

emphasis on the management of external trade problems 

at the level of the Commission; even though individual 

member countries may have particular preferences or 

prior experience in specific trade issues, they have 

subordinated national trade policy to the Commission, 

which speaks for all of the EU members. 

This difference in approach explains only part of the 

trade friction. A more significant factor has to do with 

perceptions of protectionism prevailing on each side of 

the Atlantic. In the American view, Europeans are more 

interventionist and thus willing to subsidize industrial or 

commercial enterprises, products or services to 

overcome trade barriers and gain market share. 

Europeans, on the other hand, point out that the U.S. 

Government intervenes for the same purposes as a matter 

of course, except that it does so most often in the name 

of national security, broadly (and loosely) defined. 

These analogies have been relevant, for example, in 

comparisons of European "subsidies" to Airbus with 

U.S. "subsidies" to military (and then civilian) aircraft 
KRAMER AND KYRIAKOPOULOS 53 

production; in discussions about national laws 

controlling foreign ownership of broadcasting and 

telecommunications organizations; and in debates on the 

nature of "buy American" versus "buy European" 

practices in public procurement. Because both sides 

have a point, the key issue concerns the ability to prevail 

in negotiation of particular disputes in the future. 

To the extent that America's trade position in general 

has deteriorated and its trade orientation is still much 

lower than that of the EU, it appears that the tendency 

toward unilaterialism is likely to grow stronger in the 

United States. This has been the case already in the 

context of U.S.Japan trade and could trigger antiEuropean trade sentiment even though U.S. trade with 

the EU is still well balanced. If that happens, trade 

conditions would continue to favor the EU, not because 

of her "Fortress Europe" behavior but because of her 

"Exporter Europe" tradition. However, trade flows 

could be adversely affected for both the United States 

and the EU. Should the United States decide to take a 

more aggressive, protectionist stance vis-a-vis its trade 

with Europe in response to such a development, it might 

do so at the expense of its political cooperation and 

dialogue with the EU. In the worst case, it is possible 

that the perception of tile tradeoff between trade and the 

whole trans-Atlantic relationship as a zero-sum solution 

might be reinforced. In conclusion, Europe can expect 

to make some-perhaps limited-economic gains through 

trade expansion, but at the risk of increased economic 

conflict with the United States with possible political and 

security spillovers. 

GROWTH THROUGH TECHNOLOGY 

Can Western Europe overcome its current economic 

problems by placing greater emphasis on technological 

innovation and greater diffusion of technology in all 

sectors of its economy? This question raises several 

controversial issues that tend to obscure a central fact: 
54 EUROPE IN THE 21st CENTURY 

namely, that technological advancement is not sought as 

an end in itself but rather as a means to improved wellbeing and greater material prosperity. The real 

problem, from a policy perspective, is whether 

technological progress can be fostered in a climate of 

low economic growth. 

In an economic sense, meaningful (that is, efficient) 

technological progress leads either to falling per unit 

prices, over time and in real terms, of established 

product lines or services, or to development of new 

forms of output. These phenomena have been observed 

in a great number of industries, primarily goodsproducing (agriculture, construction, manufacturing) but 

also in several sectors of the service-producing industries 

(especially communications and transportation). In both 

its manifestations, technological progress results in 

significant, often revolutionary, productivity 

improvements leading to permanent reductions in cost of 

production over time. Technological progress has, as a 

rule, transformed highly labor-intensive operations to 

fully automated processes. In releasing labor from 

onerous or deadend jobs and boring tasks, technological 

progress (as opposed to mere application of technology)3 

can lead to economic expansion that raises living 

standards. Europe's record in this respect is impressive. 

Under what conditions can it be improved? 

Pessimistic assessments of Europe's potential to 

channel technological innovation into the production 

process are based on several trends: erosion of Western 

Europe's comparative advantage in some hightechnology sectors (notably consumer electronics and 

related apparatus, computing equipment and office 

supplies), its low ranking in patent awards (behind Japan 

and the United States), lagging spending on research and 

development and not sufficiently large numbers or 

proportion of researchers. (In R&D spending as well as 

in numbers of researchers, Western Europe is behind 

Japan and, by some measures, behind the United States 

as well, in both absolute and relative terms.) In addition, 
KRAMER AND KYRIAKOPOULOS 55 

some evidence can be read to suggest that deindustrialization has affected not just the United States 

but also Western Europe (as indicated by the ascent of its 

service-producing industries at the expense of 

manufacturing). 

But another set of factors deserves equal attention, for 

it is tempting to overlook important structural differences 

when making broad international comparisons. First, 

with respect to secular changes in comparative 

advantage, trade balances matter a lot. If a technology 

gap exists, it has not affected the robustness of European 

trade, as discussed earlier. In fact, trade data lend 

support to a more optimistic assessment of Europe's 

international competitiveness position vis-a-vis the 

United States and Japan. Thus, even though by some 

technological indicators (i.e., number of new patents and 

researchers) the United States has been a longtime 

0leader, this position has not prevented it from becoming 

also the world's largest debtor nation. In its trade 

balance and among broad end-use categories of 

merchandise traded, the United States usually has a 

surplus in only two (and these are overshadowed by 

larger deficits in most other categories). Of these, the 

more significant surplus is in foods, feeds, and beverages, 

not normally classified as high technology sectors; a 

much smaller surplus is shown under industrial supplies 

and materials. By contrast, the EU (ranked third in 

terms of technology orientation) has a balanced trade 

with the United States and a much smaller trade deficit 

with Japan than does the United States. Thus, the 

connection between technological supremacy measured 

in factor inputs and production efficiency or productivity 

gains may be much more roundabout (and certainly less 

obvious) than normally assumed. 

In gauging the potential for greater technological 

advancement in Europe, the following advantages stand 

out: 

• Europe's human capital stock is impressive in 

scientific and technological know-how as measured 
56 EUROPE IN THE 21 st CENTURY 

by the share of engineering and natural science 

graduates in terms of total population of university 

students (EU: 28 percent; U.S.: 17 percent; Japan: 25 

percent).4 

• Europe is ahead of the United States in terms of 

investment orientation, a condition commensurate 

with high savings rates; European gross savings rates, 

at 20 percent of GDP, are now lower than Japan's (at 

30 percent) but have historically been higher those of 

the United States (at 14 percent). 

• Western Europe's traditional exposure to the 

competitive pressures of international trade has been 

and remains singular; by comparison, the U.S. 

economy still retains a strong domestic focus while 

Japan's size has yet to confer on it a role larger than 

Europe's or America's in world trade. 

All in all, Europe has the potential to push forward 

in terms of technological advancement. This will be 

good for its international competitiveness position, 

although its overall gains through trade may become 

more limited for reasons discussed earlier. It is even 

more likely that technological advancement will 

eventually create conditions favorable to higher 

economic growth in general, as it always has in the past. 

However, technology per se will probably not be an 

important factor for short-term turnaround in European 

unemployment. Thus, while technology remains 

essential for the preservation of high living standards in 

the future, it cannot serve as a substitute for 

countercyclical macroeconomic policies aimed at 

joblessness. For this reason, it is possible that fewer 

resources will be diverted toward technology-related 

investments and more toward job creation schemes. If 

so, the role of technology could become even more 

limited. 
KRAMER AND KYRIAKOPOULOS 57 

GROWTH THROUGH ENLARGEMENT 

Europe can also grow by expanding its membership 

wisely. The club of 12 added three new members in 

1995: Austria, Sweden, and Finland. These affluent, 

industrialized democracies bring with them higher than 

average per capita incomes, well-developed market 

economies and strong export orientation; such attributes 

change immediately the economic statistics of the EU as 

a whole and in the right direction. The financial benefits 

are especially visible because these new members will be 

net contributors to the EU's budget and thus enhance 

EU-financed projects. At the same time, potential costs 

to political cohesion in the European Union are 

minimized because the new members are, in reality, old 

and established partners of the EU through EFTA. Their 

political, social, cultural, and economic institutions are 

mature and in harmony with those of EU member states. 

Thus, Europe's most recent enlargement may actually 

represent a win-win outcome and one that stimulates 

economic expansion for the union as a whole. 

Nonetheless, this enlargement does present some 

problems. It reinforces the need to overhaul the 

cumbersome institutional structure of the EU at the 1996 

Intergovernmental Conference (IGC). The three new 

members' security identity is marked by a long tradition 

of neutrality: they may be less willing to support the idea 

of robust European security cooperation. Finally, these 

nations seem less committed to the Monnet ideal of 

Europe; Swedish public opinion is already showing 

reservations about the likely benefits of EU membership. 

But what are the limits to the EU's enlargement? In 

theory, Europe could have and should have become 

whole again after the end of the Cold War. Instead, 

there is now a new divide, the result of the de facto 

separation between two groups of countries: those that 

are members of the EU (industrial democracies with 

developed political institutions and mature market 

economies) and those that are not (former Communist 
58 EUROPE IN THE 21st CENTURY 

countries facing serious problems of political and 

economic adjustment). The success and speed with 

which Western Europe can integrate the states of Central 

and Eastern Europe, as well as Russia, into its political 

and economic structures will be critical determinants of 

this processs. If true integration can be achieved, the 

single market will expand immensely. The benefits 

associated with economies of scale will be considerable 

and, if past trends are a guide, trade flows will grow 

significantly as well. 

It would be a mistake to invoke economics as the 

singular driving force pushing toward EU expansion. A 

strong argument can be made that economic integration 

is a means toward a larger goal, that of political (and, by 

extension, social and cultural) unification. In contrast to 

other economic zones or free trade areas (including the 

largest and most recent one, NAFTA), the EU is 

composed of countries with a common collective 

conscience, heritage, and culture. Geographically, their 

boundaries and history tie them together on the 

European continent. Their political and economic 

institutions are similarly based on common conceptions 

of governance, from the birth of participatory democracy 

in the Greek city-states to monarchy to parliamentary 

democracy and from feudalism to contemporary political 

economy. Culturally, EU member states have created 

and share in the values of Western civilization, from 

Greek philosophy to the spread of Christianity to the 

Renaissance and the Age of Enlighnement. Indeed, the 

notion of a European identity (symbolized in the EU 

passport since 1985) has a far stronger cultural, 

sociogeographic content than the American one (in the 

sense of the North American or South American 

continent, and even less so in the case of both of them 

combined). These factors indicate that the current 

divide in Europe may be temporary, ephemeral, and 

artificial. The limits of the EU will most likely be 

expanded to include all the states professing a broadly 

based and genuine popular allegiance to a common 
KRAMER AND KYRIAKOPOULOS 59 

European ethos, culture, history and civic values. By 

these criteria, the European Union might eventually 

include all the countries on the continent of Europe all 

the way to the Urals; indeed, Russia is as much a 

European power on its western side as it is Asiatic on its 

eastern side. 

There are grounds for optimism that such an 

accomplishment is possible: since 1989, the reunification 

of Germany has involved not just the absorption of the 

former GDR by the FDR but also the immediate 

inclusion, through Germany's membership, of the former 

Communist GDR into the EU. This has not been an 

easy process; in addition to major political, social, 

industrial, and other dislocations caused by the decision 

to reunify the two countries, the financial costs have 

been enormous and borne mostly by German taxpayers. 

But beyond the direct financial costs, the full economic 

costs of this inevitable task are incurred (directly or 

indirectly) by all citizens of the EU. It is inconceivable 

now that Europe would have room for two German 

states, one inside the EU, the other outside, because 

despite their differences in political and economic 

systems over decades, the two German states share 

common linguistic, cultural and historic traditions. The 

extent to which such traditions form a common civic 

denominator among the peoples of Europe will most 

likely define the limits of the post Cold War EU, its 

economic geography, ethnographic composition and 

new political identity. European history, after all, 

reflects a legacy of both centripetal and centrifugal 

forces. Diversity and unity are not contradictory. In the 

High Middle Ages, for example, there was a remarkable 

unity in cultural and intellectual life at a time of political 

fragmentation. Today it is possible to imagine political 

and economic integration together with enormous 

degrees of cultural diversity. 

In the near term, enlargement of the European Union 

is constrained by serious political uncertainties. These, 

in turn, lead to calculations unfavorable to the 
60 EUROPE IN THE 21 st CENTURY 

commitment of scarce resources outside of the EU. The 

issues, prospects and problems associated with future 

enlargement must be dealt with in terms of the economic 

calculus prevailing in Europe today. Further 

enlargement can take place in two directions: south and 

northeast. 

Expansion to the south would mean simply opening 

up the EU to Malta and Cyprus. The economic benefits 

or costs would be minimal, given the small size of the 

economies involved. The political gains would be 

negligible, the potential dangers great. Malta has a long 

history as a maverick within international organizations. 

Giving Malta the existing right of veto could paralyze the 

operations of EU institutions, especially if the Maltese 

Labour Party returns to power. Entry of Cyprus is 

predicated on a solution of the Cypriot question, which 

depends in turn on a breakthrough in Greek-Turkish 

relations. Far more than expansion, there will certainly 

be greater involvement of Europe in the Mediterranean. 

The conflict in Algeria has focused the attention of 

Mediterranean states like France, Italy, and Spain on the 

importance of stabilizing the countries of the Maghreb to 

avoid generalization of instability and immigration 

because of Islamic fundamentalism, a high birthrate and 

economic backwardness. It is to conjure potential 

dangers emanating from the Maghreb rather than in 

pursuit of economic gains that the EU is likely to incur 

significant financial burdens. 

Thus when EU enlargement is invoked what is 

usually meant is expansion to the northeast. The first 

tranche of candidates are the Czech Republic, Poland, 

and Hungary (Slovakia is often included in this group, 

but will be discussed separately). The political 

experience of these three countries since the end of 

Communist rule has been generally positive. 

Democratic elections, alternation of power, freedom of 

speech, and rule of law have prevailed. The process of 

democratization was based either on historical 

experience (the Czech Republic from 1918 to 1938), the 
KRAMER AND KYRIAKOPOULOS 61 

record of resistance to Communist rule (Solidarity in 

Poland), or the origins of a genuine multiparty system 

under Communist rule (Hungary). Neither Poland nor 

the Czech Republic is involved in any significant 

boundary disputes or national minority questions, 

although antisemitism persists in Poland. Hungary's 

differences with Slovakia seemed to have been resolved 

by a new treaty negotiated under the stability pact rubric 

but reemerged when Slovakia voted to make Slovak the 

official language of the country. A treaty with Romania 

remains to be negotiated. The left wing Hungarian 

government of Gyula Horn has been far more 

conciliatory on issues related to the large Hungarian 

national minorities in neighboring countries than was its 

conservative predecessor. Assuming that this issue is 

satisfactorily resolved, there is reason to think that the 

membership of these countries in the EU is at least as 

sound a proposition on political grounds as was Greek 

membership in 1981 and Spanish and Portuguese 

membership a decade ago. Including them in the EU 

would expand the zone of stability and security in 

Europe. 

Slovakia has not gone as far in creating a free market 

and has weaker democratic credentials. Had it not been 

part of Czechoslovakia it is unlikely that it would be 

considered at this point for EU membership. Beyond 

this tranche of countries it is hard to see many likely 

candidates for EU membership in the next decade. Until 

peace reigns in the Balkans, incorporating any Balkan 

state could be risky, as it could be involved in a widened 

war. This certainly is the case of most of the republics of 

the former Yugoslavia. Nor is there much progress 

toward liberal democracy in other Balkan countries, 

although Bulgaria has shown good sense in dealing with 

its minority problems. Slovenia is economically 

developed, but it is not clear whether it should be 

rewarded for having pulled the plug out of Yugoslavia 

and unleashing civil war. Rumania seems not to have 

undergone much genuine reform at all. The Baltics 
62 EUROPE IN THE 21st CENTURY 

remain a problem because of the continuing problem of 

Russian minorities. 

It is fair to say that EU membership can consolidate 

democracy. But affording EU membership to states not 

yet far advanced toward democracy or harboring 

territorial disputes with neighbors or unresolved national 

minority questions runs the risk of importing these 

problems into the EU. Even the admission of the 

strongest candidates poses serious risks if the 

decisionmaking mechanism of the EU is not reformed 

and until there is a consensus on the direction the EU is 

supposed to take. The more states are admitted, the 

more difficult it will be to change the institutional 

structure and the more dysfunctional the present 

structure will be. One danger is that once admitted, new 

states will immediately be relegated to the bottom tier of 

a multispeed Europe, which will have to be multispeed 

in part becuse of their admission. The upcoming IGC 

will have to resolve issues of institutional structure that 

logically should have been dealt with before any 

enlargement. 

Beyond the political dimension, expansion to the east 

involves equally serious problems of economic 

integration. Both in terms of industrial development and 

income levels, a large gap exists between Western 

Europe and countries that stayed behind the Iron 

Curtain for decades. The least troubling and most 

optimistic case is the Czech Republic, the best economic 

performer in Eastern Europe: its per capita income is 

just over $7,000, putting the country in first place among 

all non-EU states in Europe. Yet, compared to EU 

income levels, the Czech standard of living is very low: it 

barely reaches one-half of average EU income, 

significantly lower than that of Greece and Portugal, the 

EU's least well-off member states (both have average 

incomes around $9,000). 

The Czech Republic situation is similar to that of 

Slovenia (a new state but located in a region with a 

strong industrial tradition). Slovakia, Hungary, Belarus, 
KRAMER AND KYRIAKOPOULOS 63 

and Estonia may be grouped together in a tier below, 

with income levels around $5,500. The former 

Yugoslavia might also have been placed in the same 

group; Croatia and, to a lesser extent, Serbia and 

Montenegro were relatively well off before the 

dissolution of the Yugoslav state. But all other former 

members of the now-defunct Warsaw Pact are countries 

of even lesser means, with average incomes inordinately 

low in comparison to EU levels. The economies of 

Poland, Ukraine, Bulgaria, and Romania show signs of 

improvement but will remain fragile in the transition to 

decentralization and open market rules. By any 

measure, these countries do not have the economic 

credentials to be considered candidates for admission to 

the EU any time soon. Nor are their evolving political 

institutions stable enough to contribute to interEuropean cooperation in the realm of foreign policy and 

security. Admission to the EU would amount to virtual 

guarantee of significant income transfers (at high cost) 

from Western Europe in exchage for future (unspecified 

if not insignificant) political benefits. 

However, the need to develop stronger ties between 

Western Europe and its eastern neighbors cannot be 

overlooked. Short of enlargement by formal expansion 

through admission of new states, it is possible to meet 

that need through interim measures such as association 

agreements. This course of action has already received 

policy priority, is feasible, and can benefit all sides. 

Greater economic integration can lead to political 

integration between east and west in Europe, in much 

the same way that it has facilitated political integration 

throughout the EU in the post- World War II period. 

Despite its cumbersomeness and slow speed, EU 

enlargement through economic integration has been 

successful for Europe. The recent admission of former 

EFTA countries adds to the body of strong evidence that 

long-term association agreements promote de facto 

economic and political integration, leading naturally to 

EU membership. Of even greater significance is the 
64 EUROPE IN THE 21st CENTURY 

success with which association agreements paved the 

way for admission into the EU of Greece, Spain, and 

Portugal in the 1980s. Not only were these countries 

relatively poor, but their political record had been 

marked by military dictatorships in the post-World War 

II period. By comparison, the countries to the east of 

the EU are less well off in material terms and 

significantly more burdened by the experience of 

Communist rule. Enlargement of the EU to the east may 

be out the question for now but could become possible 

in the future, even though it might require long-term 

association agreements.5 

Political considerations will probably lead to the 

admission of the Czech Republic, Hungary, and Poland 

by early in the next decade. In the long term, inclusion 

of these states and of other states in the East later on will 

pave the way for enormous expansion of European trade 

and economic growth. Initially and for some time, 

however, the economic and financial costs to the EU will 

be far greater than the benefits. Enlargement to the East 

may help solve Europe's economic problems in the 

future but will certainly exacerbate them in the next 

decade. 

MONETARY UNION 

Europe's internal market has benefitted greatly from 

economic liberalization and integration processes at 

work since the implementation of the Single European 

Act. Economic union is to be complete when full 

monetary union is implemented, leading to higher 

economic growth across Europe. 

The direct benefits of monetary union can be 

substantial. They include savings on currency 

conversion costs as a result of irrevocable locked 

exchange rates; sustainable price stability as a result of 

monetary policy coordination by a European System of 

Central Banks; savings on government finances through 

lower interest rates; and reduced costs on currency 
KRAMER AND KYRIAKOPOULOS 65 

conversion and forward exchange covers incurred by 

banks and other enterprises doing international business 

in ECUs (central banks will also economize on the costs 

of holding foreign currencies). Removal of restrictions 

on capital flows has already been achieved. Indirect 

benefits are difficult to quantify but could be even more 

profound, not just in terms of their economic effects but 

also because of their political ramifications.6 

European monetary integration has a long history 

and is marked by several phases. An important phase 

began in 1978 when the European Monetary System 

(EMS) was conceived and, by one account, "sold to the 

rest of the Community by (then) West German 

Chancellor Helmut Schmidt and French President 

Val~ry Giscard d'Estaing."7 In the late 1980s, not just 

academics but business leaders also would engage in 

speculative talk of the advent of a common European 

currency. The Economist featured a cover story on the 

Phoenix (a fictitious name for the European coin and 

paper that might be issued one day). In the meantime, 

the European Currency Unit (ECU) has achieved the 

status of a premier international monetary unit; even 

though it is not issued in paper or metal form, it has 

been traded in world currency markets as a key foreign 

currency and is used to settle official accounts and 

private invoices. In the last 10 years or so, many 

European government bonds have been denominated in 

ECUs. But the most ambitious phase of monetary 

integration began with the incorporation of European 

monetary union (EMU) in the articles of the Union 

Treaty in 1992. In December 1995, the EU baptized its 

future single currency "Euro." 

The literature on the problems, crises, prospects and 

promises of European monetary integration is quite 

prolific. Beyond the theoretical issues related to the 

demand and supply of Euromoney, interest rates and 

effects on macroeconomic aggregates, there has been a 

lot of debate on the implications of monetary union for 

the distribution of political power within and among EU 
66 EUROPE IN THE 21 st CENTURY 

member states. American observers, but also several 

European economists, have attached special importance 

to the meaning of EMU for national sovereignty and 

particularly for its effects on the distribution of political 

power among participating states: as control of the 

money supply is effectively handed over to a European 

central bank, the ability of the government of each 

sovereign state to control national economic activity is 

diminished or eliminated. For political conservatives 

who advocate devolution of power away from the center, 

EMU represents a most undesirable condition, 

threatening the very existence of democratic 

governance.8 On the other hand, interventionist 

economists and politicians have argued that monetary 

union will contribute to more effective management of 

the economy at a pan-European level, increasing the 

synergism between fiscal and financial policies in a truly 

single European market. 

From a conceptual and even from a technocratic 

viewpoint, the evolution of EMU should be assessed 

with reference to parallels in the development of central 

banking in the United States since the 19th century. In 

contrast to all other major powers in the Western world, 

the United States did not have a central bank until just 

before World War I. The U.S. banking system was 

controlled and regulated by the states, not by the Federal 

Government. The creation of a uniform, single currency 

standard as well as the establishment of a U.S. central 

bank did not materialize until 1913 (with legislation 

creating the Federal Reserve System), after a long series 

of crises and years of financial chaos, especially after the 

turn of the century.9 The U.S. banking system is still 

unique as a two-tier system, with state banks chartered by 

state authorities and national banks licensed to operate 

as members of the Federal Reserve System. Using this 

analogy and applying it very loosely to the EU setting, it 

is evident that the EMU provisions of the Maastricht 

Treaty will create a similar two-tier banking system in 

Europe: in each EU member state, control of the banks 
KRAMER AND KYRIAKOPOULOS 67 

will be exercised by the national authorities, while a 

European system of central banks will set monetary 

targets and policies to achieve them. 

Theoretical considerations notwithstanding, the 

practical implications of a single EU currency to be used 

in daily cash transactions are overwhelming. The 

European Union of the 15 may now boast more 

currencies (exactly 15)10 than official languages (a total of 

11). The proliferation of official languages has led some 

public officials to suggest that the total number of 

languages be reduced (in official EU communications 

including publications) by half, to, say, five or six. 11 The 

accounting logic may be flawless but proposals of this 

sort enraged the public in countries that might be 

affected (generally the smaller ones). Such proposals 

were quickly withdrawn for further study; language, after 

all, is the most powerful symbol of national culture and 

sovereignty in the multinational EU. By comparison, the 

lowering of the status of a country's currency (as would 

be the case when ECUs are minted) is viewed with much 

less sentimentality by Europeans. The complexities and 

costs of dealing with 15 currencies can be tremendous: 

from the policy demands of exchange rate adjustment to 

inconvenience and expense due to transaction costs, the 

multiplicity of currencies has been an obstacle to 

European monetary integration. This may explain why 

the movement toward a single currency has met 

generally with public approval. 

European attitudes toward a single currency have 

been positive. According to a poll conducted in spring 

1993, a majority of EU citizens would like to see national 

currencies replaced by a single currency by 1999. 

Opposition to a single currency is highest in the United 

Kingdom, Denmark, and Germany, lowest in Italy, 

Greece, and Belgium. 12 Similar attitudes prevail toward 

a European Central Bank.13 

In the years following the signing of the Union 

Treaty, it seemed as though the evolution toward a single 

currency in Europe was inevitable, but monetary union 
68 EUROPE IN THE 21st CENTURY 

could take longer, might be more complicated and 

troublesome, and could create greater protracted 

adjustment problems than originally estimated. Time is 

an important element but hardly the most critical. As 

with economic union, which took over 40 years to reach 

its present stage in Europe, the optimal date for issuing a 

European currency is still open to debate. In the end, a 

single European currency can materialize at such time as 

the EU's economic power and political and social 

integration make it imperative. 14 But what if monetary 

union proved to be more complicated and protracted 

than initially envisioned? 

There have been obstacles along the way and more 

could emerge, however. In the post-Cold War era, 

there have been tendencies in Western Europe to resort 

to stratification in order to deal with current problems, 

as analyzed in earlier sections of this book. For all the 

reasons already listed, the EU is considering interim 

solutions that may be more divisive than cohesive. One 

example is a multitier approach to monetary unification, 

suggested as a means of keeping with the letter (but not 

the spirit) of the Union Treaty; a two-tier EU, with some 

countries in the top tier (or in a "hard core") and most in 

the bottom tier (or "soft core") may be technically 

possible but could prove politically dangerous. Would 

the increased commitment to monetary union of "hard 

core" countries be exactly offset by the (justifiably) 

diluted commitment of "soft core" countries? What 

would be the impact on the future of financial discipline 

within the EU as a whole? What signals would be 

thereby transmitted to prospective EU candidatemembers concerning their monetary integration? And if 

there is something truly negative to be said about the 

convergence criteria for monetary union, it is that they 

were deemed irrelevant and unnecessary (at least by 

implication) for the monetary union between the Federal 

Republic of Germany (FRG) and the former German 

Democratic Republic (GDR). By any measure, the 

GDR's economy was in much worse condition at the 
KRAMER AND KYRIAKOPOULOS 69 

time of German reunification than the least well-off EU 

member state, now or at the end of the decade. If 

monetary union without any preconditions was feasible 

between the former FRG and GDR, why would it not be 

achievable by EU member states characterized by fewer 

economic disparities among them and with a 40-year 

history of economic and financial integration? 

The events in France in December of 1995, in the 

form of public workers union strikes that paralyzed 

urban life, underscore the importance of answering the 

question posed above. Among the first to assess as 

paradoxical (and, perhaps, unacceptable) the nature of 

the tradeoff offered by the government, the French 

perceived that the benefits of EMU came at an exorbitant 

cost: higher unemployment and lower living standards. 

The government's insistence that its austerity measures 

are necessary for France to satisfy EMU criteria may be 

technically valid but politically explosive. This fact 

alone suggests that the application of the criteria as well 

as their interpretation warrant reevaluation as to their 

economic validity and political relevance. In many 

ways, the future of EMU may be hostage to a set of 

quantitative tests that have the virtue of being highly 

specific yet extremely arbitrary. 15 

In the final analysis, it is imperative that conditions 

for participation in the final stage of monetary union be 

observed and financial discipline enforced. Under any 

circumstances, the stability of a single currency will 

depend on sound public finances. This fundamental 

monetary principle is at the heart of the provisions of the 

Union Treaty. Its application will be a function of the 

technical tools with which the EU Council is already 

armed as well as of the manner in which they are used. 

But above all, monetary union will be determined 

ultimately by the Europeans' political will to bring it 

about. The fact that the Maastricht Treaty was ratified at 

all despite the obstacles encountered demonstrates 

Europe's underlying commitment to eventual monetary 

union by the end of the century. Monetary union once 
70 EUROPE IN THE 21st CENTURY 

achieved should provide an important impetus for faster 

economic growth. 

In summary, of the four factors examined for their 

likely impact on Europe's growth and prosperity toward 

the next century, two seem to hold the most promise: 

monetary union and limited enlargement. It should not 

appear paradoxical that while these are the most 

difficult, riskiest, and perhaps most ambitious 

undertakings, they are also the ones that are likely to 

generate the greatest pay-off to Europe's prosperity. By 

contrast, Europe's near-term gains from continuing its 

tradition as a premier world trader or from maintaining 

its technological prowess are bound to be more limited. 

This does not mean that a choice to emphasize the 

bigger projects needed to truly unite Europe can or 

should be at the expense or exclusion of the more 

traditional options (trade and technological 

advancement). But it does mean that resumption of a 

course of strong economic expansion will depend 

mainly on Europe's successful pursuit of monetary 

unification and prudent management of EU enlargement. 

BUT IS THE POLITICAL WILL THERE? 

The above conclusions are based on relatively optimistic 

assumptions about the future: namely, that no political 

and security problems emerge that significantly threaten 

European interests and the European economy. Such 

threats might include revival of the conflict in Bosnia and 

spillover to other areas, such as the former Yugoslav 

Republic of Macedonia or Kosovo, perhaps leading to a 

regional war; the continued weakening of reformist 

forces in Russia, resulting in a nationalist and 

expansionist foreign policy; a war in the Middle East 

affecting oil suppplies; or continued distancing of the 

United States from Europe to the point that American 

security guarantees lose their credibility. Clearly, such 

external factors could provoke a crisis in the European 

economy, making our predictions of future sources of 
KRAMER AND KYRIAKOPOULOS 71 

economic growth questionable. U.S. involvement in 

Bosnia and the Dayton peace accords have obviated the 

immediate threat of an aggravated Balkan crisis. The 

weak and divided response of Western Europe to the 

crisis from its outset, which in turn was partly a result of 

ambivalent European leadership and the domestic 

preoccupations already discussed, was a key factor for 

U.S. intervention. There is no guaranteee, however, that 

the peace settlement will long survive the end of the 

NATO peacekeeping mission, and that, if it does not, 

Europe will be any better equipped to respond to a 

renewed crisis than last time. 

But a far more obvious threat to Europe's economic 

future is whether Europe will have the political will to 

move resolutely toward EU institutional reform at the 

upcoming IGC meeting, on which economic growth 

depends. The European Union looks like the Ptolemaic 

system of the universe before the advent of Copernicus, 

with its ponderous system of circles within circles. 

Enlargement of the EU only makes it more cumbersome. 

Widening has preceded adequate deepening. The 

structure of the EU reflects the underlying ambivalence 

of European states about yielding sovereignty in areas 

particularly sensitive to them. 

What is alarming is that expectations for the IGC are 

being cut back. It is not surprising that the British 

Government is wary about majority voting and 

"federalism" in general. France under Chirac is 

uncomfortable about the increasingly clear signals from 

Bonn that Germany will insist on additional movement 

toward federalism in exchange ibr EMU. The French 

seem to have forgotten that the primary purpose of their 

historical European policy was to irreversibly moor 

Germany to European institutions. Paradoxically, they 

are now resisting Germany's demand to be further tied 

down. 

It is almost certain that the EU will come up with 

some kind of package addressing institutional reform by 

1997; after all, the IGC cannot be allowed to fail. The 
72 EUROPE IN THE 21 st CENTURY 

question is whether the politically acceptable package 

will also prove workable. The need to compromise 

between different visions of Europe may produce a 

Europe without vision. The states of Europe lack the 

reality of power they once possessed to act effectively on 

the national level, or the will to make Europe really 

succeed; the whole seems to be less than the sum of its 

parts. Europe awaits its Copernican revolution. 

Whether the leadership necessary to make that 

revolution presents itself-under the admittedly difficult 

economic and political circumstances just 

described-may be the critical factor in determining 

whether the EU will survive as a viable institution and 

whether Europe will play the kind of role to which its 

wealth, population, and history would seem to destine it. 

NOTES 

1. With a population exceeding 1.8 billion, they export 

about $700 billion a year, or less than half the dollar value of 

exports sent abroad by 347 million Europeans, according to a 

recent estimate. Strategic Assessment 1995 (Washington, DC: 

Institute for National Strategic Studies, 1995), 198. 

2. Clifford P. Hackett, Cautious Revolution: The European 

Community Arrives, Praeger, 1990, 121. 

3. For example, mere application of technology in U.S. 

defense production has resulted in rising, not falling, prices 

over time. Also, the application of technology has not been 

associated with reduced costs of production in less tradeexposed sectors of the economy, including services, medical 

care in particular. 

4. Industrial Research and Deveolopment Advisory 

Committee of the Commission of the European Communities, 

Skill Shortages in Europe-IRDAC Opinion (Luxembourg: Office 

for Official Publications of the European Communities, 

undated), 34. 
KRAMER AND KYRIAKOPOULOS 73 

5. For Greece, the transition between an association 

agreement with and membership in the EU in 1981 lasted 20 

years. Portugal's association with the EU began in 1959, 

through Portugal's membership in the European Free Trade 

Area; EU membership materialized in 1986. During the same 

year, Spain also joined the EU, following years of isolation 

from Europe (Franco's regime ended with his death in 1975). 

6. A recent assessment concludes: "The Maastricht 

negotiations were initiated by a desire to have a less Germandominated, more equal currency system than the EMS. In 

other words, the initial catalyst for change was internal. But as 

time went on . . . a wider vision was raised in many minds of 

how a monetary union might change Europe's place in the 

world. This vision is set early in the twenty-first century. It 

conjures up the prospect that every central banker around the 

world might have to keep Ecus (rather than dollars) in his 

foreign exchange reserves, that every trader with the world's 

largest commercial bloc might have to invoice his goods in 

Ecus, that every broker of oil and basic commodities might 

have to mark his prices in Ecus, and that every prudent 

investor might never want to be without substantial Ecu assets 

in his portfolio." David Buchan, Europe: The Strange Superpower 

(Dartmouth, 1993), 25-26. 

7. Steven F. Overturf, "The Economics of the Renewed 

Integration Movement," Annals of the American Academy of 

Political and Social Science, Oan. 1994): 85. 

8. See, for example, Murray Weidenbaum "Why 

Maastricht Will Fail," The National Interest, Summer 1993. 

9. Until then, regulation and control of the American 

banking system was in the hands of state banks. In the absence 

of a central authority to monitor the quality of state bank assets 

and liabilities, currency in circulation consisted of bank notes 

often issued without regard to financial strength. High failure 

rates among banks resulted in substantial losses by depositors, 

leading to financial, economic and social turmoil. 

10. The sheer incovenience of changing currencies at each 

border crossing (exacerbated now that there are none) within 
74 EUROPE IN THE 21 st CENTURY 

the EU can be approximated if one imagines U.S. citizens 

having to do the same when crossing state lines. 

11. In the summer of 1994, European media reported on 

deliberations and proposals concerning the proliferation of 

official languages in the EU. 

12. European Union: Europe on the Move (Luxembourg: 

Office for Official Publications of the European Communities 

1994), 40. 

13. Ibid., 39. The Maastricht Treaty actually calls for a 

European System of Central Banks rather than a single bank. 

14. By analogy, the post World War II international 

financial system was a natural outcome of prevailing economic 

and political power balances. The United States was the 

world's strongest economy and this prowess served as the 

backbone of the international financial system based on the 

gold standard. For a long time, this system could meet the 

needs of the United States and its partners. When it no longer 

did, it was undone (by U.S. unilateral action, announced in the 

summer of 1971). 

15. The convergence criteria for EMU have been and 

remain controversial, particularly as to their relevance on 

technical grounds: "These criteria . . . taken at face value . . . 

made no sense whatsoever. The first criterion was that a 

country maintain a stable exchange rate for two years before 

joining . . . a country that showed that it was very good at 

living with an independent currency would be allowed to 

abolish it. The second criterion was . . . circular: a country 

would be allowed to join EMU if the markets thought it 

would. The third criterion required inflation to be close to 

that of the EC's best performance . [But] under fixed exchange 

rates...there was really nothing a country could do about 

[inflation] without violating the first criterion]. Finally, two 

criteria set limits on budget deficits and the size of government 

debt. These are reasonable things, but what do they have to 

do with monetary union? The Federal Reserve does not need 

to police tile budgets of New York and California, because 

they cannot print money to cover their deficits. The same 
KRAMER AND KYRIAKOPOULOS 75 

would be true of national governments after EMU." Paul 

Krugman, Peddling Prosperity, Norton, 1994, 191. 
ABOUT THE AUTHORS 

Steven Philip Kramer is Professor of History at the Industrial 

College of the Armed Forces, National Defense University. 

Dr. Kramer has taught contemporary European history and 

government at the University of New Mexico and Georgetown 

University, served as a Council of Foreign Relations Fellow in 

the Department of State, and directed the Face-to-Face 

program of the Carnegie Endowment for International Peace. 

He has also been a John J. McCloy Distinguished Fellow in 

Residence at the American Institute for Contemporary 

German Studies and a Fellow at the Institute for the Study of 

Diplomacy at Georgetown. He has written widely on 

European politics and culture. His most recent book is Does 

France Still Count: The French Role in the New Europe 

(1994). 

Professor Kramer received a B.A. from Brandeis 

University and a Ph.D. from Princeton University. 

Irene Kyriakopoulos is Professor of Economics at the 

Industrial College of the Armed Forces, National Defense 

University. Dr. Kyriakopoulos teaches economics of strategy 

and resources management and directs a course on the 

political economy of the European Union. She has served as 

Research Associate on the staff of The Brookings Institution, 

as a member of the Economics faculty of The George 

Washington University and as Faculty Fellow at the Office of 

Personnel Management. Her research interests and activities 

have focused on defense economics, European integration and 

the economic dimension of international security. Her latest 

publication is "Economic Integration as a Model for Security 

Cooperation," in Reiner K. Huber and Rudolf Avenhaus, eds., 

Models for Security Policy in the Post-Cold War Era (1996). 

Professor Kyriakopoulos received a B.S. from the 

University of Maryland and a Ph.D. from The George 

Washington University. 

77 
McNair Papers 

The McNair Papers are published at Fort Lesley J. McNair, home of the 

Institute for National Strategic Studies and the National Defense 

University. An Army post since 1794, the fort was given its present 

name in 1948 in honor of Lieutenant General Lesley James McNair. 

General McNair, known as "Educator of the Army" and trainer of some 

three million troops, was about to take command of Allied ground 

forces in Europe under Eisenhower, when he was killed in combat in 

Normamty, 25 July 1944. 

The following is a complete listing of published McNair Papers. 

For information on availability of specific titles, contact the 

Distribution Manager, Publications Directorate & NDU Press, Fort 

Lesley J. McNair, Washington, DC 20319-6000 (telephone: 

commercial 202/475-1916; DSN 335-1916). 

1. Joseph P. Lorenz, Egypt and the New Arab Coalition, February 

1989. 

2. John E. Endicott, Grand Strategy and the Pacific Region, May 

1989. 

3. Eugene V. Rostow, President, Prime Minister, or Constitutional 

Monarch ? October 1989. 

4. Howard G. DeWolf, SDI and Arms Control, November 1989. 

5. Martin C. Libicki, What Makes Industries Strategic, November 

1989. 

6. Melvin A. Goodman, Gorbachev and Soviet Policy in the Third 

World, February 1990. 

7. John Van Oudenaren, "The Tradition of Change in Soviet Foreign 

Policy," and Francis Conte, "Two Schools of Soviet Diplomacy," in 

Utulerstamting Soviet Foreign Policy, April 1990. 

8. Max G. Manwaring and Court Prisk, A Strategic View of 

Insurgencies: b~sights from El Salvador, May 1990. 

9. Steven R. Linke, Managing Crises in Defense Industry: The 

PEPCON and Avtex Cases, June 1990. 

10. Christine M. Helms, Arabism and Islam: Stateless Nations and 

Nationless States, September 1990. 

11. Ralph A. Cossa, lran: Soviet Interests, US Concerns, July 1990. 
12. Ewan Jamieson, Friend or Ally? A Question for New Zealand, May 

1991. 

13. Richard J. Dunn III, From Gettysburg to the Gulf and Beyotut: 

Coping with Revolutionary Technological Change in Land Warfare, 

March 1992. 

14. Ted Greenwood, U.S. and NATO Force Structure and Military 

Operations in the Mediterranean, June 1993. 

15. Oscar W. Clyatt, Jr., Bulgaria's Quest for Security After the Cold 

War, February 1993. 

16. William C. Bodie, Moscow's "Near Abroad": Security Policy in 

Post-Soviet Europe, June 1993. 

17. William H. Lewis (ed.), Military Implications of United Nations 

Peacekeeping Operations, June 1993. 

18. Sterling D. Sessions and Carl R. Jones, Interoperability: A Desert 

Storm Case Study, July 1993. 

19. Eugene V. Rostow, Should Article 43 of the United Nations 

Charter Be Raised Front the Dead? July 1993 

20. William T. Johnsen and Thomas Durell-Young; Jeffrey Simon; 

Daniel N. Nelson; William C. Bodie, and James McCarthy, European 

Security Toward the Year 2000, August 1993. 

21. Edwin R. Carlisle, ed., Developing Battlefield Technologies in the 

1990s, August 1993. 

22. Patrick Clawson, How Has Saddam Hussein Survived? Economic 

Sanctions, 1990-93, August 1993. 

23. Jeffrey Simon, Czechoslovakia's "Velvet Divorce," Visegrad 

Cohesion, and European Fault Lines, October 1993. 

24. Eugene V. Rostow, The Future of Palestine, November 1993. 

25. William H. Lewis, John Mackinlay, John G. Ruggie, and Sir 

Brian Urquhart, Peacekeephzg: The Way Ahead? November 1993. 

26. Edward Marks and William Lewis, Triage for Failing States, 

January 1994. 

27. Gregory D. Foster, In Search of a Post-Cold War Security 

Structure, February 1994. 

28. Martin C. Libicki, The Mesh and the Net: Speculations on Armed 

Conflict in a Time of Free Silicon, March 1994. 

29. Patrick Clawson, ed., Iran's Strategic Intentions and Capabilities, 

April 1994. 
30. James W. Morrison, Vladimir Zhirinovskiy: An Assessment of a 

Russian Ultra-Nationalist, April 1994. 

31. Patrick M. Cronin and Michael J. Green, Redefining the U.S.- 

Japan Alliance: Tokyo's National Defense Program, November 1994. 

32. Scott W. Conrad, Moving the Force: Desert Storm and Beyond, 

December 1994. 

33. John N. Petrie, American Neutrality in the 20th Century: The 

Impossible Dream, January 1995. 

34. James H. Brusstar and Ellen Jones, The Russian Military's Role in 

Politics, January 1995. 

35. S. Nelson Drew, NATO from Berlin to Bosnia: Trans-Atlantic 

Security in Transition, January 1995. 

36. Karl W. Eikenberry, Explaining and Influencing Chinese Arms 

Transfers, February 1995. 

37. William W. Mendel and David G. Bradford, Interagency 

Cooperation: A Regional Model for Overseas Operations, March 1995. 

38. Robbin Laird, French Security Policy in Transition: Dynamics of 

Continuity and Change, March 1995. 

39. Jeffrey Simon, Central European Civil-Military Relations and 

NATO Expansion, April 1995. 

40. James W. Morrison, NATO Expansion atut Alternative Future 

Security Alignments in Europe, April 1995. 

41. Barry R. Schneider, Radical Responses to Radical Regimes: 

Evaluathtg Preemptive Counter-Proliferation, May 1995. 

42. John Jaworsky, Ukraine: Stability and Instability, July 1995. 

43. Ronald Tiersky, The Mitterrand Legacy and the Future of French 

Security Policy, August 1995. 

44. John A. Cope, International Military Education and Training: An 

Assessment, October 1995. 

45. Elli Lieberman, Deterrence Theory: Success or Failure in ArabIsraeli Wars? October 1995. 

46. Stanley R. Sloan, NATO's Future: Beyond Collective Defense, 

December 1995. 

47. M. E. Ahrari, The New Great Game in Muslim Central Asia, 

January 1996. 

48. Mark J. Roberts, Khomeini's Incorporation of the Iranian 

Military, January 1996. 
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