The United States and Europe share a long and intertwined history. (1) U.S.-European political,security, and economic relations that today comprise the broad transatlantic relationship have theirmodern origins in post-World War II efforts to deter the Soviet threat and bring security to Europe. NATO, which was created in 1949, and the European Union (EU), the latest stage in a process ofEuropean integration begun officially in 1952, are the two main pillars upon which the transatlanticrelationship still rests. NATO was founded upon a shared commitment to protect common valuesof democracy, individual liberty, and the rule of law; in practice, it sought to do this by providingcollective defense against Soviet expansion through a mutual security guarantee for the United Statesand its European allies. The European integration project was meant to promote peace, politicalstability, and economic prosperity in Europe by entrenching democratic systems and free markets. The U.S. Congress and successive U.S. Administrations have strongly supported both NATOand the EU, believing that both organizations have helped foster democracy, reliable military allies,and strong trading partners. The United States also views the Organization for Security andCooperation in Europe (OSCE) as an important transatlantic forum for promoting democracy andhuman rights both in Europe and in Europe's wider neighborhood, including Russia, Ukraine,Belarus, and the countries of the Caucasus and Central Asia. The United States and Europeannations also share membership in other major international organizations such as the World TradeOrganization (WTO) and the United Nations. Since the end of the Cold War, both NATO and the EU have evolved along with Europe'schanged strategic landscape. While NATO's collective defense guarantee remains at the core of thealliance, members have also sought to redefine its mission as new security challenges have emergedon Europe's periphery and beyond. At the same time, EU members have moved beyond economicintegration and have taken steps toward political integration with decisions to develop a commonforeign policy and a defense arm. Both organizations have also enlarged in recent years toencompass many Central and East European states, bringing the number of NATO and EU membersto 26 and 25 respectively. The United States was a key proponent of NATO expansion and a firmbacker of EU enlargement, viewing these twin efforts as serving U.S. interests by consolidating a"Europe whole and free, at peace with itself and with the world." Meanwhile, the U.S.-European economic relationship has continued to grow. The UnitedStates and the EU share the largest trade and investment relationship in the world. Annual two-wayflows of goods, services, and foreign direct investment exceed $1.1 trillion. The total stock oftwo-way direct investment is estimated to be over $1.6 trillion, making this huge investment positionperhaps the most significant aspect of the relationship. Although some prominent U.S.-EU tradedisputes exist, the vast portion of this bilateral economic relationship is harmonious. Some analystsestimate that trade tensions involve only 1-2% of transatlantic commerce. (2) Despite the shared history and close economic ties, the transatlantic partnership has beenfundamentally challenged in recent years. The September 11 terrorist attacks on the United Statesprompted an initial display of transatlantic solidarity, but much of the goodwill has since dissipatedas numerous trade and foreign policy disputes have emerged. The crisis over Iraq is most notable,but the list of disagreements is wide and varied. Although Europeans are not monolithic in theirviews, most states -- including those such as the United Kingdom, Spain, Italy, and Poland thatsupported the U.S. intervention in Iraq -- object to at least some elements of U.S. policy on a rangeof issues, including the Israeli-Palestinian conflict, the treatment of Al Qaeda prisoners atGuantÃ¡namo Bay and the U.S. practice of rendition, missile defense, genetically-modified food, andthe U.N. Kyoto Protocol on climate change. The Bush Administration says it will make mendingtransatlantic relations -- in both NATO and the EU -- a priority in its second term. Nevertheless, a debate is reemerging in policymaking and academic circles on the value andpurpose of the U.S.-European relationship. While many would argue that much still binds the twosides of the Atlantic, others worry that the relationship is in trouble. Some U.S. critics question theextent to which the European allies share U.S. threat perceptions of the challenges posed by Islamistterrorism or the proliferation of weapons of mass destruction (WMD). Even if the allies agree onthe necessity of tackling such problems, U.S. and European tactics are often at odds; Europeangovernments remains firmly wedded to managing international crises through multilateralinstitutions, while the United States views this approach as only one option. The BushAdministration and Members of Congress are also concerned that deficient European militarycapabilities hinder the allies' ability to share the security burden with the United States. Otherssuggest that U.S. actions in the prosecution of the war on terrorism and in Iraq have prompted someto question whether the two sides of the Atlantic still share enough values and interests to make thetransatlantic partnership work. This report assesses the present state of the U.S.-Europeanrelationship and reasons for current frictions, and provides, for the purpose of analysis, a spectrumof options for U.S. policymakers in considering the future shape of the political and strategicdimensions of the transatlantic partnership. Historically, U.S.-European relations have experienced numerous ups and downs. Duringthe Cold War, even with the unifying pressure of a common military threat, transatlantic tensionsflared from time to time over controversial issues such as Vietnam and the stationing of U.S. ballisticmissiles in Europe. Ineffective and tentative international responses to the Balkan conflicts in theearly 1990s prompted serious questioning of NATO's role in the post-Cold War era, and of Europe'sability to manage crises on the European continent. Proponents of the alliance have always stressed,however, the underlying solidity of the transatlantic relationship given its basis in common valuesand shared interests. Thus, conventional wisdom dictates that frictions merely representdisagreements among friends characteristic of U.S.-European "business as usual." Many Europeansacknowledge that criticism of U.S. policies in Iraq and the Middle East has been fierce recently, butclaim that they have only felt free to express their views because U.S.-European relations are soclose, and honesty is a hallmark of true friendship. Even without the Soviet threat to unite the two sides of the Atlantic, the United States andits European allies face a common set of challenges -- from countering terrorism and WMDproliferation to ensuring the stability of the global financial markets -- and have few othercomparable partners. Supporters of strong transatlantic ties argue that neither the United States norEurope can adequately address such diverse concerns alone and that the track record shows that theycan accomplish much more in the world when they work together rather than at cross purposes. U.S.and European forces are promoting peace and stability in the Balkans and Afghanistan. U.S. andEuropean law enforcement authorities have sought to intensify police and judicial cooperation sinceSeptember 11 to root out terrorist cells in Europe and elsewhere. U.S.-European cooperation hasalso been critical in making the world trading system more open and efficient. In addition, proponents stress that the trust and habits of political and military cooperationthat have developed among the allies, and especially within NATO, over the last 50-plus years areunique in international relations and continue to serve U.S. interests. NATO's organizationalstructure provides a forum in which differences among allies can be discussed and narrowed. Thealliance has also fostered a beneficial "Atlantic loyalty," especially in times of extreme adversity, asevidenced by the invocation of NATO's Article 5 defense guarantee after September 11. (3) As noted above, the United States and the EU share a huge and mutually beneficial economicrelationship that is increasingly interdependent. Reports indicate that the transatlantic economyemploys 12 to 14 million workers, and that most U.S. and European investments flow to each otherrather than to lower-wage developing nations. Europe remains the most important foreign sourceof global profits for U.S. companies, accounting for over half of U.S. firms' total annual foreignprofits. Similarly, the United States is the most important market in terms of earnings for manyEuropean multinationals. Between 1990 and 2000, for example, U.S. affiliate income of Europeancompanies increased from $4.4 billion to nearly $26 billion. Although transatlantic mergers andacquisitions have slowed since the 2001 economic downturn, the boom of the late 1990s has leftEuropean firms more engaged in the U.S. economy than ever before. (4) This economicinterdependency, some argue, is a key reason a transatlantic divorce would be impossible. U.S. and European policymakers are keen to stress that working relations between U.S. andEuropean officials remain close, and have not been impeded by the highly charged politicalconfrontations over issues such as Iraq. Some commentators suggest that without the Soviet threat,European allies feel freer to voice more robustly their own views; European officials suggest thatthis simply represents the transatlantic alliance's evolution into a more mature, frank, and openrelationship. U.S. officials also note that some bumps in the relationship are to be expected as theUnited States and the European allies slowly chart new territory in grappling with how to addresssignificant challenges outside of Europe.