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Op-Ed

Role Reversal and Alliance Realities

By Henry A. Kissinger

*Washington Post*, February 10, 2003

*This op-ed was reprinted with the permission of the author.*

The road to Iraqi disarmament has produced the gravest crisis within the Atlantic Alliance since its creation five decades ago. The central issue, bluntly stated, is as follows:

> If the United States yields to the threat of a French veto, or if Iraq, encouraged by the action of our allies, evades the shrinking nonmilitary options still available, the result will be a catastrophe for the Atlantic Alliance and for the international order. If the crisis ends without regime change in Baghdad, if the United States marches 200,000 troops into the region and then marches them back out without having achieved more than a nebulous containment of a regime that has violated U.N. directives for over a decade, the credibility of American power in the war on terrorism and in international affairs will be gravely, perhaps irreparably, impaired.

The governments that have supported or tolerated the American buildup in the region will be jeopardized or driven to look for an exit. If Saddam Hussein's regime continues in power, based on the claim that he has complied with U.N. Resolution 1441 or that no adequate proof of violations exists, the U.N. process will have produced a debacle. Sanctions will be lifted or substantially eased, as they nearly were two years ago. Iraq will then emerge as the richest country in the region, with either caches of undeclared weapons of mass destruction or new ones built with the additional resources freed by the lifting of sanctions.

> But if this is not what France and Germany seek, what is their objective? The satisfaction of an implacable public opinion which their leaders foster rather than try to shape? The thwarting of a powerful ally? A French price to Germany's current self-absorption in exchange for a greater say in European union? The fact that this crisis has broken out at such a late stage in the political process demonstrates an amazing lack of understanding in Europe of American realities. No government exposed to President Bush or his principal advisers after the passage of U.N. Resolution 1441 last November should have doubted that within months it would face an American claim of a material breach and measures to overcome it. Why, then, vote for the first resolution only to threaten to veto its inevitable follow-on? In the end, French realism will not permit France to stand aside while its strongest ally -- which has stood by it through two world wars and the Cold War -- pursues its vital interests with a coalition of the willing.

It cannot be in France's interest to remove all terrorist inhibitions and confirm the fundamentalist view of the West's psychological collapse. Moreover, if France and Germany do not want to abandon their European vocation for the foreseeable future,

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The European countries that have dissociated from their position on Iraq will need to be reckoned with. Indeed, one of the casualties of the current imbroglio may well be the notion that Europe's identity can be achieved by acting as a counterweight to the United States.

But even if France acquiesces in the end -- as is probable -- a legacy of distrust will continue to weigh on Atlantic relations. The necessary reassessment of the existing poisonous atmosphere would do well to learn from history. A generation ago, comparable discord arose, even though the Soviet threat at the time set limits to the implications. The two sides of the Atlantic are repeating a play in which they were principal actors once before and in the same region: the Middle East. Only now the roles are totally reversed.

In the mid-1950s, Britain and France still thought of themselves as major world powers. Britain had special interests in Egypt and the Gulf, France in Syria and Lebanon. Our European allies treated these interests as a flank of the Cold War. As they became increasingly conscious of the lack of resources to sustain that role, they invited America to undertake a joint effort in the Middle East, as it had with respect to Greece and Turkey when Britain was no longer able to hold that line.

But the United States declined to assume the mantle. It was not prepared to associate itself with British and French interests in the Middle East (seen as essentially colonial), much as our European critics now seek to dissociate from the American definition of its interests in the region. And just as today our European critics support the war against terror but insist on fighting it with methods essentially of conciliation, so in the 1950s, the United States sought to serve its Cold War strategy by dissociating from its European allies on regional issues, expecting that post-colonial regimes would then seize the opportunity to join the struggle against Soviet imperialism. It was not to be. The post-colonial radical leaders treated U.S. overtures as helpful assists from a renegade imperialist, very rarely as acts of partnership in the Cold War. Indeed, as the role of Britain and France diminished, the United States increasingly became the target of Middle East radicalism, which viewed Moscow not as a strategic threat but as a useful lever to extract concessions. This trend became particularly pronounced after the Soviet Union jumped over the containment belt along its southern border by selling arms first to Egypt, then throughout the developing world.

The difference in perspective came to a head when, on July 26, 1956, Egypt's President Gamal Abdel Nasser nationalized the Suez Canal. Britain and France considered this a mortal threat to their lifeline to the Middle East -- and to their great power status. They called Nasser's motives comparable to Hitler's and declared that no outcome would be acceptable that would permit a single power to "exploit [the canal] purely for purposes of national policy."

This should have signaled that Britain and France, whose leaders had experienced appeasement as the cardinal sin, were prepared to risk war. But the United States was not, and it treated the British and French warnings as bargaining maneuvers. The Eisenhower administration formally accepted the European objective of an internationally guaranteed use of the Suez Canal. But it rejected the use of force. In such circumstances, diplomats resort to stalling and seek to transform substance into procedure -- as our European critics are now doing in the U.N. Security Council. And Secretary of State John Foster Dulles was a master diplomat. On Aug. 1, 1956, he proposed a maritime conference of 24 principal seafaring nations to devise a system of free navigation through the canal. But he negated the impact of that proposal on Aug. 3 by stating: "We do not want to meet violence with violence." Nasser rejected

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The scheme on Sept. 10. Three days later, Dulles came up with the proposal of a Users' Association to operate the canal and collect revenues by a line of ships just outside Egyptian territorial waters at either end of the canal. Once again, Dulles undercut his own proposal by abjuring the use of force. On Oct. 12 the United Nations adopted a Six Point Plan combining the conclusions of the Maritime Conference and some elements of the Users' Association. It was vetoed by the Soviet Union.

In exasperation and frustration, Britain and France went to war. Planning incompetently, distracted by the simultaneous Soviet suppression of the revolution in Hungary and burdened by bringing in Israel as an ally, Britain and France found themselves confronting an overwhelming U.N. vote of condemnation. The U.N. charge was led by the United States, voting with the Soviet Union against its allies -- for the only time in the Cold War -- and withholding support for European currencies in financial markets.

The analogy thus far stops before a formal allied dissociation from American policy. France and Germany still have the option of permitting themselves to be persuaded by Secretary of State Colin Powell's presentation to the U.N. Security Council or Hans Blix's final report of Feb. 14. In making that decision, America's European critics should remember that none of the hoped-for benign results of America's dissociation from its allies in 1956 were achieved. Nasser showed no gratitude for having been saved by American concern for the nonaligned. Instead he presented the outcome as a personal triumph extorted from a reluctant United States. Pro-Western regimes toppled throughout the Middle East, among them Iraq's, starting a series of ever more radical convulsions in Baghdad.

Within five years, Egyptian troops invaded Yemen. In 1967 Nasser threw off the restraints established in the aftermath of the Suez crisis along the Israeli border and in the Straits of Tiran, unleashing the Six Day War, after which Egypt broke relations with the United States. These were not restored until Anwar Sadat drew the conclusion in 1973 that blackmailing America with Soviet arms was a dead end -- a lesson that should have been taught two decades earlier.

As for the Soviet Union, it interpreted Western divisions during the Suez crisis as an opportunity to exploit allied divisions closer to home. In 1958 Nikita Khrushchev proclaimed an ultimatum ushering in four years of crises over Berlin.

The most profound impact was on the Western alliance, though it took years to work itself out. France's decision to build a national nuclear force either resulted from, or received an enormous impetus from, the crisis in which the United States voted with the Soviet Union and Khrushchev felt free to threaten Britain and France with nuclear weapons. Even German Chancellor Konrad Adenauer, as good a friend as America had in Europe, saw in the Suez crisis the possible precursor of a diplomacy in which Europe would be a bystander unless it organized itself for an independent course. On the day Britain and France accepted the American ultimatum, he said to the French Foreign Minister: There remain to [France and England] only one way of playing a decisive role in the world...We have no time to waste. Europe will be your revenge."

History, of course, never repeats itself precisely. Nasser was no Saddam Hussein; the threat of Third World radicalism backed by Soviet arms was less insidious than contemporary terrorism combined with weapons of mass destruction. But then as now, America's task was to overcome strategic dangers while fostering the aspirations for dignity, equality and progress of the peoples of the region. This goal did not require the humiliation of allies.

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It may be argued that the Suez crisis shows that, over a period of time, containment proved more effective than confrontation. This is belied by the consequences described above. And there was one fundamental difference: In the 1950s, the United States had the option of replacing Britain and France in the search for stability and progress in the region; there is no comparable option for France and Germany if the current crisis ends badly. Radicalism will then reign unchecked.

The main issue then, as now, concerns the nature of alliances, especially when no Soviet threat exists to set limits to allied discord. During the Suez crisis, America put forward three principles: that allied obligations were circumscribed by a precise legal charter; that recourse to force was admissible only in strictly defined self-defense; and that the United States had an opportunity to build relations in the developing world, in effect, at the expense of its allies. These principles are now being applied with a vengeance against America by its European critics.

They were not valid when the Cold War defined certain inescapable necessities. They are dangerous today, when the international system is in revolutionary flux; (ital) Schadenfreude (unital) is not a policy. Alliances do not function because heads of state consult their lawyers; they thrive precisely when they involve moral and emotional commitments beyond legal documents. And alliances whose partners believe they can benefit in the long term from the failures of their allies turn into a contradiction in terms. If the Atlantic Alliance is to remain relevant to the challenges of the new period, its leaders must find a new definition for these imperatives.

(c) 2003, Tribune Media Services International.

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Thursday April 24, 2003

# A global image on the way down

## U.S. is blamed for others' economic and social misery

By **Brian Knowlton/IHT** (International Herald Tribune)

Thursday, December 5, 2002

**WASHINGTON:** The global image of the United States has suffered a dramatic bruising in the past two years, most seriously in Muslim countries but also to a surprising extent among many traditional allies, a major new opinion survey has found. The souring attitudes toward the United States were matched by broad discontent with world economic and social conditions, the survey found.

"Since 2000, favorability ratings for the United States have fallen in 19 of the 27 countries where trend benchmarks are available," said a report from the nonpartisan Pew Research Center which, in association with the International Herald Tribune, surveyed 38,000 people in 44 countries in late summer and early fall.

While majorities in nearly every country supported the U.S.-led war on terrorism, U.S. threats of war against Iraq appear to have heightened concerns, recorded in earlier surveys, about an American foreign policy seen as overly aggressive and insufficiently concerned with the interests of friends and allies.

Andrew Kohut, director of the Pew Research Center, called the breadth of the U.S. image problem surprising, attributing it in part to the United States' status as the world's sole superpower. "When you're the richest guy on the block and the most powerful nation on earth, unchallenged, you don't have the natural coalitions that unite you with your allies against your enemy," he said.

Tensions were arising with allies, he said, because "we don't have a common enemy to bond us together."

Reflecting broad discontent based partly in an unusually synchronous global economic downturn, almost all national publics viewed global fortunes as drifting lower. Respondents in only 7 of 44 countries judged their national economies positively. Public issues of chief global concern, in declining order, were: AIDS and infectious diseases; religious and ethnic hatred; nuclear weapons; the rich-poor gap; and pollution and environmental problems.

Other survey findings point to complicated and often conflicted views of the United States. The downward trend in the U.S. image, fueled by complaints about foreign policy, business practices and a perceived failure to do enough to narrow the global rich-poor gap, was offset somewhat by persisting reserves of goodwill. The United States and its citizens continue to receive overall positive ratings by majorities in 35 of the 42 countries in which the question was asked — and there was a surprising rise in U.S. favorability in Russia. But while many people still admire U.S. technological achievements and cultural exports, majorities in nearly every country said they

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disliked the spread of U.S. influence. Few people, even in close allies like Canada, Mexico, Britain and Germany, expressed a "very favorable" opinion of the United States.

Anti-American sentiment was striking in Egypt, one of the largest recipients of U.S. foreign aid and a country considered pivotal to U.S. policy in the Middle East. The 6 percent of Egyptians with favorable views of the United States were outnumbered more than 11-to-1 by those holding unfavorable views. In Pakistan, which has provided crucial support to the U.S. campaign in Afghanistan, unfavorable views dominated by about 7 to 1.

Reaction to the war on terror or the U.S. threats to Iraq appeared to propel some of the sharpest shifts in opinion of the United States. The U.S. favorability figure in Germany, where the possibility of war on Iraq is so deeply unpopular that it caused testy relations with the Bush administration, dropped from nearly 80 percent two years ago to about 60 percent this year; pressure on Indonesia, a populous Muslim country, to crack down on terrorists may have fueled a 14 percent drop in the U.S. favorability rating. The numbers plunged in Turkey and Pakistan as well.

But in Russia, which has supported the U.S. crackdown on terror and where a close personal friendship has evolved between Presidents Vladimir Putin and George W. Bush, the rise in U.S. favorability rankings has been large, to 61 percent from 37 percent.

Ambivalence to the spread of American culture and values was a recurring theme in the poll. In Canada, for example, 54 percent of those surveyed said the spread of American ideas and customs was bad, to 37 percent who found it good. Yet when asked whether they liked American music, movies and television, more than 3 in 4 Canadians said they did. Similar contradictions prevailed in Britain, Germany, France and other countries. Eight in 10 Americans, meanwhile, said that the spread of U.S. ideas and customs was a good thing. Many people around the world said that the United States did not adequately consider their countries' interests. This was in stark contrast to Americans' solidly held view that the United States does take others' interests into account.

U.S. policy in the Middle East was another factor fueling anti-American sentiment, dramatically in the region but also in Europe. In addition, majorities in most countries say that the United States does too little to solve global problems. Despite widespread reservations about U.S. power and influence, the people of no country said that the emergence of another superpower would make the world safer. Even 53 percent of Russians said that the world was safer with a single superpower.

While many people expressed concerns about the world economy or their national economies, satisfaction with life rose strongly in the past decade through much of Europe, with a rise of 21 points in France, 12 points in Italy and 18 points in the Czech Republic.

Younger East Europeans were particularly upbeat. German correspondents displayed the effects of the huge West German investment into Eastern Germany; there was a 21-point rise (to 36 percent) in life satisfaction in the Eastern region, while satisfaction in Western Germany remained steady at 52 percent — the only European public to show no increase in personal satisfaction since the early 1990s. While Canadians and Americans judged their lives to be better than those of people of major West European nations, the big gap was between people in the West and the rest.

Asians, and particularly Chinese and Indians, were less satisfied with their lives than were Westerners. Yet, the Chinese and the Indians, and many others in Asia, were extremely optimistic about prospects for their children. In Japan, where the economy has struggled for more than a decade, respondents were among the gloomiest of the Asians. Yet, an unusually high proportion of Japanese reported no major personal concerns. The economy surely was a key reason for Argentine pessimism; most said their lives had got worse in recent years; and respondents in Turkey, facing the soaring unemployment rate that contributed to the recent electoral success of an Islamic political party, were among the unhappiest people surveyed.

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While few in the West reported ever doing without the basics of life, Overwhelming majorities in Africa said there had been times in the past year when they had too little money for food, clothing or health care. Majorities in Latin America, Russia and Ukraine also had faced times when they had too little to afford food.

Fifteen percent of Americans said they had been unable to afford food at times in past year — the highest of any advanced economy. But most people in the West expressed positive views of their personal lives. Two-thirds of Canadians and nearly as many Americans gave their current lives the highest rating; smaller majorities in Western Europe did the same.

Outside the West, satisfaction levels were far lower. East Europeans expressed considerable unhappiness with their lives. Only 1 in 5 Russians rated his or her life highly, though younger people were more upbeat.

Fewer than 4 in 10 Africans surveyed rated their lives highly. African countries accounted for 9 of the 11 poorest countries in the survey.

Income alone did not fully explain people's evaluations of their lives. Mexicans and South Koreans expressed roughly the same satisfaction levels as West Europeans did, though per-capita incomes in Europe are much higher.

A tendency emerged for people to be particularly pessimistic about conditions far from their homes. The people of most countries surveyed rated the quality of their own life as much higher than the state of their country, and rated national conditions as better than their assessment of the world.

Perhaps reflecting security concerns around the world, the military emerged as a highly rated institution in most countries; notable exceptions were in Latin American countries with histories of military dictatorships or abuses of power, including Guatemala and Argentina.

Despite displeasure with national and international conditions, few blamed the messengers. Lopsided majorities in almost every country said that news organizations had a beneficial impact on their societies, rating them higher than their national governments. Television was the predominant source of information on national and international affairs cited by nearly all respondents in the 44 countries surveyed.

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# The End of the West

By Charles A. Kupchan

Atlantic Monthly, November 01, 2002

The American era appears to be alive and well. The U.S. economy is more than twice the size of the next biggest-Japan's-and the United States spends more on defense than the world's other major powers combined. China is regularly identified as America's next challenger, but it is decades away from entering the top ranks. The terrorist attacks in New York and Washington certainly punctured the sense of security that arose from the end of the Cold War and the triumph of the West, but they have done little to compromise U.S. hegemony. Indeed, they have reawakened America's appetite for global engagement. At least for the foreseeable future, the United States will continue to enjoy primacy, taking on Islamic terrorism even as it keeps a watchful eye on China.

that encapsulates the conventional wisdom-and it is woefully off the mark. Not only is American primacy far less durable than it appears, but it is already beginning to diminish. And the rising challenger is not China or the Islamic world but the European Union, an emerging polity that is in the process of marshaling the impressive resources and historical ambitions of Europe's separate nation-states.

The EU's annual economic output has reached about $8 trillion, compared with America's $10 trillion, and the euro will soon threaten the dollar's global dominance. Europe is strengthening its collective consciousness and character and forging a clearer sense of interests and values that are quite distinct from those of the United States. The EU's member states are debating the adoption of a Europe-wide constitution (a move favored by two thirds of the union's population), building armed forces capable of operating independently of the U.S. military, and striving to project a single voice in the diplomatic arena. As the EU fortifies its governmental institutions and takes in new members (Poland, Hungary, the Czech Republic, and at least four other countries are expected to join in 2004), it will become a formidable counterweight to the United States on the world stage. The transatlantic rivalry that has already begun will inevitably intensify. Centers of power by their nature compete for position, influence, and prestige.

The coming clash between the United States and the European Union will doubtless bear little resemblance to the all-consuming standoff of the Cold War. Although military confrontation remains a remote prospect, however, U.S.-EU competition will extend far beyond the realm of trade. The U.S. Federal Reserve and the European Central Bank are destined to vie for control of the international monetary system. Washington and Brussels will just as likely lock horns over the Middle East. Europe will resist rather than backstop U.S. leadership, perhaps paralyzing the World Bank, the United Nations, and other institutions that since World War II have relied on transatlantic cooperation to function effectively. An ascendant EU will surely test its muscle against America, especially if the unilateralist bent in U.S. foreign policy

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continues. A once united West appears well on its way to separating into competing halves.

For the moment America remains largely oblivious to the challenges posed by a rising Europe. Policymakers in Washington tend to view the EU as at best an impressive trade bloc, and at worst a collection of feckless allies that regularly complain about America's heavy hand even as they do little to bear the burdens of common defense. Moreover, most American foreign-policy experts presume that were the EU to realize its full potential as a political and economic power, the geopolitical consequences would be minimal: amity among the Atlantic democracies has been a well-entrenched fact of life, an apparently unalterable product of shared history and values. That the EU and the United States might part ways would seem to border on the unthinkable.

These presumptions are dangerous illusions. To be sure, Europe is not a centralized federation, and its integration is proceeding in fits and starts. But political entities that take shape by stitching together previously separate states always emerge tentatively. The United States began as a loose confederation in 1781. After that formula proved too weak to sustain the Union, America opted for a tighter federation in 1789. It then took roughly a hundred years-not to mention a bloody civil war-for the Union to strengthen its governing bodies, nurture a national identity that transcended state loyalties, and project a geopolitical voice beyond its neighborhood. Europe has been working at political union for about five decades-and faces many hurdles in the years ahead. But the EU is already coming of age as a collective force; it is on, if not well ahead of, schedule.

A story also provides ample warning of the trouble likely to accompany a division such as the one that the West is now starting to experience. Consider the fate of the Roman Empire after Diocletian decided, at the end of the third century, to split the realm into eastern and western halves, leading to the establishment of a second capital, in Byzantium-which Constantine elected to rename Constantinople in 324. Despite their shared heritage, Rome and Constantinople became rivals: a common religion fell prey to lasting disputes over authority and doctrine, and imperial unity gave way to bloodshed and the demise of Roman rule.

As Byzantium did with Rome when it separated from its former overseer, the EU is making a run at the United States. And just as the Byzantines and the Romans parted ways over values and interests, so have the Europeans and the Americans. The two sides of the Atlantic follow different social models. Despite recent deregulation across Europe, America's laissez-faire capitalism still contrasts sharply with Europe's more centralized approach. Whereas Americans decry the constraints on growth that stem from the European model, Europeans look askance at America's income inequalities, its consumerism, and its readiness to sacrifice social capital for material gain.

The two have also parted company on matters of statecraft. Americans still live by the rules of realpolitik, viewing military threat, coercion, and war as essential tools of diplomacy. In contrast, Europeans by and large have spent the past fifty years trying to tame international politics, setting aside guns in favor of the rule of law. On July 1, while the EU was celebrating the launch of the International Criminal Court, the Bush Administration was announcing its intention to withdraw U.S. forces from Bosnia unless they were granted immunity from the court's jurisdiction. Europeans see America's reliance on the use of force as simplistic, self-serving, and a product of its excessive power; Americans see the EU's firm commitment to multilateral institutions as naive, self-righteous, and a product of its military weakness.

Americans and Europeans still enjoy an affinity arising from historical ties and

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democratic traditions. But even this is wearing thin. As a multi-ethnic immigrant nation, America has begun to wonder about a Europe that remains hostile to immigrants despite its shrinking population, and that falls prey to bouts of intolerance and anti-Semitism. Europeans, in turn, take a dim view of an America wedded to gun ownership and capital punishment. At root, America and Europe are driven by different political cultures. And the cultural distance appears to be widening, not closing, putting the two sides of the Atlantic on diverging social paths.

As the EU continues to rise, its economic and political interests are likely to collide frequently with those of the United States, intensifying the ill will. Airbus recently surpassed Boeing as the world's leading supplier of commercial aircraft, and Nokia is the top producer of cell phones; they are only two of many European companies that are now besting their U.S. competitors. In 2000 Britain and France each ranked ahead of the United States in the value of corporate international acquisitions. German companies have been expanding as well; in 1998 Bertelsmann bought Random House and Daimler-Benz bought Chrysler. Much of the investment capital that buoyed the U.S. economy in the 1990s has lately been heading to the other side of the Atlantic, enabling the euro to gain ground against the dollar and increasing the likelihood that the EU will soon enjoy substantial increases in productivity and growth.

These economic successes are impressive in their own right, but there is more to them than meets the eye. From the outset European economic integration has been a daring experiment aimed at politically binding together the Continent's long-warring nations. And the intended effects are now visible. Driving across the border from Germany to France is like driving from Virginia to Maryland: no passport control, no customs, no currency exchange. The EU in 1999 appointed its first foreign-policy chief, who has been busy overseeing the creation of the union's new military forces even as he pursues diplomatic agendas in the Balkans, the Middle East, and other trouble spots. And the union decided earlier this year to construct its own satellite network, called Galileo-a move that will reduce European reliance on U.S. technology. All these initiatives enjoy strong public support, with more than 70 percent of Europe's citizens favoring, for example, a single security policy for the EU as a whole.

Even if the EU makes good on its military plans, its defense capabilities will admittedly be modest compared with those of the United States. Its members are uninterested in projecting military power globally (not least for the costs associated with doing so). Accordingly, a division of labor is emerging, in which the EU manages Europe's security while U.S. forces focus on the rest of the world. This is not a recipe for a face-off between titans, but it does spell the end of Europe's deference to its American protector and the potential unraveling of NATO.

Britain's decision to enhance its leadership role in Europe is moving the EU more quickly toward self-reliance. London for years kept its distance from the Continent, but Prime Minister Tony Blair has altered course, orchestrating the EU's push on the defense front and working to take his country into the euro zone. "We must be wholehearted, not halfhearted, partners in Europe," Blair told Britons late last year, warning them that "Britain has no economic future outside Europe." Similarly, Germany's growing comfort with leadership is strengthening the union's political will. part of its postwar policy of reassurance and reconciliation, Bonn for decades dreaded lightly on diplomacy and defense. Since 1999, however, when the seat of government moved back to Berlin, symbolizing a renewed self-confidence, Germany has been actively guiding the EU's evolution, marking out a pathway for building a federal Europe.

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This new enthusiasm for Europe's collective enterprise is partly a product of domestic politics. For most of the postwar era, politicians sold integration to their constituents by arguing that it offered the only way for Europe to escape its bloody past. But the younger generation of Europeans has lived through neither World War II nor the Cold War, and therefore has no past from which to escape. As a result, a new political discourse is emerging-one that sees integration as a vehicle for enhancing Europe's power and achieving, rather than checking, international ambitions.

The French used to be alone in looking to the EU as a counterpoise to America, but the other members have now joined in. Tony Blair has asserted, "Whatever its origin, Europe today is no longer just about peace. It is about projecting collective power." Germany's Chancellor Gerhard Schröder called for a "more integrated and enlarged Europe" to offset U.S. hegemony. According to Romano Prodi, the President of the European Commission, the EU's executive body, one of the chief goals of the union is to create "a superpower on the European continent that stands equal to the United States." Gårdán Persson, the Prime Minister of Sweden, a country that long ago renounced power politics, recently remarked that the EU is "one of the few institutions we can develop as a balance to U.S. world domination."

The Bush Administration, like the Clinton Administration before it, has been none too pleased about Europe's growing assertiveness, but Washington's dismissive attitude toward the EU up to now has only strengthened Europe's resolve. Bush's penchant for unilateralism, in particular, has provoked European pique. As Bush backs away from the Kyoto Protocol on global warming, withdraws from the Anti-Ballistic Missile Treaty, and distances the United States from a host of multilateral institutions, Europe grows ever more convinced that it must both challenge America and chart its own course.

After September 11 Europeans hoped that an America confronted with the threat of terrorism might rediscover the virtues of multilateralism. But soon Bush was unilaterally declaring Iraq, Iran, and North Korea an "axis of evil" and indicating that he intended to topple Saddam Hussein with or without the approval of U.S. allies. Germany's Foreign Minister Joschka Fischer then cautioned Washington that "alliance partners are not satellites." The *Berliner Zeitung* lamented that far from renouncing its go-it-alone ways, the United States had "used the opportunity to strengthen its selfish superpower position." "Never has a president of the United States been so foreign to us," the newspaper proclaimed in an editorial, "and never have German citizens been so skeptical about the policies of their most powerful of allies." With America and Europe squabbling over the sources of terrorism as well as how best to fight it, this new threat promises to exacerbate rather than repair the widening transatlantic divide.

The consequences of the growing rift between the United States and Europe are only just becoming apparent. The two sharply disagree on the Middle East: the EU opposes both America's steady support of Israel and its insistence on isolating, rather than engaging, Iraq and Iran. Trade disputes are heating up, especially over steel and agriculture. Despite America's defection from the Kyoto Protocol, the EU moved forward with more than a hundred countries participating, leaving Washington a lonely and, from all appearances, an environmentally irresponsible bystander. Last year EU member states took the lead in voting the United States off two UN commissions-payback for America's unilateral ways.

As Europe increasingly holds its own and the United States continues to shrug off compromise, the international institutions that have helped to promote peace and prosperity since World War II will inevitably falter. As the EU enlarges eastward, it

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will come to dominate the geopolitics of Eurasia, gradually replacing America as the arbiter of the globe's strategic heartland. As capital flows to Europe and a rising euro competes with the dollar as a reserve currency, the monetary stability of recent decades will give way to a self-interested jockeying more reminiscent of the 1930s. The order that has come with a single captain at the helm will be no more.

History is coming full circle. After breaking away from the British Empire, the United States came together as a unitary federation, emerged as a leading nation, and eventually eclipsed Europe's Great Powers. It is now Europe's turn to ascend and break away from an America that refuses to surrender its privileges of primacy.

Europe will inevitably rise up as America's principal competitor. Should Washington and Brussels begin to recognize the dangers of the growing gulf between them, they may be able to contain their budding rivalry. Should they fail, however, to prepare for life after Pax Americana, they will ensure that the coming clash of civilizations will be not between the West and the rest but within a West divided against itself.

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Op-Ed

# The Last Days of the Atlantic Alliance

By Charles A. Kupchan

*Financial Times*, November 18, 2002

At the Prague summit this week, Nato members intend to invite as many as seven central European countries to join. The entry of Estonia, Latvia, Lithuania, Slovakia, Slovenia, Romania, and Bulgaria is a logical next step in the continuing enlargement of Nato, a process that is helping to consolidate the eastward spread of a democratic and peaceful Europe.

The incorporation into Nato of countries that long suffered under communist rule symbolises their entry into the west - the main reason they have pressed so hard for membership. But ironically and, for these prospective members, unfortunately, they will be entering a western alliance that is soon to be defunct. By the time the new entrants show up at the welcoming ceremony, Nato's lights will be flickering, leaving up to the European Union to take command of Europe's security. The Atlantic alliance will almost surely be around for the better part of this decade - at least in name. But its founder and primary patron, the US, is losing interest in Nato. The result is a military pact that is hollowing out and of diminishing geopolitical relevance. Prior to the last round of Nato enlargement, which extended membership to Poland, Hungary, and the Czech Republic, Washington was abuzz with debate. In the weeks leading up to the approaching Prague summit, there has been a deafening silence in the US; nobody seems to care.

Three potent trends are at work.

First, Europe's own success obviates the need for its American guardian. The EU's aggregate wealth approaches that of the US; Europe is strengthening its collective character as it prepares for its own eastward enlargement; and a democratising Russia, rather than threatening Europe, hopes to one day enter its ranks. Under these circumstances, the Atlantic alliance has lost its raison d'etre.

Second, the two sides of the Atlantic are drifting apart politically. The Bush administration's unilateralism has done an excellent job of provoking Europe's pique, making many Europeans less accepting of the US's heavy hand. The Bush administration has in turn been angered by European criticism, especially by the anti-American rhetoric that emerged amid the German election last September. A combination of Europe's military weakness and its carping has left the Bush team viewing Europe as more of a nuisance than a partner.

Third, US priorities are shifting away from Europe. The US faces pressing strategic challenges in other quarters of the globe, with the struggle against terrorism now added to an already long list of onerous commitments in east Asia and the Middle East. The Bush administration is justifiably directing America's attention and resources to these regions. The war in Afghanistan has already diverted significant

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US capabilities from south-east Europe to south-west Asia. The impending war against Iraq will further distract America from its European calling.

In an effort to salvage Nato's relevance, Washington recently proposed the creation of a Nato response force capable of rapid deployment well beyond alliance boundaries. But turning Nato into a global strike force is a non-starter. The limited size of the proposed unit - 20,000 troops - minimises its significance. As Washington made clear in refusing European help during the main phase of the war in Afghanistan, it does not welcome the constraints of coalition warfare. And EU members are struggling to come up with sufficient forces to handle conflicts in their own backyard; they are neither capable of, nor interested in, new commitments in distant lands.

The US and Europe are thus parting ways, bringing to an end their close strategic partnership. As America decamps from the Continent, Europe's security order will become much more European and much less Atlantic. The central European countries soon to join Nato are doing so primarily to get America but, like it or not, they will get Europe instead.

The EU must now ready itself to shoulder more responsibility for its own defence. Most EU members have been happy to support the union's decision to form a rapid reaction force, but few have followed through with defence reforms and increased spending. That must change, and the EU must strengthen its ability to formulate and implement a common foreign and security policy. Similarly, the EU's prospective members in central Europe must realise that their future security, as well as their economic well being, rests with the EU. Accordingly, they should get behind the union's push on the defence front, instead of quietly resisting the EU's efforts in the hope of keeping Nato in the lead.

Pronouncements emanating from Prague this week will no doubt affirm that the Atlantic alliance is in the midst of rejuvenation. At best, however, the gathering will merely postpone Nato's inevitable demise.

The writer is a professor of international affairs at Georgetown University and senior fellow at the Council on Foreign Relations. He is the author of "The End of the American Era"

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Op-Ed

# The Atlantic Alliance Lies in the Rubble

By Charles A. Kupchan

*Financial Times*, April 10, 2003

Now that the war in Iraq appears to be close to its end, Americans and Europeans will inevitably begin asking how to repair the transatlantic bond. They need not bother. The diplomatic divide that has opened between the US and continental Europe is bringing the Atlantic alliance to a definitive end.

Even before the outbreak of war, the anguished stand-off at the United Nations Security Council made it amply evident that European and American security are no longer indivisible. By steadfastly opposing the US, France, Germany and Russia revealed that they are ready for a Europe without its American pacifier. Having already made clear that shifting priorities necessitate a diminished US presence in Europe, Washington is sure to oblige, casting aside the western alliance in spirit, if not also in fact.

The central question facing US and European policy makers is thus not how to repair the transatlantic relationship but whether the end of alliance will take the form of an amicable separation or a nasty divorce. The former is far preferable in that it keeps open the possibility of revived co-operation down the road, but it will take a great deal of hard work by Americans and Europeans alike.

For its part, George W. Bush's administration will have to realise that the guiding principles of its foreign policy have put Washington on a collision course with Europe. Those principles must now change if there is to be any hope of post-war rapprochement across the Atlantic. In particular, the administration must redress three miscalculations about the use of US power.

First, Washington has operated under the assumption that the more powerful the US is, and the more uncompromising its leadership, the more readily the rest of the world will get in line. But the opposite has transpired. Mr Bush's swagger may appear determined at home, but in Europe and the rest of the world it smacks of arrogance. Far from evoking deference, the US policy of pre-emption and pre-eminence is inviting European resentment and resistance.

The second misconception is that a country as strong as the US does not need international institutions; they only constrain America's room for manoeuvre. Mr Bush is right that institutions contain US power, but that is precisely why they are so integral to international stability. By obliging Washington to adhere to common rules, they increase confidence in the purpose and predictability of US power. When Washington walks away from international institutions, the rest of the world runs for cover.

Third, Mr Bush has vastly overestimated the autonomy that comes with military

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supremacy. The administration has been dismissive of allies because it feels it does not need them. Washington should look again. The war on terrorism requires extensive international co-operation. Afghanistan is being held together by a broad multinational coalition. Although France, Germany and Russia could not stop the war against Iraq, they ultimately denied Washington the legitimacy of UN backing, making the war in Iraq an especially risky gamble.

These strategic misconceptions are continuing to tear down what little remains of the Atlantic community. Before it is too late, Washington must rediscover the principles of restraint, multilateralism and alliance. Otherwise, estranged allies will become outright adversaries, and Europe will have no reason even to contemplate working on its end of a new bargain.

For its part, Europe must redouble efforts to build a union capable of acting collectively on the international stage. The European Union is currently in a no-man's-land. It is too strong to be Washington's lackey, but too weak and divided to be either an effective partner or a formidable counterweight.

Although debate over Iraq has unquestionably weakened European unity, the current crisis does have the potential to be a turning point. Preserving the Atlantic link has been one of the key motivations inducing Britain, Spain and most central European countries to side with the Bush administration. But now that the Atlantic alliance is expiring, an Atlanticist Europe is no longer an option.

France and Germany have realised as much - one of the main reasons they are discussing with Belgium deeper defence co-operation. The Poles have yet to give up hope of a strong Nato, but they can ignore reality for only so long; Warsaw and other like-minded capitals will soon realise that they have no choice but to settle for a strong EU. The sooner that current and prospective EU members face up to the fact that the US is in the midst of decamping from Europe - for good - the sooner they will begin throwing their weight behind a more effective and collective union.

The Atlantic alliance now lies in the rubble of Baghdad. Perhaps that sad truth will awaken US leaders to their strategic mis-steps, and at the same time impress on Europe's leaders the urgent need for a deeper union.

If so, the seeds of a more mature and balanced Atlantic order may also lie in Baghdad's ruins.

The writer is a professor of international affairs at Georgetown University and a senior fellow at the Council on Foreign Relations. He is author of "The End of the American Era"

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THIS IS A BORZOI BOOK
PUBLISHED BY ALFRED A. KNOPF

Copyright © 2002 by Charles A. Kupchan

All rights reserved under International and Pan-American Copyright
Conventions. Published in the United States by Alfred A. Knopf,
a division of Random House, Inc., New York, and simultaneously
in Canada by Random House of Canada Limited, Toronto.

Distributed by Random House, Inc., New York.

www.aaknopf.com

Grateful acknowledgment is made to Princeton University Press to reproduce figures on pages 91 and 92 from Shiller, Robert J.

*Irrational Exuberance*. Copyright © 2000 by Princeton University Press. Reprinted by permission of Princeton University Press.

Knopf, Borzoi Books, and the colophon are registered
trademarks of Random House, Inc.

Library of Congress Cataloging-in-Publication Data
Kupchan, Charles.

The end of the American era : U.S. foreign policy and the geopolitics
of the twenty-first century / Charles A. Kupchan. — 1st ed.

p. cm.

Includes bibliographical references and index.

ISBN 0-375-41215-8 (alk. paper)

1. United States Foreign relations. 2. United States — Foreign relations—1989— 1. Title.

JZ1480 .87 2002

327.75—dc21

2002018443

Manufactured in the United States of America
First Edition

To my family

centrist, moderate, and levelheaded than states controlled by a single individual or an authoritarian ruling group whose pathologies are likely to go unchecked. And it makes sense that open, transparent politics should be able to build closer ties with each other than closed, opaque ones.

The problem is that the peace-causing effects of democracy may not be able to prevail over trends pushing the international system in the other direction. Nationalism could counter, if not overwhelm, a democratic peace, as could the changing structure of the international system and the tectonic geopolitical forces that these changes generate. The return of multipolarity promises to stir up competitive instincts that may well make short shrift of democracy's benign effects. At a minimum, we cannot afford to be confident that the spread of democratic governance will serve as a sufficient antidote to the geopolitical tensions brought on by the end of America's unipolar moment.

## CHAPTER FOUR

# The Rise of Europe

THE CLAIM THAT EUROPE is an emerging pole and that its rise will hasten the end of America's unipolar moment rests on two main propositions, both of which cut against the grain of conventional wisdom. The first concerns the pathways through which shifts in the global distribution of power take place. Most scholars view uneven rates of economic growth as the main engine behind international change. Centers of innovation and productivity move from one locale to another, eventually enabling a nimble newcomer to overtake a tiring hegemon.¹

This account, however, fails to capture the main source of change in today's setting. Europe will soon catch up with America not because of a superior economy or technological base, but because it is coming together, amassing the impressive resources and intellectual capital already possessed by its constituent states. Europe's political union is in the midst of altering the global landscape.

The second proposition challenging conventional wisdom concerns the implications of Europe's rise for its relations with America. For most policy-makers and scholars alike, amity among the Atlantic democracies is a fact of life, an unalterable product of their common history and values. That the EU and the United States might part ways borders on the unthinkable.²

This book takes a different tack. Throughout the Cold War, the United States and Europe effectively constituted a single pole—the West. Shared values no doubt contributed to the strength of this political community. But Europe and America have been fast friends for the past five decades in part because the Europeans have had no choice. They needed America's help to hold off the Soviet Union. And

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the scope of U.S. predominance ensured they followed Washington's lead. Now that the asymmetry between the United States and Europe is closing, such harmony cannot be taken for granted. A single pole is gradually separating into two. North America and Europe are likely to engage in the competition over status, wealth, and power that has been—and remains—so much a part of the human experience.

Before examining the EU's emergence as a counterweight to America, we again look to history for guidance. To illuminate the profound effect processes of integration and amalgamation can have on the balance of power, we turn to the unification of Germany during the nineteenth century. After Count Otto von Bismarck joined most German-speaking lands in Central Europe into a single country, the new Germany enjoyed several decades of impressive economic growth, soon followed by a steady rise in its military might and ambition. The unification of Germany irretrievably altered Europe's geopolitics, setting the stage for a new round of rivalry that eventually encompassed the world. Europe as a whole is now engaged in a process of integration and amalgamation that may have similarly profound consequences.

To shed light on what may transpire when a single pole separates into competitive halves, we turn to the Roman Empire. During the third century, the Emperor Diocletian decided to divide the empire into western and eastern realms to facilitate the tasks of administration and defense. Rome remained the capital of the western half, while Constantinople (formerly Byzantium) emerged as its counterpart in the east. Although this administrative innovation initially consolidated imperial rule, Rome and Constantinople soon clashed over matters of security, status, and religion. Despite their common culture and heritage, the Western and Eastern Empires became distinct competitors. The replacement of one pole with two as a matter of course replaced hierarchy and order with mounting geopolitical rivalry. Rome's fate does not augur well for a unitary West that is in the midst of separating into distinct North American and European power centers.

## THE PAST

THE UNIFICATION OF GERMANY in 1871 joined together communities that had for centuries been independent fiefdoms, principalities, and dukedoms. Austria was the only sizable German-speaking polity

The Rise of Europe

missing from the new amalgam. And that was no accident. Prussia and Austria had long been rivals. In addition, Otto von Bismarck, the minister president of Prussia, was relying on an anti-Austrian policy to disarm his opponents in parliament. In his typically blunt formulation, "The Viennese policy being what it is, Germany is too small for the two of us." Under Bismarck's guidance, the unification of Germany was coming to mean the exclusion of Austria.³

The establishment of a unified Germany, even without Austria as a part, was to alter the geopolitical map of Europe. Prussia under the capable and ambitious leadership of Bismarck had won three wars in its bid to unify Germany—against Denmark in 1864, Austria in 1866, and France in 1870–1871. Victory in the Franco-Prussian War and the population and resources thereafter at the disposal of the new state confirmed that Germany had overshadowed all challengers, including France, as continental Europe's dominant nation. The force that Prussia fielded in 1870 was roughly twice the size of what France was able to muster; French defenses crumbled quickly. At its founding, Germany's population was already larger than that of France and its population growth rate much higher. By 1915, the German population stood at 70 million, the French at 40 million. Add German discipline and the abundant industrial resources of the Ruhr region, and it was clear that a behemoth had arrived.

German unification dealt France the most immediate blow—defeat and humiliation at the hands of Prussia—but the implications for Britain were also ominous. A unified Germany and its consequent ascent spelled the end of Britain's hegemony and would eventually make obsolete its grand strategy of coupling global naval mastery with the avoidance of major military commitments on the European continent. Britain never dominated Europe as did Rome. But not doing so was the genius of its grand strategy. Britain intervened on the Continent only as needed to maintain a stable balance. With potential rivals thus keeping one another in check, Britain was free to focus on developing and safeguarding its overseas empire.

Not so after German unification. A federated German Reich was officially proclaimed on January 18, 1871, by way of a pompous ceremony in the Galerie des Glaces in Versailles presided over by Kaiser Wilhelm I. British leaders immediately recognized the implications. Only three weeks later, Benjamin Disraeli, the Conservative leader who would soon become prime minister, told the House of Commons that the unification of Germany "represents the German Revolution,

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a greater political event than the French Revolution of the last century. There is not a diplomatic tradition which has not been swept away. We used to have discussions in this House about the balance of power... but what has really come to pass in Europe? The balance of power has been entirely destroyed."⁴ The uniting of the German people into a single state, Disraeli feared, would irreversibly upset the European equilibrium, eroding for good the foundation of Britain's grand strategy and setting the stage for the demise of its global dominion.

Disraeli was all too accurate in his predictions. During the three decades following unification, the German economy enjoyed steady growth. Technological innovations gave dramatic boosts to heavy industry. Germany rapidly caught up with and then surpassed Britain in key areas of industrial production such as steel and pig iron. A new industrial and financial elite emerged, which, by allying itself with the traditional landed aristocracy, wielded mounting influence. This alliance between "iron and rye" served as Bismarck's main political base and helped him counter the strength of the rising working class.

Due largely to Bismarck's astute diplomacy, Germany's economic accomplishments did not immediately upset Europe's geopolitical equilibrium. Bismarck avoided any rapid or substantial buildup of the navy and army. Although German traders eventually left him little choice but to take on overseas territories, he initially opposed the acquisition of colonies, concerned that it would alienate Britain and France. And he set up an elaborate system of agreements and alliances that made Germany the diplomatic pivot of Europe. Bismarck shrewdly maximized German influence. But he was always ready to pull in the reins just before Germany's newfound ambition would set off strategic rivalry. Bismarck manipulated the European balance, but he stopped short of overturning it.

After 1890, Germany was governed by less able individuals. They also faced greater political challenges at home. The Social Democrats were on the rise at the same time that the alliance between iron and rye was coming apart. German industry was booming and no longer needed protective tariffs. German farmers meanwhile were pressing for protection against imports of Russian and American grain.

The impetuous Kaiser Wilhelm II, backed by his foreign minister Bernhard von Bülow (who was soon to become chancellor) and his naval chief Alfred Tirpitz, turned to nationalism to unite the country. Germany, its leaders proclaimed, deserved a level of international

influence commensurate with its economic might. The country would be able to fulfill its new calling only if it had the necessary tools, including a high-seas fleet. Armed with nationalist fervor and the First Naval Law of 1898, Germany embarked upon its new quest. The industrialists welcomed the lucrative orders for their steel mills and shipyards. The landed gentry were rewarded with grain tariffs for supporting the naval buildup. And the rising voice of the Social Democrats was neutralized, at least temporarily, by the unifying cause of national greatness.

The deft use of foreign policy as a tool of domestic politics, however, came at great cost to European peace. With Germany's decision to translate its economic capability into military might, the count-down to World War I began. As Disraeli had predicted, a stable balance quickly gave way to rivalry and rearmament. Carried along by strong currents of nationalism, Germany's military buildup proved unstoppable. Not even a coalition of Russia, France, and Britain was able to deter Berlin from its bid to dominate Europe. Despite intelligence reports suggesting that Germany did not have the where-withal to prevail against this troika, the kaiser and his confidants headed steadily toward war. In 1913, as all parties proceeded with full-scale rearmament, the chancellor, Theobald von Bethmann-Hollweg, warned a Reichstag charged with war fever, "Woe be to him whose retreat is not well-prepared."⁵ When it became clear that Germany was on an irreversible path, Bethmann uttered with resignation that the country was taking "a leap in the dark."⁶

Germany's defeat in World War I restored only temporarily Europe's equilibrium. The Versailles Treaty exacted painful war reparations, demilitarized the Rhineland, and put a cap on the size of Germany's army. But after Adolf Hitler took office in 1933, Germany rode roughshod over its international obligations and began yet another bid for continental hegemony. Fueled by a more twisted and potent brand of nationalism, a unified Germany on this second attempt at dominating Europe came perilously close to overrunning its neighbors to the west and east. Were it not for Hitler's excessive ambition—his decision to open a second front against Russia in 1941 stretched German resources too thin—and America's eventual willingness to help stop the Nazi war machine, Germany may well have gained lasting control of Western and Central Europe.

Scarred by the two world wars, Germany's neighbors were not about to let history repeat itself. At the close of World War II, the

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spent but victorious Allies occupied Germany and divided the country into administrative units, ensuring its unified strength could not again plunge Europe into war. Once the Cold War set in, Germany was formally separated into two countries, with the western half joining NATO and the eastern half the Warsaw Pact. The Allies soon permitted West Germany to rearm and rebuild its economy to help counter the Soviet threat. But the return of German power was tolerated only within the binding context of NATO and the European Community. Under no circumstances would America and its allies again allow Germany to pursue its own path.

When the fall of the Berlin Wall raised the prospect of the reunification of Germany, most of Europe recoiled at the thought. In recalling her discussions with French President François Mitterrand, British Prime Minister Margaret Thatcher captured the dominant sentiments of the moment: "I produced from my handbag a map showing the various configurations of Germany in the past, which were not altogether reassuring about the future. We talked through what precisely we might do. . . . [Mitterrand] said that at moments of great danger in the past France had always established special relations with Britain and he felt such a time had come again. We must draw together and stay in touch. It seemed to me that although we had not discovered the means, at least we both had the will to check the German juggernaut. That was a start."⁷

Despite the widespread reservations among Germany's neighbors, reunification ultimately proved unavoidable due to the political momentum behind it in Germany. Fortunately for Europe and the rest of the world, this second coming together of a single German nation-state did not expose the frightful geopolitical fault line that it did last time. Instead, Germany's resources and ambition have been merged with the resources and ambition of Europe and the enterprise of European integration.

The integration of Europe's individual nation-states into a collective whole has provided an antidote to the destructive rivalry that for centuries was the inevitable by-product of Europe's multipolarity. France and Germany, rather than vying for supremacy, have formed a close partnership and now serve together as Europe's anchor. Brussels has become the collective capital, in symbolic and practical terms diminishing the authority of the individual national governments. Europe's smaller countries have arrayed themselves around this benign core, with overlapping economic, political, and social networks

binding core and periphery together. The Continent's new democracies are waiting impatiently to join the club. Through the European Union, Europe has finally found a way of safely accommodating a unified Germany.

What is good for Europe, however, may not necessarily be good for everyone else. Collective will and centralized authority promote internal stability, but they also encourage external ambition. An integrated and prosperous Europe may have solved the German question, but it could well emerge as a formidable entity on a new geopolitical map of the world.

IN THE NINETEENTH CENTURY, Europe's geopolitics underwent a profound revolution. The agent of change was the integration of individual entities into a unitary state, creating a Germany that overturned the Continent's stable balance. Europe today is unifying, just as Germany did more than a century ago. The EU is not likely to become a single state—at least not anytime soon. But the economic, military, and geopolitical weight of its individual countries has to be assessed in the aggregate, even if then discounted because its integration is still under way. Although a work in progress, Europe's unification has already begun to transform the international system.

To examine how the rise of the EU is likely to affect its relationship with the United States, the past again provides useful clues. During the fourth century, Europe underwent a revolution as significant as that of the nineteenth century. Except the agent of change was the reverse—the division of a unipolar Roman empire into two entities rather than the merging of individual German polities into a unitary whole. The split of a single imperial realm into separate halves had ominous consequences for Roman rule. The peace sustained by unipolarity quickly gave way to the rivalry brought on by competition for primacy among dueling centers of power.

By the first century A.D., the borders of the Roman Empire stretched west to Spain and the British Isles, north to Belgium and the Rhineland, south to North Africa and Egypt, and east to the Arabian peninsula. Rome was to control much of this territory for the next three hundred years. A hub-spoke pattern of rule provided the foundation for an imperial realm of such scope and longevity. Rome extended its reach over the periphery through overlapping sources of control. The Romans made significant improvements in roadway con-

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struction, warfare, and shipbuilding, facilitating the flow of political influence and resources between the imperial center and its distant limbs. They introduced an advanced system of governance that fostered the "Romanization" of new subjects. Small groups of Romans were sent to live in imperial territories to help assimilate conquered peoples and encourage them to take on a Roman identity and way of life. The goal was to cultivate allegiance toward, rather than resentment of, Roman rule; assimilation was a much cheaper and more effective way to extend control than was coercion.

Rome was similarly thrifty in its military strategy. The well-trained legions were kept in reserve and deployed only as needed to put down uprisings or repel invaders. This system provided effective deterrence; the mere prospect of facing the legions was enough to dissuade many potential challengers from attacking.⁸ Like America today, Rome enjoyed uncontested primacy and the deference that came with it.

By the third century, Rome was beginning to feel the strain of keeping together such a large imperial zone. The empire's frontiers could no longer be guaranteed against contenders growing in both number and strength. Germanic tribes threatened in the west. Persians and nomads from the Black Sea region pressed in the east. Ammianus Marcellinus, a historian of the late Roman period, made clear that the barbarian tribes, despite their primitive weaponry and organization, posed a significant threat:

> Being lightly equipped and very sudden in their movements they can deliberately scatter and gallop about at random, inflicting tremendous slaughter; their extreme nimbleness enables them to force a rampart or pillage an enemy's camp before one catches sight of them.... You cannot make a truce with them, because they are quite unreliable and easily swayed by any breath of rumor which promises advantage; like unreasoning beasts they are entirely at the mercy of the maddest impulses. They are totally ignorant of the distinction between right and wrong, their speech is shifty and obscure, and they are under no restraint from religion or superstition.⁹

The frequency and intensity of barbarian attacks compelled Rome to change its military strategy. With simultaneous threats emerging on the perimeter, the legions had to be dispatched to the frontier.

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Their deployment, however, put an extraordinary strain on troop levels and imperial coffers. Even worse, with the legions no longer held in reserve, but instead stretched precariously thin, they could no longer deter adversaries through intimidation. Attacks on one part of the frontier therefore invited secondary attacks elsewhere. The empire also began to face threats from within. Some of the larger provinces had amassed considerable wealth and were seeking to distance themselves from Rome.

Enter Diocletian, who became emperor in 284, and his bold and innovative solution to the problem of imperial overstretch. The task of managing the empire, Diocletian reasoned, had grown too onerous for a single ruler. Better to divide up the realm and devolve responsibility for its several parts to trusted colleagues. He accordingly elevated one of his generals, Maximian, to the rank of coemperor. Diocletian and Maximian each named a junior emperor, known as a Caesar, who would help run the empire and be in line to succeed his Augustus (supreme emperor). The realm was then effectively divided into two halves, and each half again divided between the Augustus and his Caesar. Diocletian ruled the Eastern Empire with the assistance of his junior counterpart, while Maximian and his Caesar ruled the west. Diocletian also divided the larger, wealthier provinces into smaller units, disarming the threat they posed to the authority of the Augusti. These reforms proved effective in shoring up the security of the realm and enabling both the western and eastern portions of the empire to turn back the barbarian threat.

Diocletian and Maximian stepped down in 305, smoothly handing over control to their Caesars—Constantius in the west and Galerius in the east. But once Diocletian and the authority he wielded were gone, fierce jockeying ensued among would-be Augusti and Caesars, with their supporters taking up arms against each other. Constantine, the son of Constantius, was by 313 able to prevail in the west and took the title of Augustus. Licinius, an ally of Galerius, was meanwhile able to triumph in the east.

Constantine was not satisfied with control of only the Western Empire, and soon took it upon himself to restore the unity of the imperial realm. He eventually did so by defeating Licinius at Chrysopolis in 324. Constantine then made two decisions that altered the course of history. First, he established a new capital for the empire as a whole at Byzantium, changing its name to Constantinople. Strategically situated on the Bosphorus, where Europe ends and Asia begins,

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Constantinople enabled Constantine to solidify his control over the eastern reaches of the empire and to deal more effectively with invaders on the eastern frontier. Second, Constantine converted to Christianity, setting the stage for its establishment as the official religion of the realm. He also became a strict enforcer of Christian doctrine, even ordering that his son, Crispus, be executed for adultery.

The restoration of imperial unity was short-lived. When Constantine died in 337, the empire was redivided between his sons. Competition between the western and eastern halves again kicked in, especially because Rome¹⁰ and Constantinople emerged as separate capitals, each seeking to extend the influence and enhance the prestige of its court. The replacement of one political center with two had been formalized. The papacy in Rome and the patriarchate in Constantinople soon joined the fray, entering battle over doctrinal questions and differing as to whether religious authorities in Constantinople were of equal status to their counterparts in Rome. Disputes over language and culture followed; the Western "Roman" Empire was based on Latin culture and language, the Eastern "Byzantine" Empire, on Greek. "New Rome" and "Old Rome" also competed over the style and grandeur of their architecture. The Western and Eastern Empires were becoming distinct political and cultural entities.

Although Diocletian's reforms in the short term facilitated the management and defense of the empire, they thus had quite adverse consequences. The split of the imperial realm, rather than promoting unity, almost immediately led to rivalry between the eastern and western halves. Gibbon notes that "this dangerous novelty impaired the strength, and fomented the vices, of a double reign."¹¹ The division of the empire also quickened rather than slowed the drain on military resources, with each Augustus and Caesar wanting a loyal army. As Lactantius, a religious scholar of the time, put it, Diocletian "appointed three men to share his rule, dividing the empire into four parts and multiplying the armies, since each of the four strove to have a far larger number of troops than previous emperors had had when they were governing the state alone."¹²

The order that unipolarity had provided was gone for good. The Roman Empire was already experiencing a rapid decline before Diocletian's time; the worsening state of affairs had inspired his reforms. But with authority and resources now divided between east and west, the pace of decline quickened. The Western Empire maintained its

integrity only until the death of Theodosius the Great in 395. Thereafter, much of its territory was overrun by Germanic tribes and other challengers. Rome itself was sacked by Goths in 410 and then invaded and plundered by Vandals in 455. Twenty years later, the last Roman emperor, Romulus Augustulus, ended his reign and left Italy in the hands of tribal leaders.

During the Western Empire's decline, Constantinople generally sought to exploit its weakness. Eastern emperors were at times tempted to seek the reunification of the realm under their sole control, a task partially accomplished by Justinian and his able general, Belisarius. But the Eastern Empire had neither the resources nor the inclination to devote its soldiers to this end, instead observing Rome's demise with a certain satisfaction. "The Byzantine court," according to Gibbon, "beheld with indifference, perhaps with pleasure, the disgrace of Rome, the misfortunes of Italy, and the loss of the West."¹⁵ Constantinople also looked with disdain at the dilution of Roman culture that had taken place. Its rulers, however, were in the end too weak and besieged with their own internal and external threats to help out. Faced with armies on their eastern and southern flanks, successive eastern emperors could not spare the troops needed to expel the invaders that had carved up the Western Empire. And the west's inhabitants were hardly prepared to direct their allegiance to Constantinople if its troops could not offer them protection.

The church, which was to have helped secure imperial unity, did just the opposite. From the outset, church authorities in Rome and Constantinople were adversaries; the pope in Rome and the patriarch in Constantinople were in a constant struggle for religious and political influence. Tensions grew so acute that in 484 the papacy and the patriarchate excommunicated each other. Serious doctrinal differences helped intensify the rivalry. Did the Holy Ghost proceed from the Father alone or also the Son? Was Christ one being of divine nature or two inseparable beings, one divine and one human? Should busts and religious images play a central part in worship, or, as in Judaism and Islam, did worshiping figures constitute idolatry? When mingled with personal animosities, these doctrinal disputes were to mire both churches in centuries of competition and intrigue—including murders, kidnappings, and lesser forms of abuse. The church nonetheless stayed nominally unified until 1054, when it formally broke into its Roman Catholic and Greek Orthodox variants.

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While Rome and Constantinople, along with their respective churches, grew further apart, the Byzantine portion of the empire fared better than the western half. Whereas the Western Empire was already coming apart within decades of the empire's division, the Byzantine realm managed to remain intact until the early seventh century. In 611, Persian armies conquered Syria and Palestine, and then moved on to Egypt in 616. The Byzantines regained much of this territory, but then lost it again to Arab armies soon thereafter. The capture of these areas had a devastating impact on Byzantium; they had been the empire's main source of grain. The setback for Constantinople was so great that Emperor Constans II considered moving the capital back to Rome. At least a part of Italy's population, especially in Rome, Naples, and Sicily, was at the time still loyal to the Byzantine emperor. Constans II did make it to the port of Syracuse in Sicily. But he was promptly murdered, ending the idea of bringing the capital back to Rome.

Following the setbacks of the seventh century, the Byzantine Empire consolidated its position until the twelfth century, after which time it was progressively dismantled by invaders from both east and west. Constantinople itself managed to hang on until 1453, when it finally gave way to an Ottoman siege. But by then the Byzantine Empire had for decades been in receivership. The fall of Constantinople was just official confirmation of the rise of the Islamic world and the decline of Christian Europe.

The Roman imperium would have eventually come undone; all great empires do. Several sources of decline were at work, especially in the Western Empire. Barbarian attacks necessitated a military buildup that weakened the economy by diverting troops and resources from trade, crafts, and agriculture. A bloated bureaucracy and a materialism born of affluence contributed to corruption and an erosion in public spirit, eventually stripping the Roman ideal of its ideological appeal. The spread of Christianity also appears to have contributed to imperial decline by directing the loyalties of citizens toward the church rather than the state.¹⁴

Although Diocletian's decision to divide the empire initially helped counter some of these sources of decline, his well-intentioned policy ultimately made matters worse by replacing one center of authority with two. Diocletian's experiment had everything going for it—a common religion, history, tradition, and commitment to the well-being of the Roman imperium. But the shift from unipolarity to bipolarity

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turned commonality into competition. Resources that once flowed to Rome went to Constantinople. Dual emperors worked against, rather than with, each other. Doctrinal disputes transformed a common religion into a divided church. And the cultural gap between Latin and Greek peoples became politicized. In Gibbon's words, "The national schism of the Greeks and Latins was enlarged by the perpetual difference of language and manners, of interest, and even of religion."¹⁵ Centuries of stable order under Rome's leadership gave way to political turmoil and Europe's eclipse by the civilizations rising to its east.

THESE HISTORICAL reflections constitute warnings about the end of America's unipolar moment and its likely consequences. The EU is an emerging pole, dividing the West into American and European halves. America and Europe have certainly been close partners for more than five decades; it would be natural to conclude that they are kith and kin for good. But consider the Roman Empire and its rapid demise after the founding of a second capital in Constantinople. The Western and Eastern Empires were for centuries one polity. They shared a common religion and had deep cultural links. They faced common enemies. And the division of the empire was carefully planned and carried out by Diocletian. Nonetheless, as soon as two poles of power replaced one, geopolitical competition followed.

America and Europe share a common heritage, have strong cultural links, and for decades faced a common enemy. These conditions have helped them form a coherent and cohesive Western world since the onset of the Cold War. But now that the West is in the midst of being divided, it may well go the way of the Roman Empire. What is happening between Washington and Brussels, however, differs in an important respect from what happened between Rome and Constantinople. Today's division is occurring by default, not by design, raising the stakes and the potential for bad blood.

## THE INTEGRATION OF EUROPE

ACCORDING TO most observers, American primacy is here to stay. As Dartmouth College political scientist William Wohlforth sums up the prevailing wisdom, "The current unipolarity is not only peaceful but durable. . . . For many decades, no state is likely to be in a position to take on the United States in any of the underlying elements of

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power.”¹⁶ Wohlforth is technically correct. In terms of its economy, its military, and its intellectual and cultural capital, America is laps ahead of all other countries, and the gap is not closing.

But America's best and brightest are thinking too traditionally; they are being misled by the past to look only at individual countries as likely challengers. As a result, they fail to appreciate that a collective Europe is next in line—even though it is rising before our eyes. Strategists continue to look right past a united Europe because it is a new animal, a political entity that defies standard categories. The European Union falls short of being a centralized federation like the United States. But it is certainly much more than a loose grouping of sovereign nations. America must figure out just what this new entity is—and start taking it seriously—if the country is to get right its new map of the world.

The integration of Europe is one of the most significant geopolitical events of the twentieth century. It represents a turning point every bit as momentous as the founding of the United States as a federal union, perhaps more so. Europe has taken history into its hands and is sculpting its own landscape. After centuries of rivalry and bloodshed among competing poles, the Europeans have had enough. They are in the midst of a revolutionary process of geopolitical engineering aimed at merging these competing polities into a collective whole, eliminating once and for all war among Europe's national states.

The results have thus far been dramatic. From the decline of the Roman Empire until the end of World War II, the peoples of Europe, interrupted only by short breaks, were at war with each other. After just fifty years of European integration, armed conflict among Britain, France, Germany, and their smaller neighbors has become virtually unthinkable. In progressing from the European Coal and Steel Community (ECSC), to the European Economic Community (EEC), to the European Union, Europe has finally escaped its past.

Most Americans dramatically underestimate—or dismiss altogether—the geopolitical significance of the EU.¹⁷ This misreading is understandable. The major initiatives and activities of the EU have been primarily economic in nature. The ECSC, founded in 1951, aimed at bringing under collective control the coal and steel production of France, Germany, Belgium, Italy, Luxembourg, and the Netherlands. The next step forward came with the establishment of the EEC in 1957, a move that eliminated internal tariffs and estab-

lished a common external tariff. Member states worked to consolidate this common market during the course of the 1960s.

In 1979, the European Monetary System was launched to regulate exchange rates among members. The Single European Act followed in 1987, removing remaining nontariff barriers, such as national regulations and standards. The goal was to create "an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured."¹⁸ Graduation to the EU took place in 1993. The hallmark of this next step was monetary union—the introduction of the euro and the elimination of separate national currencies. Twelve countries have already joined monetary union, with more to come. Euro notes and coins began circulating in January 2002. The French franc and the German mark are gone for good.

Europe's accomplishments in the realm of economic integration have not been matched on matters of defense—adding to the perception that the EU is an economic heavyweight, but a geopolitical lightweight. The Europeans did have a go at it. The Brussels Treaty (1948), the European Defense Community (1952), and the Western European Union (1954) were all attempts to give a collective Europe a defense arm. But they never got off the ground. Instead, the Europeans turned to the United States and NATO. American resources were needed to help rebuild Western Europe's economies and offset the military might of the Soviet Union. And Western Europe's main states were not yet comfortable enough with each other to begin merging their armed forces and defense policies. They were prepared to integrate their economies and pool authority over trade policy, but integrating defense establishments was deemed too much of an encroachment on national sovereignty. From this perspective, a unified Europe has from early on loomed large on an economic map of the world, but remains only a geopolitical blip.

This account of the European project is woefully off target. There is much more to Europe, as becomes clear by putting European integration in its appropriate historical context. Consider the transition of America's thirteen colonies to a federal union of states. Although nominally a confederation after 1781 and a unitary federation from 1789 onward, the early decades of the United States were devoted almost exclusively to matters of economic integration. Bringing down interstate tariffs, regulating commerce, coordinating foreign-trade policies, and issuing a single currency for use in all the states—these

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issues dominated political debate. Military integration lagged way behind economic integration. The individual states ensured that the Articles of Confederation preserved the right of each state to maintain a militia. Congress was allowed to build and equip a small navy and had the right to draw on the personnel of the individual states to constitute a modest national army. But the states, not the federal government, held the upper hand.

Although the U.S. Constitution strengthened the hand of the federal government, the states continued to retain considerable autonomy. Americans were at least as worried about the threat posed by an overbearing central authority as they were about that posed by outside enemies. The country's foreign ambition and its military accordingly remained limited throughout the Union's early decades. To the observer of the time, America might have been a potential economic giant, but it was not a major strategic presence. As we now know, however, the amalgamation of the United States would alter the geopolitics of North America and, soon, the world.

German unification was no different. It began quietly and slowly after the end of the Napoleonic Wars in 1815. Trade ties were again in the lead, knitting together the economies of the separate German lands. A formal customs union—the Zollverein—was formed in 1834. Political oversight was provided by a confederal structure known as the Bund, which was founded in 1820. The main purpose of the Bund was to resist liberal political change within its member states. Although the individual states sent representatives to a collective parliament, each maintained the right to form alliances and declare war. The Bund thus did not signify the establishment of a centralized and unitary state that was capable of upsetting the European balance. Nonetheless, a historic process of amalgamation was in train. When this process culminated in German unification in 1871, it had become clear—at least to Disraeli—that “the balance of power [in Europe] has been entirely destroyed.”

Unlike the amalgamation of the United States and Germany, the process of integration in Europe could well stop short of a unitary state. But even if it does, its geopolitical implications will still be profound. From the outset, European integration has been all about matters of war and peace. Economic activity has been doing most of the work, but in the service of geopolitical intent. Europe's founding fathers knew all too well that a multipolar Europe would continue to be condemned to competition and conflict. Something therefore had

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to be done to interrupt the cyclical rise and fall of Europe's great powers and the attendant rivalry and bloodshed.

That something was European integration. If separate poles were destined to compete with each other with disastrous consequences for all, then the only way out was to find some means of binding these poles to each other, making them part of a broader whole. By mincing, merging, and ultimately transcending the separate interests and identities of Europe's national states, the process of integration was to produce a new political entity—a collective European polity.

Robert Schuman, France's foreign minister from 1948 to 1952 and one of the founders of European integration, was explicit about the geopolitical objectives of European integration and the linkages between economic activity and its political consequences. The first task was to overcome the intractable fault line between Germany and France. In Schuman's words, “The coming together of the nations of Europe requires the elimination of the age-old opposition of France and Germany. Any action taken must in the first place concern these two countries.” The ECSC was to be the vehicle for attaining this task: “The solidarity in production thus established [by the ECSC] will make it plain that any war between France and Germany becomes not merely unthinkable, but materially impossible. The setting up of this powerful productive unit, open to all countries willing to take part and bound ultimately to provide all the member countries with the basic elements of industrial production on the same terms, will lay a true foundation for their economic unification.”

Nurturing common economic interests was only the initial objective of economic integration. A deeper merging of interest and identity was to follow. “That fusion of interest which is indispensable to the establishment of a common economic system,” Schuman asserted, was to be “the leaven from which may grow a wider and deeper community between countries long opposed to one another by sanguinary divisions.”¹⁹ Jean Monnet, the intellectual architect of the ECSC and the first president of its High Authority, was even more explicit: “We can never sufficiently emphasize that the six Community countries are the fore-runners of a broader Europe, whose bounds are set only by those who have not yet joined. Our Community is not a coal and steel producers’ association; it is the beginning of Europe.”²⁰ Germany, France, and the states surrounding them were ultimately to form a new political community that would transcend the national state. As the preamble to the ECSC Treaty explicitly stated, the mem-

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bers were preparing "the foundations for institutions which will give direction to a destiny henceforward shared."²¹ The intractable insta-bility of multipolarity was to give way to the unity and harmony of a collective Europe anchored by the Franco-German core.

Europe has from its modest beginnings thus had ambitious goals. Fully aware that economic integration alone would not be enough to realize these goals, Europe's architects also turned to more explicit tools of social engineering. They created a European parliament to symbolize that a collective Europe, not just its individual member states, was a legitimate and representative realm of politics. They instituted educational and cultural exchanges to help break down psychological barriers among societies long hostile toward each other. And they created symbols—a common flag, a common passport, and a common currency—needed to make Europe real to the average citizen and create a collective European space worthy of a sense of loyalty and belonging. As Wim Duisenberg, first president of the European Central Bank, remarked, "The Euro is much more than just a currency. It is a symbol of European integration in every sense of the word."²²

The European project has been an unqualified success. Not only has war among Europe's nations become unimaginable, but the borders among them are undefended and already being crossed without passport or customs control. Driving from France to Germany is becoming like driving from Virginia to Maryland. Opinion surveys reveal a clear preference among European publics for quickening the speed of integration. Almost half of those polled strongly identify as Europeans, not just as citizens of a national state. And more than 70 percent support a common defense and security policy for the EU.²³ Europe's experiment in geopolitical engineering is working.

Europe's economy has followed suit. The intense focus on regional trade has reaped clear benefits. About 75 percent of the EU's total trade is within Europe. Its major economies are becoming more competitive as they deregulate and as their Social Democratic parties move to the center and distance themselves from their traditional labor base. The German government in 2000 passed important tax reforms intended to stimulate growth. The French followed with a similar, but slightly less ambitious, tax reform. Adherence to the stringent criteria imposed by monetary union and the rising political fortunes of center-right parties are also speeding the emergence of a leaner European economy.

Europe's collective gross domestic product (GDP) now stands at

close to $8 trillion, compared with about $10 trillion for the United States. Prospective growth rates for the EU are similar to those forecast for the U.S. Following the sharp decline in the U.S. technology sector, the venture capital that fueled the American dot-com revolution began flowing primarily to Europe, opening up the possibility that the EU will enjoy the boost in productivity that America did during the 1990s.²⁴ With the impending addition of new members (the next wave of enlargement is scheduled for 2004 and is likely to include Poland, Hungary, the Czech Republic, Estonia, Slovenia, Cyprus, Malta, and possibly Slovakia, Lithuania, and Latvia), the EU's wealth may before long pull even with America's.

Airbus (a French, German, British, Italian, and Spanish conglomerate) has already passed Boeing as the world's number-one supplier of civilian aircraft. The largest maker of cell phones in the world is Finland's Nokia, well ahead of America's Motorola. After years of U.S. corporations acquiring foreign companies, the tables are turning. In 2000, British and French corporations ranked ahead of their American counterparts in terms of the aggregate value of their international acquisitions.²⁵ Germany has also been coming on strong. Bertelsmann is the largest book publisher in the world, having bought Random House and other prominent U.S. houses. Daimler-Benz acquired Chrysler in 1998 and Deutsche Telekom purchased VoiceStream in May 2001.

The euro admittedly lost more than 20 percent of its value against the dollar after its debut in January 1999. The flow of European capital to a booming U.S. economy was one of the main causes of its decline. With the slowdown in the United States, the return of capital to EU financial markets, and the prospects for growth within the EU, the euro is poised to make a comeback. It is likely to emerge as one of the world's major reserve currencies.²⁶

The EU's governing bodies—the Commission, the Parliament, and the Council—have matured in step. The Commission, which grew out of the High Authority of the ECSC, is the union's main bureaucracy, staffed by a multinational civil service and by individuals on loan from member states. Although it has only limited power to make decisions, the Commission controls the agenda, formulates specific policy proposals, and is responsible for implementation of decisions. The size and jurisdiction of the Commission have expanded considerably over time as the EU has widened the range of policy issues over which it has authority.

The policy agenda is divided into three so-called pillars—commu-

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nity affairs (matters pertaining primarily to the operation of the single market), foreign and security policy, and justice and home affairs.²⁷ The Commission's powers are strongest in the first pillar, with authority over economic matters divided between the Commission, which handles trade and competition policy, and the European Central Bank, which sets monetary policy for the union and is run by the presidents of the member states' national banks. The individual member states still control their own macroeconomic and fiscal policies within the constraints of EU-wide guidelines. The European Court of Justice plays an important role in enforcing decisions and resolving disputes between member states and EU institutions. When at odds, EU law trumps national law.

The European Parliament grew out of the ECSC's Common Assembly. All member states send representatives, elected since 1979 by direct suffrage. The Parliament initially had only consultative powers, but its authority has grown steadily since the 1970s. It now has the right to amend proposals drafted by the Commission and to work with the Council to find mutually acceptable policies. The Parliament also approves the composition of the Commission, can demand its resignation, and, together with the Council, has final say over the union's annual budget. The broadening authority of the Parliament has been central to reinforcing the democratic character of a supranational Europe.

The Council, in its first incarnation the Council of Ministers of the ECSC, is the EU's main decision-making body. It consists of the ministers of the member states, who attend when the issue for which they are responsible is under discussion. It also meets periodically at the level of heads of state or government. Most issues taken up by the Council require a qualified majority to win approval.²⁸ Only matters of foreign and defense policy, justice and home affairs, and some domestic legislation, such as taxation, still require unanimity. The presidency of the Council rotates among member states and changes hands every six months. Summits used to take place in the capital of the country holding the presidency, but all of them will soon be held in Brussels, reinforcing the city's position as the capital of a collective Europe.

Nothing speaks to the success of Europe and its evolving institutions more than the ongoing clamor for entry into the club. Britain, Denmark, and Ireland joined in 1973, followed by Greece in 1981, Spain and Portugal in 1986, and Austria, Finland, and Sweden in

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1995. Even after joining, Britain kept its distance from the Continent, trying to serve as a bridge between North America and Europe. But Prime Minister Tony Blair has changed course and is intent on making Britain a leading member of the EU. It is only a matter of time before Londoners will be buying their fish and chips with euros, not pounds. Blair fully recognized that Britain would find itself marginalized—in economic and geopolitical terms—if it did not become part of the European mainstream. As he explained in November 2001, “We must be whole-hearted, not half-hearted, partners in Europe. . . . The tragedy for British politics—for Britain—has been that politicians of both parties have failed, not just in the 1950s but on up to the present day, to appreciate the emerging reality of European integration. And in doing so, they have failed Britain’s interests.” Blair went on to insist that “Britain has no economic future outside Europe.”²⁹

Europe's new democracies are meanwhile jostling each other to make it to the front of the line. This yearning for entry enables the EU to exercise a quiet discipline across the dozen or so countries consolidating their transitions from communism to capitalist democracy in preparation for EU membership. Prospective members are privatizing and liberalizing their economies, stabilizing their currencies, protecting their minorities, and resolving outstanding border disputes—in short, getting their houses in order so that they can become part of the broader European home. The EU has democratized and pacified Europe's west. It is now poised to do the same for Europe's east.

EUROPE'S accomplishments notwithstanding, an assessment of the EU's future must be tempered by the recent setbacks that integration has suffered and by the enormity of the challenges that lie ahead. Europe over the past decade has certainly had its fair share of disappointments. The EU failed miserably when in the early 1990s it tried to stop the slaughter in Bosnia. Norway in 1994 decided against membership. Denmark, Sweden, and Britain have chosen for now to stay out of the euro-zone. The Nice Summit in December 2000 was to have made substantial progress on institutional reform in order to pave the way for enlargement, but it fell well short of expectations. Despite the limited ambition of the reforms it contained, the Nice Treaty failed to pass a referendum in Ireland in June 2001, revealing the public's lack of enthusiasm for enlargement into Central Europe.

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These are serious stumbles. But for a number of reasons, they do not provide cause for doubting the EU's ability to face down the challenges that lie ahead. Even under the best of circumstances, processes of integration and amalgamation are slow and difficult; after all, the states coming together to form a new polity are being asked to give up what they most cherish—their sovereignty and autonomy. America, Germany, and Italy, to name a few, all came together from their constituent units in fits and starts. Europe's ongoing integration has been, and will continue to be, no different. The EU will have good days and bad days. It will at times appear to be losing its momentum and the support of its member states and their citizens. But, as it has done over the past five decades, Europe is then likely to muster the will to take its next step forward.

It is also important to keep in mind that processes of integration tend to accelerate after they pass through a certain inflection point. Political centralization in the United States proceeded slowly until the late 1800s—and then took off. The 1890s saw notable growth in the authority of the executive branch, the size of the U.S. Navy, and the scope of the country's foreign ambition. In similar fashion, German integration proceeded slowly at first, but by the turn of the century moved into a new phase characterized by rapid centralization and expanding naval strength. It is impossible to predict if or when the EU might enter such a phase of accelerated integration, but, as discussed below, the prospect of impending enlargement might well be the precipitating factor.

Optimism about the EU's future also arises from the weakness of the arguments put forward by the euro-skeptics. Many observers, especially in the United States, continue to dismiss the EU's geopolitical significance, claiming that Europe will never coalesce as a serious international actor. They point to four main obstacles. First, Europe's supranational institutions lack democratic legitimacy. As the EU tries to deepen, it will therefore bump up against this "democratic deficit."³⁰ Second, the EU's population is aging, confronting Germany and other members with the prospect of a dwindling workforce and a bankrupt pension system. Third, the eastward enlargement of the EU, expected to begin by the middle of this decade, will dilute the union and hamper the further evolution of its collective character. Fourth, the EU has been and is likely to remain a military weakling, preventing it from taking on a more weighty geopolitical role.

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The EU undeniably has a democratic deficit. Despite the recent adoption of measures to strengthen the role of the Parliament and to encourage the formation of EU-wide political parties, the nation-state retains a strong grip on political life. Linguistic differences and distinct national cultures make the national realm of politics especially durable, raising questions among ordinary citizens about the legitimacy and representative character of EU institutions. As Joschka Fischer, Germany's foreign minister in the center-left government that was elected in 1998, admitted, the EU is often "viewed as a bureaucratic affair run by a faceless, soulless Eurocracy in Brussels at best boring, at worst dangerous."³¹ The citizens of EU member states, skeptics contend, are not about to entrust their fate to the EU Commission and its unaccountable staff.

This is a justified and credible critique, but it becomes less potent when put in historical relief. The legitimation of a supranational realm of politics always lags considerably behind the evolution of supranational institutions, which itself is a laborious and incremental process. Their fear of an unaccountable executive led America's founders to set up a system of constitutional checks and balances and to protect the rights of individuals to bear arms. It was not until after the Civil War, decades into America's life as a unitary federation, that the national realm decisively surpassed the individual states as the primary source of political identity and chief target of political loyalty.

Consider the poignant words of Robert E. Lee, an officer in the U.S. Army and an ardent opponent of secession, as he chose sides on the eve of the Civil War: "With all my devotion to the Union, I have not been able to make up my mind to raise my hand against my relatives, my children, my home. . . . If the Union is dissolved, and the Government disrupted, I shall return to my native State and share the miseries of my people."³² Europe may have a democratic deficit, but it is one through which all integrating polities must necessarily pass as they evolve.

Europe's elites understand that they must make the EU more democratic and are beginning to take steps to address the problem. The adoption of an EU constitution is now under consideration, with many Europeans viewing the process of drafting, debate, and ratification as a means of cultivating deeper public engagement. Roughly two-thirds of the EU's population favors the adoption of a constitution. In March 2002, the EU opened what is effectively a constitutional

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convention, with former French President Valéry Giscard d'Estaing serving as its chairman. The group's mandate is to prepare proposals for consideration at the major conference on EU reform scheduled for 2004. A constitution would likely provide a clearer demarcation of the respective powers of the member states and EU institutions. It might also expand the authority of both national parliaments and the European Parliament in order to enhance democratic accountability.³⁵

Germany's recent willingness to take the lead on institutional change improves the prospects for reform. Bonn for decades deferred to other European capitals as part of its post-World War II effort to reassure and pursue reconciliation with its neighbors. As a sign of its regained comfort with leadership, the seat of government returned to Berlin in 1999, and Germany has been at the forefront of efforts to guide the EU's evolution and redress its democratic deficit. As Fischer explained in a much-acclaimed speech in May 2000, "A tension has emerged between the communitarization of economy and currency on the one hand and the lack of political and democratic structures on the other, a tension which might lead to crises within the EU if we do not take productive steps to make good the shortfall in political integration and democracy, thus completing the process of integration."

Fischer was explicit about just what productive steps are needed. "There is a very simple answer," he said: "the transition from a union of states to full parliamentarization as a European Federation ... and that means nothing less than a European Parliament and a European government which really do exercise legislative and executive power within the Federation." This federation would "be a Union which the citizens could understand," he continued, "because it would have made good its shortfall on democracy." Fischer reassured that "all this will not mean the abolition of the nation-state. Because even for the finalized Federation the nation-state, with its cultural and democratic traditions, will be irreplaceable in ensuring the legitimation of a union of citizens and states that is wholly accepted by the people.... Even when European finality is attained, we will still be British or German, French or Polish."³⁴

A few months later, Chancellor Gerhard Schröder proposed the establishment of a two-chamber structure of governance, with an upper house of ministers from each country and a parliament consisting of popularly elected representatives. As in Fischer's scheme, Europe's nation-states would continue to retain important political powers, but institutions of collective governance would be consider-

ably strengthened. Whether or not the precise formulations of Fischer and Schröder come to fruition is much less important than the fact that the EU's most populous and wealthy member has been actively promoting a federal Europe and articulating a pathway for getting there.

Britain too has shown more flexibility on the question of the EU's institutional evolution. Tony Blair has already orchestrated a dramatic about-face in British policy. After decades of skepticism about Europe, London has recently been seeking to establish itself as part of the EU's core. In the prime minister's words, Britain must be a "leading player, a strategic partner" within the union. Blair was behind the new push on the defense front. And he has indicated that he intends to orchestrate Britain's entry into the euro-zone during his second term. William Hague, the Conservative candidate in the 2001 election, made opposition to the euro a centerpiece of his campaign—and his party was badly defeated.

Although Blair has stated his opposition to Europe's evolution into a federal "superstate," he has made clear that he supports "a strong Britain in a strong Europe"—essentially a brand of European supra-nationalism in which the individual member states coexist comfortably alongside EU institutions.³⁵ In similar fashion, Blair has been tentative about the notion of an EU constitution, but he has proposed a "Statement of Principles" that would be "a political, not a legal document," and "therefore be much simpler and more accessible to Europe's citizens." Blair has also called for the creation of a second chamber of the European Parliament to enhance democratic oversight.³⁶ His views have not exactly tracked those of Schröder and Fischer, but they have all recognized the need to generate a debate over the EU's institutional future and to work toward a more democratic and effective form of governance.

France has been more tentative about the EU's evolution, in part because of the cohabitation government in office from 1997 until 2002. President Jacques Chirac and Prime Minister Lionel Jospin hailed from different parties and held different views. Chirac was supportive of deeper integration, especially on matters of foreign and security policy. He was also an outspoken proponent of an EU constitution, arguing that "such a text would bring Europeans together, allowing them to identify with a project through a solemn act of endorsement." During the summer of 2001, Chirac said he hoped a constitution would be ready for ratification by 2004.³⁷

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Jospin was more guarded. In May 2001, he countered Germany's federalist inclinations, announcing in a speech on Europe's future, "I want a Europe, but I remain attached to my nation. Making Europe without unmaking France, or any other European nation—that is my political choice."⁵⁸ This position is a paradoxical one for France, given its role in founding European integration and guiding its evolution for decades. Monnet and Schuman, after all, were strong backers of federalism even when they were just beginning to formulate Europe's earliest steps.

But the remnants of Gaullism continue to hold a perverse sway over French politics, producing a brand of nationalism that at once has great ambition for the European enterprise and stands in the way of realizing that ambition. France's position of late has been to call for a Europe that is strong in terms of its role in the world, but weak in its governing institutions—a logical and practical impossibility. Europe cannot be decentralized and fragmented, but at the same time pursue geopolitical ambition. Nonetheless, a uniquely French combination of vulnerability and grandeur has produced this contradictory stance. France is no longer strong enough to project its voice on the global stage, and hence looks to Europe to do so instead. But that same sense of weakness denies the French the confidence to move forward on integration and further sublimate the national state to the European project. France's foot-dragging on institutional reform also stems from a certain discomfort over Germany's new willingness to take a leadership role.

France's ambivalence toward the deepening of EU institutions is unlikely to endure, if only because it is untenable over the long run. An externally strong Europe cannot be weak internally. In addition, Jospin's defeat in the 2002 presidential election should bolster Chirac and his more pro-European stance. France will also face pressure from Germany and other EU members as matters of institutional reform gain urgency in preparation for eastward enlargement. When faced with the prospect of putting the integrity of the union at risk or getting on with the deepening of institutions, the choice will be an easy one even for the étatist French. The European project is too important and the stakes, especially for France, too high.

Finally, even if Europe's democratic deficit does eventually put a cap on further integration, that would not mean that the EU is never to become a serious counterweight to the United States. The EU already presents a challenge to U.S. influence; it need not evolve into

a tight federation before it becomes a center of global power. An EU that encompasses Western and Central Europe and whose wealth rivals that of the United States is in and of itself a counterpoise to America. Of course, the more unitary and collective its character, the better able will Europe be to project a single voice and stand its ground. But even the looser Europe that exists today, especially in combination with America's shifting strategic priorities, is an emergent pole in a changing global system.

The EU's demographic problem is no doubt a serious one. Declining birth rates during the post-World War II era mean that Germany, for example, will by 2020 have one worker for every pensioner.⁵⁹ The engine of the EU's economy risks being choked by an inadequate workforce and pension obligations that outstrip employee contributions. One study completed in 2000 estimated that the German pension system, if left unchanged, would move into deficit in 2019, with pension debt reaching 50 percent of GDP by 2032. Pension systems in France and Italy are in even worse shape.⁴⁰

Although there will be no easy fix to offset the economic implications of an aging population, EU members are fully aware of the potential crisis that looms ahead and are beginning to take steps to avert it. The German parliament in 2001 passed legislation providing tax breaks and other incentives intended to encourage workers to invest in private pension plans as a way of alleviating the burden on the national system. EU members are also debating how to liberalize rules on the inflow of foreign labor. Germany, for example, has begun relying on guest workers to meet shortfalls in its information technology sector. In August 2000, Berlin enacted a special immigration program to attract 20,000 computer engineers, primarily from India.

The eastward enlargement of the EU has the potential to help matters considerably. Central European countries have a large labor pool that promises to ease shortfalls in some EU countries. Turkey's younger population also makes it a prime candidate for supplying workers. To enhance labor mobility within the EU, which still remains relatively low, the Commission is examining various measures, including improving language education; facilitating the transfer of unemployment, pension, and health benefits across member states; and standardizing academic and professional qualifications.⁴¹

These developments promise to ameliorate, but by no means solve, the problems arising from the EU's aging population. More ambitious reforms are still needed, including better coordination of fiscal poli-

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cies among EU members—no easy task with national governments loath to give up control over taxation policy, and trade unions resisting measures that promise to reduce retirement benefits. Improving the social integration of immigrants also deserves urgent attention.

As for enlargement, Europe's critics claim that the prospective inclusion of more than a dozen new members has the potential to dilute the union and paralyze its decision-making structures. The concern is not just that the growing number of member states will complicate governance, but also that the new entrants will have had relatively little experience in democracy and will bring to the EU divergent political cultures and economies at different stages of development. Enlargement also promises to saddle the EU with rising expenses in the form of agricultural subsidies and development assistance.

These concerns are all on point; enlargement does confront the EU with a set of high hurdles. But the challenge may in fact prove to be the EU's saving grace. Enlargement will proceed whether or not the EU has made the necessary preparations; promises have been made to the new democracies of Central Europe and reneging on them is outside the realm of the possible. Deepening the union's institutions may be optional, but widening them is not.

It is precisely because widening without deepening would imperil the ability of the EU to function, however, that enlargement is likely to be the crucial catalyst, the triggering event ultimately forcing the EU to undertake the internal reforms it might otherwise put off indefinitely. Preparation for enlargement creates a sense of urgency and gives EU leaders the domestic leverage they need to get on with the politically difficult task of institutional deepening. Fischer and other politicians have stated as much, acknowledging that enlargement does have the potential to paralyze the EU. "But this danger," he noted, "is no reason not to push on with enlargement as quickly as possible; rather it shows the need for decisive, appropriate institutional reform so that the Union's capacity to act is maintained even after enlargement."⁴²

The American experience again provides an important parallel. It was ultimately westward enlargement that obliged the United States to deal with perhaps its weakest link—the cultural and economic divide between the North and the South. During the first half of the 1800s, free states and slave states cut various deals, such as the Missouri Compromise, to prevent their political differences from rising to

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the surface as enlargement proceeded.⁴³ In this sense, institutional reform was put off, but at a high cost to the Union's coherence. The continuation of westward expansion, however, eventually brought these underlying political differences to a head, forcing a direct clash between the North and South. The Civil War cost many lives, but it also set the stage for social and political reform and for more effective and centralized governance. Enlargement and the crisis it provoked thus cleared the way for the brand of federalism that remains the ideological and institutional foundation of contemporary America.

Enlargement of the EU fortunately holds little prospect of provoking war, but it does promise to oblige reluctant member states to embrace essential institutional reforms. Strengthening the authority of EU institutions is a must if a union of twenty-five or more countries is to function effectively. That means the extension of qualified majority voting to issues that now require unanimity. It means lodging with the Commission oversight of economic policy and, eventually, of foreign and defense policy. It means expanding the role of the European Parliament. And it may eventually mean establishing a directly elected chief executive of the EU.

Enlargement will also put pressure on the EU to differentiate between an inner core of member states and those whose integration is taking place on a slower, piecemeal basis. More reliance on differentiation—what EU officials euphemistically call “enhanced cooperation”—will enable core members to pursue deeper levels of integration while others opt out or follow long transition periods. The introduction of the euro has essentially followed this model, with a core group of states leading the way and others joining the eurozone when they both muster sufficient political will and meet the specified economic criteria. This multitiered approach will help ensure that the EU is not left always pursuing the lowest common denominator, of paramount importance as the countries of Central Europe begin to enter. In Fischer's words, "Precisely in an enlarged and thus necessarily more heterogeneous Union, further differentiation will be inevitable."⁴⁴ This flexibility will not just limit the ability of slow movers to hold back the rest, but it will also free up Europe's core states to press forward with deeper integration, ultimately serving as a political vanguard for the union as a whole.

Finally, enlargement is likely to require long-overdue reform of the EU budget. The Common Agricultural Policy (CAP)—essentially a

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program of farm subsidies and price guarantees—comprises almost 50 percent of the EU's overall budget. Repeated attempts to reform the CAP have made little progress, largely due to the political clout of French farmers. The size of the agricultural sector in Central Europe, however, makes reform of the CAP a necessity if enlargement is to proceed. The German government has already laid out a number of proposals, including letting each member state deal with farm subsidies on a national basis. Enlargement will also compel reform of the EU's regional assistance program. Development assistance, which comprises almost 35 percent of the EU budget, is another program that has suffered from a combination of inertia and political stalemate. The coming entry of states seeking economic aid will necessitate the program's overhaul. In short, enlargement may be just the shock the EU needs to get it over upcoming institutional hurdles.

Defense is the final issue repeatedly raised by euro-skeptics, and justifiably so. EU members do make important contributions in the security area, but largely through nonmilitary means—giving substantial amounts of economic aid to conflict-prone regions and investing both money and personnel in conflict resolution, democratization, and nation-building. European militaries have been active primarily in peacekeeping missions, with most member states lacking the capability to participate in more demanding operations. The problem is not the lack of soldiers, but the lack of firepower. Although the EU's collective defense budget is well below America's, Europe has many more soldiers under arms than does the United States. Defense budgets go to paying personnel and maintaining large territorial armies, not to buying well-trained and -equipped forces and the transport required to get them where they need to be. Europe has been incapable of undertaking a sizable operation on its own, remaining dependent upon the U.S. military and its impressive logistical infrastructure. The critics are correct that the union is a military weakling.

Times, however, are changing. Europe has arrived at a turning point. For several reasons, its military presence will mount in the years ahead.

For starters, Europe is in the midst of creating more centralized and authoritative structures of collective governance, a necessary precursor to a common defense policy. It is one thing to coordinate trade policy and standardize the size of electrical outlets. It is another to give up your national currency and debate the desirability of an EU

constitution—acts that in symbolic and practical terms constitute a true pooling of sovereignty and the lifting up of politics, interest, and identity from the national to the supranational level. And in preparation for the addition of new members, the EU is likely to take steps to further centralize authority. Europe's institutional reforms promise to set the stage for more geopolitical ambition, just as the centralization of America's political institutions did in the late nineteenth century.

Another clear sign of Europe's maturation is its redoubled effort to forge a common security policy and acquire the military capability needed to back it up. In 1999 the EU established the position of high representative for foreign and security policy—in effect, a collective Europe's first foreign policy chief. Javier Solana, the former secretary general of NATO, was selected as its initial occupant. Solana oversaw the development of new political and military councils capable of producing a common defense policy. And the EU committed itself to have ready by 2003 a rapid reaction force of roughly 60,000 capable of being deployed on short notice and sustained in the field for at least one year. The member states thereafter began integrating their defense plans and budgets in order to make good on this pledge.

Euro-skeptics are right to point out that EU defense budgets have been shrinking and that new expenditures will ultimately be needed if Europe is to acquire the level of capability that it has envisaged. But the EU can achieve a great deal by spending more wisely the resources that it already devotes to defense. More coordination among national procurement programs, a sensible division of labor as to which member states fulfill which military tasks, and the switch from poorly trained conscript armies to polished professional units will do much to improve the EU's military capability.

Significant reforms have already been accomplished. France has phased out universal military service. Germany has already conducted a thorough review of its defense establishment and is in the midst of implementing important changes. And new, collective procurement programs have been taking shape. In June 2001, nine European nations (Germany, France, Spain, Britain, Italy, Turkey, Belgium, Portugal, and Luxembourg) committed to buy a total of 212 A400M transport aircraft.⁴⁵ The aircraft will be built by Airbus, 80 percent of which is owned by the European Aeronautic Defence & Space Company, a new consortium of European defense contractors. EU members have also agreed to construct their own satellite network, called

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Galileo, a move that will reduce European reliance on U.S. assets and technology.

The EU has also begun to flex its diplomatic muscle in unprecedented fashion. In March 2001, the Bush administration indicated it was stepping back from Clinton's forward-leaning stance on pursuing rapprochement between North Korea and South Korea. Concerned about the negative consequences for the region, the EU announced that it would pick up the mediating role from which the United States was walking away. "This means that Europe must step in," said the foreign minister of Sweden, the country at that time holding the rotating presidency of the EU.⁴⁶ Later that month, Albanian rebels brought Macedonia to the brink of war, exchanging fire with the Macedonian army in the hills close to the border with Kosovo. The Bush administration kept its distance. Again, the EU stepped in and took the diplomatic lead. Solana and other European officials played a much more important role in resolving the crisis than did their American counterparts. In September 2001, Germany's foreign minister orchestrated an extension of the peacekeeping mission in Macedonia. It was the EU that brokered the March 2002 deal in which Yugoslavia's leaders agreed to give their country a new name—Serbia and Montenegro—a move intended to forestall Montenegro's drift toward independence. And during the course of 2002, the EU became deeply involved in negotiations between Israelis and Palestinians—for decades the exclusive preserve of American diplomats—and played a central role in ending the siege of the Church of the Nativity in Bethlehem in May.

"Europe's turn," declared one of Germany's leading newspapers, the *Frankfurter Allgemeine Zeitung*, reflecting on this trend. "A more assertive Europe," commented the *New York Times*, which also noted that the European Union had "gained a new sense of confidence on the world stage, built on Europe's improving economy and its growing political and commercial integration."⁴⁷

Granted, the EU is moving ahead on matters of diplomacy and defense slowly and modestly. But so did the United States, Germany, and every other polity that formed through the stitching together of once-separate entities. States, by their nature, only reluctantly give up their sovereignty and entrust their well-being to a collective union. It is now the turn of Europe's states to make that leap.

That the EU is preparing for a new stage in its evolution is not just a function of time and maturation. Europe is also acquiring greater

geopolitical ambition because of the changing ideological role that integration plays in European politics. During the past five decades, elected leaders justified the European project and the sacrifices it entailed on two grounds. First, Europe had to integrate to escape its past. Union was the only way to leave behind rivalry and war. Second, Europe had to band together against the communist threat. NATO was on the front lines, but the EU was all the while building Europe's economic strength and political confidence.

Neither of these justifications for integration now carries much weight. The Soviet Union is gone and Russia too weak to pose a threat to Western Europe even if it wanted to. And now that more than five decades have passed since World War II, escaping the past no longer resonates as a pressing cause for many Europeans. Their historical knowledge aside, younger generations that lived through neither the war nor Europe's reconstruction have no personal past from which they seek to escape. The dominant political discourse that has for decades given the EU its meaning and momentum is rapidly losing its relevance.

In its place is emerging a new discourse, one that emphasizes Europe's future rather than its past. And instead of justifying integration as a way to check the geopolitical ambition of the national state, this new discourse portrays integration as a way to acquire power and project geopolitical ambition for Europe as a whole. French President Jacques Chirac, in a speech delivered in Paris in November 1999, could hardly have been clearer: "The European Union itself [must] become a major pole of international equilibrium, endowing itself with the instruments of a true power."⁴⁸ Even the British, who for decades vehemently opposed any EU role in security affairs, have changed their minds. In the words of Prime Minister Tony Blair, "Europe's citizens need Europe to be strong and united. They need it to be a power in the world. Whatever its origin, Europe today is no longer just about peace. It is about projecting collective power."⁴⁹

Integration is thus being relegitimated among European electorates, but paradoxically through a new brand of pan-European nationalism. Europe's individual nations may have rid themselves for good of foreign ambition, but aspirations are returning at the level of a collective Europe. As these new political currents gather momentum, so will Europe's geopolitical ambition.

Strangely enough, America is also providing momentum behind Europe's return to the realm of geopolitics. Europe now finds itself

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weak and poorly organized on matters of defense because for decades it had the luxury of relying on the United States for its security. The extension of America's strategic umbrella to Europe not only kept the peace during the Cold War, but also enabled the Europeans to expend their main energies on political and economic integration. The United States was buying much-needed time for Europe to get its process of unification up and running. As the years passed, however, strategic necessity turned into an unhealthy dependency. Europe ended up free-riding on America's willingness to be its guardian. Despite all that has changed since 1949, and especially since 1989, Europe has remained dependent on the United States to manage its security.

Europe has thus had a very good deal for a long time. But as most good deals do, this one too is coming to an end. The Cold War bargain struck between a recovering Europe and a hegemonic America is fast wearing thin. And it should. The Cold War is over, Europe's nations are at peace, and the EU is thriving. The U.S. Congress is more than justified in insisting that Europe finally bear a greater defense burden. The battle for Kosovo and the presence of U.S. peacekeepers in the Balkans made clear that the United States is still willing to buy a little more time for Europe to mature. But America could hardly have fought the war over Kosovo with more reluctance. And the Bush administration made plain its ambivalence about keeping U.S. troops in the Balkans indefinitely, a concern only intensified by the added missions stemming from the new focus on homeland defense and fighting terrorism.

There is no better way to get the Europeans to take on more defense responsibilities than to confront them with the prospect of an America that is losing interest in being the guarantor of European security. It is anything but happenstance that Europe redoubled efforts to forge a common defense policy just after the close of NATO's war for Kosovo. The Europeans are scared—and justifiably so—that America will not show up the next time war breaks out somewhere in Europe's periphery. And they are aware that they can either prepare now for that eventuality—or be left in the lurch. They are making the right choice in building up their military capacities. But they are also making a choice that will inevitably give Europe more geopolitical clout—at the expense of American primacy.

This fundamental shift in the strategic relationship between North America and Europe is in its early stages. It will gain momentum in

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the next few years. And the impetus will come not just from Europe's new ambition, which will gather slowly, but also from America's domestic politics and its schizophrenic reaction to the rise of Europe— a subject taken up in the following chapters.

## ROME REDUX

THE PARALLELS between today's world and the world of the late Roman Empire are striking. Washington today, like Rome then, enjoys primacy, but is beginning to tire of the burdens of hegemony as it witnesses the gradual diffusion of power and influence away from the imperial core. And Europe today, like Byzantium then, is emerging as an independent center of power, dividing a unitary realm into two.

It is too soon to tell whether Washington and Brussels will head down the same road as Rome and Constantinople—toward geopolitical rivalry—but the warning signs are certainly present. The United States already feels pressured by the euro and the growing strength of Europe's economy and its top corporations. The EU's geopolitical ambition is still limited, but there are clear signs of wind in the sails. And although America has called for the EU to do more on defense, Washington is none too pleased about having to make room for a more assertive and independent Europe. Perhaps America and Europe are experiencing growing pains. Perhaps the political grandstanding will soon die out. If history is any indication, however, this tentative competition is likely to develop into a more serious rivalry.

Skeptics may object to the analogy drawn between the contemporary Western world and the Roman Empire of the fourth century, arguing that times have changed and politics have moderated; the emerging relationship between North America and Europe will therefore bear no resemblance to the testy confrontation between Rome and Byzantium. It is true that social values have evolved over the centuries and that political and religious violence, especially among liberal democracies, is much less prevalent today than during Roman times. America and Europe have carved out a political community in which war between them borders on the unimaginable. And Europe stood by America after the terror attacks of September 2001, with NATO for the first time in its history invoking the clause in its treaty confirming that an attack on one is an attack on all. It is also the case

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that even if Europe does move ahead on the defense front, its fighting capability will for the foreseeable future remain modest; the EU is not about to pose a military challenge to the United States.

These considerations admittedly make armed conflict between the United States and Europe an extremely remote prospect. But the likelihood of war breaking out across the Atlantic is too high a standard for gauging whether the rise of Europe and the resulting competition with America will be of geopolitical consequence. Here are just a few of the probable outcomes.

As Europe's wealth, military capacity, and collective character increase, so will its appetite for greater international influence. Just as America's will to extend its primacy stems not just from self-interest, but also from an emotional satisfaction derived from its leadership position—call it nationalism—so will Europe's rise inspire a yearning for greater status. As the United States currently sits atop the international pecking order, the EU's search for greater autonomy and status will, at least initially, take the form of resisting U.S. influence and ending its long decades of deference to Washington.

Some of Europe's leaders have already been vocal in expressing their disgruntlement with America's might and its overbearing ways. French Foreign Minister Hubert Vedrine complained in 1999 that "we cannot accept a politically unipolar or a culturally uniform world, or the unilateralism of the one and only American megapower." President Jacques Chirac was in complete agreement: "We need a means to struggle against American hegemony." Immediately after meeting with Chinese President Jiang Zemin in December 1999, Russian President Boris Yeltsin proclaimed that "we arrived at a conclusion that the unipolar scheme is no good. We need a multi-polar structure."⁵⁰

Such sentiments only intensified after the election of George W. Bush because of the unilateralist substance and tone of his foreign policy. In the wake of Bush's call to widen the war against terrorism to Iraq, Iran, and North Korea, Vedrine called for Europe to speak out against a United States that acted "unilaterally, without consulting others, making decisions based on its own view of the world and its own interests." When asked about how to deal with American preponderance, Gerhard Schröder replied that "the answer or remedy is easy: a more integrated and enlarged Europe" that has "more clout." Valéry Giscard d'Estaing opened the EU's constitutional convention in March 2002 by noting that successful reform of the union's institu-

tions would ensure that "Europe will have changed its role in the world." "It will be respected and listened to," he continued, "not only as the economic power it already is, but as a political power that will speak as an equal with the largest existing and future powers on the planet." Romano Prodi, president of the Commission, agreed that one of the EU's chief goals is to create "a superpower on the European continent that stands equal to the United States."⁵¹

These statements and others like them have been intended to appeal to domestic electorates as well as to guide European policy. But even as political rhetoric, these exhortations are revealing. That European leaders are calling upon nationalist instincts and urging that Europe act as a counterweight to America underscores the potential for U.S.-European rivalry. Combine the logic of realism with that of a pan-European nationalism and it becomes clear that even in the absence of conflicts of interest between Europe and the United States, there will still be competitive jockeying for position and status across the Atlantic.

There will, however, also be conflicts of interest. Thankfully, the United States and the EU have no outstanding territorial disputes; those were resolved during the nineteenth century through a combination of war and diplomacy. But the two parties are likely to clash over other issues.

The United States and Europe have long gone their separate ways in the Middle East, particularly over Iran and Iraq. Washington has advocated a combination of rigid containment and sanctions, while Europe has favored constructive engagement. Maintaining the sanctions regime against Iraq proved all but impossible. So too have European companies defied Washington's efforts to prevent them from investing and operating in places like Iran and Libya. It is entirely plausible that Congress could at some point insist on sanctions against Europe for its companies' violations of the 1996 Iran-Libya Sanctions Act (ILSA). Congress renewed ILSA for another five years in July 2001. The EU meanwhile adopted a statute making it illegal for European companies to comply with ILSA. The events of September 2001 and the resulting battle against terrorism have further complicated the political environment in the Middle East, making more likely a clash of interests across the Atlantic. The United States and Europe have also taken different approaches to the Arab-Israeli peace process, raising the prospect that the states of the region might play the two

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sides off each other as Europe becomes more involved as a mediator. European leaders were openly and sharply critical of the Bush administration's support for Israel's crackdown on Yasser Arafat's regime as violence escalated in late 2001 and early 2002.⁵²

Consider how the debate over missile defense could play out over the next few years. The Bush administration has made clear that it intends to proceed with development and deployment, and that it may well opt for a broad system that includes interceptors based on land, at sea, in the air, and in space. A system of this scope is unlikely to win support in Europe, opening up the possibility of a significant strategic rift, especially if Russia sides with the EU. Europe simply has a different view of likely threats and how to cope with them. Without the Soviet threat around to keep the alliance intact, a rupture of this sort could well jeopardize America's close strategic partnership with Europe. The relationship may soon resemble that of the interwar period, when America and the European democracies were not adversaries, but they were certainly not trusting allies.

The United States and Europe are also likely to engage in more intense competition over trade and finance. America and Europe today enjoy a remarkably healthy economic relationship, with both parties benefiting from strong flows of trade and investment. A more assertive Europe and a less competitive American economy do, however, make it likely that trade disputes will become more politicized. When the Bush administration announced new tariffs on imported steel in March 2002, the EU vowed to contest the move at the WTO. Pascal Lamy, the EU's top trade official, commented that "the U.S. decision to go down the route of protectionism is a major setback for the world trading system."⁵³ Europe's restriction on imports of genetically modified foods, a ban that could cost U.S. companies $4 billion per year, has particular potential to produce a major dispute and stand in the way of a new round of global trade talks. The emergence of the euro as a reserve currency would also create the potential for diverging views about management of the international financial system. The competitive devaluations and lack of monetary coordination during the interwar period made amply clear that the absence of a dominant economic player can result in considerable financial turmoil and go-it-alone foreign policies—even among like-minded allies.

At issue are competing values, not just competing interests. The two sides of the Atlantic are separated by quite different social models. Despite continuing deregulation across Europe, America's laissez-

faire capitalism contrasts sharply with Europe's more state-centered economy. While Americans decry the constraints on growth stemming from the European model, Europeans look askance at America's income inequalities, its consumerism, and its willingness to sacrifice social capital for material gain. The two have also parted company on matters of statecraft. Americans see the EU's firm commitment to multilateral institutions and the rule of international law as naïve, self-righteous, and a product of its military weakness, while Europeans see America's reliance on the use of force as simplistic, self-serving, and a product of its excessive power. Europeans still share a historical affinity for the United States, but they also feel estranged from a society wedded to gun ownership, capital punishment, and gas-guzzling cars. At root, America and Europe adhere to quite different political cultures. And the cultural distance appears to be widening, not closing, putting the two sides of the Atlantic on diverging social paths.

This divergence over values as well as interests is likely to deal a serious blow to the effectiveness of international organizations. Most multilateral institutions currently rely on a combination of U.S. leadership and European backstopping to produce consensus and joint action. The United States and Europe often vote as a bloc, leading to a winning coalition in the U.N., the IMF, the World Bank, and many other bodies. Such coordination quietly and steadily keeps these international institutions on track.

When Europe resists rather than backstops American leadership, multilateral organizations are more likely to be faced with gridlock, if not paralysis. Early signs of such resistance are already visible. In May 2001, EU member states took the lead in voting the United States off the U.N. Commission on Human Rights, the first time Washington had been absent from the body since its formation in 1947. The apparent rationale was to deliver a payback for U.S. unilateralism and to express disapproval of America's death penalty. The same day, in a separate vote of the U.N.'s Economic and Social Council, the United States lost its seat on the International Narcotics Control Board.

The Europeans pressed ahead with the establishment of the International Criminal Court despite U.S. objections. When the ICC came into being on July 1, 2002, the Bush administration made known its displeasure by threatening to withdraw U.S. personnel from the U.N. mission in Bosnia unless American forces were granted protection from prosecution by the court. After Washington defected from the Kyoto Protocol, EU members joined with Japan and 150 other

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countries to finalize the agreement on global warming in July 2001, their delegates displaying their disapproval when Paula Dobriansky, the Bush administration's emissary, sought to explain America's decision to opt out. In short, a world in which the United States and Europe are no longer closely working together is one in which the day-to-day functioning of international institutions could be put at risk.

None of these scenarios could plausibly lead to armed conflict between the United States and Europe. But any one of them could result in a dramatically different—and much less benign—world than the one we live in today.

The Roman past may shed one final ray of light on the present. Although Byzantium proved to be Rome's chief rival in the near term, it was the rise of non-European powers that ultimately led to the demise of the Roman Empire and its Byzantine successor. The spread of wealth and military might to the Islamic world initially deprived the Byzantine Empire of its main source of grain in the Middle East. Ottoman armies were eventually able to overwhelm Constantinople's walls, formally bringing the Byzantine era to an end. The Ottomans were soon at the gates of Vienna.

In similar fashion, the rise of Asia may in the long term spell more trouble for the West than the return of rivalry between North America and Europe. This book focuses primarily on the rise of Europe, both because the EU's geopolitical significance has been so grossly overlooked and underestimated and because Europe, not Asia, is the near-term challenger to American primacy. It is during this current decade that the geopolitical implications of Europe's ascent will take effect, while the rise of Asia is further off.

But Asia's advance is not that far off. By the third decade of this new century, China will likely arrive on the scene as one of the world's leading nations. If its internal politics have not changed dramatically by that time, the United States will face not just another pole, but potentially a major ideological and geopolitical adversary. In contrast to the European case, the United States could face disputes with China—over Taiwan or the Korean peninsula, for example—that could lead to armed conflict.

Japan too will eventually come out of its economic slump and re-emerge as a global player. Especially because of its estranged relationship with China, Japan is likely to stick by its alliance with the United States and follow Washington's lead on matters of defense. But even within Japan there have been restless stirrings and initial signs that a

change of course might be in the offing. Junichiro Koizumi, the prime minister who took office in April 2001, from the outset shrouded himself in both populist and nationalist symbols. He proposed constitutional revisions that would eliminate provisions limiting the role of Japan's military. He selected as his initial foreign minister Makiko Tanaka, a fellow populist who proceeded to skip numerous meetings with visiting dignitaries, including one with Deputy Secretary of State Richard Armitage, the first high-level U.S. official to pay a visit to the new government. In August 2001, he visited the Yasukuni Shrine, a memorial that pays homage to Japanese heroes from World War II. Koizumi also stood by the decision of the Ministry of Education to approve new history textbooks that gloss over the country's wartime atrocities—provoking outrage in China and South Korea.

Japan is not about to make a dramatic change of course and deliberately act as a counterweight to the United States anytime soon. But an ascendant Asia looms on the distant horizon. And coupled with various uncertainties, including the trajectory of North Korea and the fate of Indonesia, the region as a whole will confront both America and Europe with new strategic challenges. By 2025, America and Europe may both be spending much more time worrying about the rise of Asia than about each other.

For now, however, it is Europe that is emerging as America's only major competitor. The implications for the global system and for U.S. grand strategy can be accurately mapped only after examining the other major source of change in the international system—America's changing internationalism.

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# Executive Summary

* One of the defining features of the global economic landscape over the past decade has been the increasing integration and cohesion of the transatlantic economy. Globalization is happening faster and reaching deeper between Europe and America than between any other two continents.

* The data in this study suggest that the past decade was not primarily about U.S. companies spreading their operations to the four corners of the globe. Rather, it was a time when the transatlantic economy became even more intertwined and interdependent. Failing to understand this dynamic can lead to serious errors of policy and cause significant damage to U.S. and European interests.

## It's Foreign Investment, Stupid

* Trade statistics remain the standard benchmark by which governments, politicians and the media usually measure international commerce. And yet a trade-only view of America's global economic engagement is dangerously misleading, because it overlooks a basic fact: whenever and wherever possible, U.S. firms prefer to sell goods and services abroad through their foreign affiliates rather than export them from the US.

* U.S. foreign affiliate sales hit a record $2.9 trillion in 2000, nearly three times larger than U.S. exports ($1.1 trillion) in the same year.

* American firms invested more capital overseas in the 1990s — in excess of $750 billion — than in the prior four decades combined. This surge in U.S. foreign direct investment (FDI) did not flow to the new and untapped markets of the developing nations, as many assume. Rather, the bulk of U.S. FDI in the 1990s — roughly half of the global total — went to the Old World, Europe.

* Foreign investment is the backbone of the transatlantic economy, not trade. And when one adds investment and trade together to get a more complete picture, one sees that U.S. economic engagement remains overwhelmingly focused on Europe — that's where the markets are, that's where the profits are.

* Similarly, foreign affiliates of European companies have been the chief means by which European companies deliver products to U.S. consumers.

* The total output of U.S. foreign affiliates in Europe ($333 billion in 2000) and of European affiliates in the U.S. ($301 billion) is greater than the total gross domestic output of most nations.

* Although transatlantic trade disputes steal the headlines, trade itself accounts for less than 20% of transatlantic commerce, and U.S.-EU trade disputes account for less than 1% of transatlantic commerce.

## Europe and America: That's Where the Profits Are....

* When it comes to the bottom line, Europe—by a wide but not fully appreciated margin—remains the most important region in the world for corporate America.

* In 2001, and throughout most of the 1990s, Europe accounted for half of total global earnings of U.S. companies, as measured by U.S. foreign affiliate income.

* The United Kingdom is the most important national market in the world for corporate America when it comes to global earnings. On average, the UK represented just over 26% of total affiliate income earned in Europe over the 1990-2001 period and for roughly 13% of the global total.

* The United States is the most important market in the world in terms of earnings for European multinationals. U.S. affiliate income of European affiliates rose more than five-fold in the 1990's to nearly $26 billion.

* Europe's investment stake in the U.S., on an historical-cost basis, grew to a whopping $835 billion in 2000, which is nearly one-quarter larger than America's stake in Europe. European firms have never been as exposed to the U.S. economy as in the first decade of the 21st century.

## That's Where the Markets Are....

* Corporate America's foreign assets tallied over $5.2 trillion in 2000. The bulk of these assets — roughly 58% — were located in Europe, with the largest share in the United Kingdom, followed by the Netherlands and Germany.

* America's asset base in the UK is almost equivalent to the combined overseas affiliate asset base of Asia, Latin America, Africa and the Middle East. And during the 1990s U.S. investment in the United Kingdom ($175 billion) was nearly 50% larger than the total invested in the entire Asia-Pacific region.

* U.S. assets in Germany alone -- $300 billion in 2000 -- were greater than total U.S. assets in all of South America.

* Europe accounted for more than half of U.S. foreign affiliate sales in 2000, with affiliate sales of $1.4 trillion more than double comparable figures for the entire Asia/Pacific region.

* The UK, not China or Mexico, was at the forefront of America's great overseas investment boom of the 1990s, attracting just over 20% of total US FDI over the period. The Netherlands ranked third, after Canada.

* U.S. affiliate sales in the United Kingdom alone in 2000 ($413 billion) exceeded aggregate sales in Latin America.

* Despite all the talk about U.S. investment flows to Mexico courtesy of the North American Free Trade Agreement (Nafta), U.S. firms in the 1990s ploughed nearly twice as much capital into the tiny Netherlands ($65.7 billion) as they sank into Mexico ($34.1 billion).

* While U.S. affiliate sales in China skyrocketed over the 1990s, by 2000 such sales still only totaled $32 billion — roughly equal to U.S. affiliate sales in Sweden, less than one-tenth of those in Germany ($236 billion) and about one-fourth of those in France ($137.5 billion).

* Nearly three-quarters of all foreign investment in the US in the 1990s came from Europe ($659 billion).

* European firms held some $3.3 trillion in US assets in 2000, accounting for more than two-thirds of total foreign assets in the U.S. There is more European investment in Texas alone than all U.S. investment in Japan.

* Affiliate sales, not trade, represent the primary means by which European firms deliver goods and services to U.S. consumers. In 2000, the value of European affiliates sales in the U.S. ($1.4 trillion) was over four times larger than the value of U.S. imports from Europe.

* UK affiliates sales in the U.S. in 2000 were more than five times the amount of UK exports to the U.S. German affiliate sales in the U.S. were more than four times greater than German exports to the U.S. - a dramatic comparison given that Germany traditionally has been considered a classic "trading" nation.

## That's Where Jobs Are....

* The bulk of corporate America's overseas workforce does not toil in low-wage nations like Mexico and China. Rather, the majority are employed in relatively well-paying jobs in the industrialized nations, notably in Europe where U.S. firms employed 4.1 million workers in 2000. If one adds indirect employment, close to 6 million Europeans owe their livelihoods to American investors.

* European affiliates employed roughly 4.4 million American workers in 2000, some 6.5% greater than U.S. affiliate employment in Europe. If one adds indirect employment, about 7 million Americans owe their livelihoods to European investors, who on average pay higher wages and provide greater benefits than domestic U.S. employers.

* The top five employers in the U.S. were firms from the United Kingdom (1.2 million workers), Germany (730,000), France (649,000), the Netherlands (561,000) and Switzerland (554,000). Out of the 6.4 million US workers on the payrolls of foreign affiliates in 2000, European firms accounted for nearly 70% of total employment.

* The manufacturing workforce of U.S. affiliates in Germany was in excess of 400,000 in 2000, double the number of manufacturing workers employed by U.S. foreign affiliates in China.

* Many in the U.S. fret over American jobs being lost to China, but few realize that the United Kingdom is home to the largest overseas workforce of U.S. affiliates, with U.S. firms employing nearly 1.3 million workers in 2000, more than the entire number of workers employed by affiliates in developing Asia, including almost five times the number of those working for U.S. affiliates in China.

## That's Where the Research Is....

* A full two-thirds of U.S. corporate research and development conducted outside the United States is conducted in Europe.

## That's Where the Money Is....

* Europe is not only a critical source of revenue for blue-chip companies, it is also a key supplier of capital or liquidity for the debt-stretched United States, which presently must borrow over $1.4 billion a day to finance its current-account deficit.

## Drifting Apart? Or Crashing Together?

* In sum, the years since the fall of the Berlin Wall have witnessed one of the greatest periods of transatlantic economic integration in history. Our mutual stake in each other's prosperity has grown dramatically since the end of the Cold War. We ignore these realities at our peril.

# 1. Introduction

In June 1986, a group of American and European scholars met in Brussels to review and analyze the major trade issues on which officials from the European Community (EC)¹ and the United States (US) often disagreed. The conference was held three months before the Punta del Este Ministerial Meeting of the General Agreement on Tariffs and Trade (GATT) that successfully launched the Uruguay Round. The aim of the seminar, whose proceedings appear in Baldwin, Hamilton and Sapir (1988), was to provide a better understanding of the economic causes of the disagreements between the EC and the US and to consider various policy options that might assist in resolving these differences in the course of the Uruguay Round.

In some ways, the circumstances today, in April 2002, look very similar to those prevailing 16 years ago. American and European scholars are again meeting, on this occasion at Harvard University, at a time of conflict between the world's two largest trading actors. The conference also comes a few months after the Doha Ministerial Meeting of the World Trade Organization (WTO), which has seen the successful launch of a new round of multilateral trade negotiations.

The European Community and the United States are the twin pillars of the world trading system. They are, by far, the world's leading exporters and importers. More strikingly, the EC and the US, together, account for a staggering 70 percent of world merchandise trade. In other words, seven-tenth of the value of world trade either originates from or is shipped to the EC or the US. Conversely, only three-tenth of the value of world trade takes place between countries outside the European Community and the United States. In comparison, the size of bilateral EC-US trade looks relatively modest. It accounts for less than 10 percent of world trade and is no bigger than bilateral US-Canada trade.

Hence, the real significance of the trade relationship between the EC and the US lies not so much in their bilateral trade as much as in their central role in the world trade matrix.

Despite the contextual similarities – the bilateral EC-US disputes, the central role of the two partners in the world trading system and the launch of a new round of multilateral trade negotiations – today's trade relations between the EC and US are substantially different from what they were 15 years ago. This is due to several developments in the multilateral trading system.

First, the number and diversity of countries with membership in the WTO is vastly greater than in the old GATT regime of the mid-1980s. Then, the GATT had less than 80 members. As of January 2002, the WTO had 144 members (including China) and 27 applicants (including Russia). Second, the dispute settlement system has become more effective. Under the old GATT regime, consensus of all members was required to proceed with every stage of the dispute settlement process. The result was often inertia as the losing party could block the process at any stage. The Dispute Settlement Understanding (DSU) reached in the Uruguay Round significantly

¹ I use the term 'European Community' (EC), rather than 'European Union' (EU), throughout the text because the EC is the relevant legal entity as far as trade relations is concerned.

changed the process by introducing the principle of 'automaticity'. Under the WTO regime, unless there is consensus among all members, no stage of the dispute settlement process can be blocked. Third, during the past 15 years the number of regional trade agreements (RTAs) has hugely increased, with the EC and the US being parties to many of them. Today, trade with RTA partners accounts for nearly one-third of total (extra-) EC and US trade.

The paper analyzes the current trade disputes between the EC and the US in the light of these changes in the trade regime. It is divided into two substantive parts. Section 2 recalls the bilateral EC-US trade conflicts that took place in the early 1980s, while Section 3 looks at the bilateral EC-US trade conflicts that have happened since the inception of the WTO in January 1995. Section 4 concludes.

## 2. EC-US Trade Conflicts in the Early 1980s (1980-1985)

### Quantitative Sketch

The early 1980s witnessed a sharp increase in trade friction between the European Community and the United States. One symptom of this friction was the growing volume of GATT litigation between the two parties.

According to Hudec (1988), more than half the number of bilateral EC-US GATT "lawsuits" filed from 1960 (the year when the EC became a full participant in GATT legal affairs) to the end of 1985 were initiated between 1980 and 1985.

The top panel of Table 1 reproduces the findings of Hudec (1988) on the number of and parties to GATT lawsuits from 1980 to 1985. These findings showed that:

1. Exactly one-third of all GATT lawsuits during this period (14 of 42) were between the EC and the US.

2. Ninety percent of all GATT lawsuits (38 of 42) involved either the EC or the US as one of the parties. Only 4 of the 42 cases involved neither.

3. Nearly 40 percent of all GATT lawsuits involving either the EC or the US were bilateral EC-US cases.

4. The EC and the US generally litigated as much with each other as with all other countries combined. Half the cases against the EC (8 of 16) were brought by the US, and half those against the US (6 of 12) were brought by the EC. Similarly, half the lawsuits filed by the EC (6 of 12) were against the US. By contrast, the US targeted more often the EC than all other countries: two-thirds of the cases filed by the US (8 of 12) were against the EC.

5. The EC and the US were each responsible for initiating roughly 30 percent of all GATT cases (12 of 42). The US was also the target of about 30 percent of the GATT lawsuits (12 of 42), but the EC was the target of nearly 40 percent of the cases (16 of 42).

The centrality of the European Community and of the United States to the GATT litigation process was, in fact, no bigger during the period 1980-1985 than it had been

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in the period 1960-1979.² Besides the sharp increase in the number of GATT actions, the main distinguishing feature of the early 1980s was the change in the respective roles of the EC and the US. Between 1960 and 1979, the US initiated 50 percent of all GATT lawsuits (19 of 38), whereas the EC initiated less than 10 percent of the cases (3 of 38). By contrast, the EC was on the receiving end of nearly half of the lawsuits (17 of 38), while the US was the defendant in less than one-tenth of the cases (3 of 38). Since the early 1980s, the EC and the US have achieved parity.

Why was there such a significant rise in trade frictions between the two partners at the time?

The early 1980s was an eventful period for the trade agenda. It was an era of implementation of the Tokyo Round agreements, concluded in 1979, and of preparation of the next GATT round of multilateral trade negotiations, eventually launched in Uruguay in 1986. At the same time, the United States witnessed its deepest recession in post-WWII history,³ a strong appreciation of its currency,⁴ and a sharp deterioration in its foreign trade balance.⁵ The European Community also suffered an economic downturn,⁶ but with a sharp depreciation of its real exchange rate and a trade balance close to equilibrium.

The EC-US trade conflicts during the first half of the 1980s reflected both the achievement and the failures of the Tokyo Round.

One of the major accomplishments of the Tokyo Round was the negotiation of six specific agreements on non-tariff barriers (NTBs). These GATT codes related to dumping, subsidies, standards, government procurement, customs valuation, and import licensing procedures. In their review of GATT codes, Stern and Hoekman (1987) noted that the "subsidies code has received the most negative publicity of all the Tokyo Round codes, and many consider it not to have been very successful. Perhaps the major explanation for this perceived lack of success is that, in drafting the code it was not possible to obtain consensus on such important issues as the appropriate use of agricultural subsidies [or] the definition of subsidies" (p. 62).

There were major differences between the European Community and the United States over what constitutes a subsidy and over how to determine the magnitude of subsidies. In fact, problems with the subsidies code mainly reflected bilateral differences between the EC and the US over matters of agricultural policy. This situation led to numerous EC-US GATT disputes in agriculture.

The fact that there was another round of multilateral trade negotiations in the offing was also, probably, an important factor contributing to the strong rise of GATT

² Thirty percent of all GATT lawsuits during the period 1960-1979 were between the EC and the US, and all but one of all 38 lawsuits involved either the EC or the US.

³ Real GDP fell by nearly 2 percentage points and the unemployment rate reached nearly 10 percent in 1982.

⁴ The dollar's real effective exchange rate gradually appreciated by nearly 30 percent between 1980 and the peak year of 1984.

⁵ The US trade balance gradually deteriorated between 1981 and 1984, reaching a deficit of nearly 3 percentage points of GDP in 1984 and 1985. It reached a peak of 3.3 percent in 1987.

⁶ Real GDP growth was barely 0.1 percent in 1981 and the unemployment rate reached a record 8.7 percent in 1982.

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litigation in the early 1980s. Moreover, as noted by Hudec (1988), the general climate
within GATT had also become more conducive to litigation at the time. Following the
Tokyo Round negotiations, there were efforts to improve the GATT's dispute
settlement system, which led to new and more rigorous procedures for most of the
GATT codes, including the subsidies code.

Agricultural Disputes

Most of the disputes between the EC and the US in the early 1980s were about trade
in agricultural products. Nearly 90 percent of all US actions against the EC (7 of 8)
involved agriculture. However, the focus on agriculture in GATT lawsuits against the
EC was not due solely to the US. In fact, three-fourths of all lawsuits against the EC
involved agricultural products (12 of 16). By contrast, only roughly 40 percent of all
lawsuits against the US covered agriculture (5 of 12), and mostly due to actions
brought by the EC (3 of 5).

By the early 1980s, the EC's Common Agricultural Policy (CAP) was already a long-established subject of US GATT lawsuits against the EC.⁷ During the 1960s, the US had tried to persuade the EC to limit the level of its variable levy, to keep price support down and to manage supply through production limits. This was the subject of all the three bilateral EC-US GATT litigation cases that took place at the time, and of the failed Kennedy Round negotiations in agriculture. During the 1970s, the US tried to preserve GATT bindings and other GATT disciplines on EC agricultural products not covered by the variable levy regimes. It also insisted that the effects of the CAP be limited to the EC market, so as to keep third-country markets open to US exports. These two objectives were the subject of four out of the six GATT lawsuits brought by the US against the EC during that time – the other two lawsuits concerned the income tax systems of EC member countries, and were filed as counterclaims against the EC's own GATT lawsuit against the US Domestic International Sales Corporation (DISC) legislation.⁸

Steel Disputes

The early 1980s also witnessed important bilateral EC-US disputes partly outside the GATT framework. The most acrimonious one was in the steel sector. In March 1980, the US Steel Corporation filed broad-ranging antidumping petitions against European producers. The EC threatened retaliation if antidumping charges were imposed. The outcome of bilateral EC-US negotiations was the revision of the notorious "trigger price mechanism" instituted by the US government in 1978 in order to establish a minimum price for imports. However, US steel imports continued to rise and in early 1982 US producers filed more than one hundred antidumping and countervailing duty complaints against suppliers from seven EC and four other countries. At the end of the year, the cases against EC producers were settled by a voluntary restraint agreement

⁷ See Hudec (1988).

⁸ The DISC case, brought in 1973, was the first-ever GATT lawsuit filed by the EC. It related to a scheme providing tax deferral for the export earnings of US corporations. The EC argued that the DISC was a tax exemption. The United States eventually repealed the DISC in 1984, and replaced it by the Foreign Sales Corporations (FSC). The FSC allowed partial exemption for the income of a foreign corporate subsidiary obtaining from handling US export sales. The repeal of the DISC and its replacement by the FSC were based on the Tokyo Round subsidies code. See Hufbauer (2002).

(VRA), whereby the EC agreed to limit its exports of carbon steel and of steel pipe and tube. In 1984, however, the Community took two legal actions against the US clamp down on its steel exports. It filed a GATT lawsuit against the US ban on steel and pipe imports, and adopted retaliatory action exercising compensation rights under GATT Article XIX in response to a US safeguard action on carbon steel.⁹

The EC-US steel disputes at the beginning of the 1980s were partly attributable to the failure of the Tokyo Round to resolve a long-standing thorn in the GATT system. Under the original GATT, Article XIX permitted countries to escape from their obligations and raise trade barriers to safeguard their domestic producers in the event of a 'serious injury' associated with a surge of imports. The article also specified that foreign suppliers could retaliate or be compensated for losses from the restricted market access.

In general, the European Community and the United States made little use of Article XIX. Both resorted, instead, to voluntary restraint agreements and other GATT-illegal measures. According to Sampson (1987), there were 53 VRAs protecting the EC market in 1986, and 32 protecting the US market. This contrasts with only 13 Article XIX actions by the EC and 14 by the US during the entire period 1970-1986.

The reasons why the EC and the US preferred GATT-illegal VRAs over GATT-sanctioned safeguard measures are well known. First, the use of Article XIX measures generally required adherence to the principle of non-discrimination, whereas VRAs could be targeted towards specific trading partners. Second, the language of Article XIX was considered by international trade lawyers to be "extraordinary oblique" and often only "explainable by reference to the historical development of the language and practice under it" (Jackson 1969 as quoted by Sampson 1987).

During the Tokyo Round, there were attempts to revise the modalities of application of Article XIX with the view to bring safeguards back under the GATT. The negotiations focused largely on the issue of 'selectivity'. Advocates of selectivity - mainly the EC - argued that countries should be allowed to apply safeguard measures only against imports from countries 'apparently' causing the injury. This proposal was strongly objected by smaller trading countries, who considered the non-discriminatory application of Article XIX as the best rampart against protectionist measures by large countries. In the end, the Tokyo Round was unable to resolve the issue and left Article XIX untouched.

Both before and after the Tokyo Round, steel was the product category most affected by VRAs, especially in the US market. The United States maintained VRAs with the EC from 1969 to 1974, and from 1982 to 1992. According to Sampson (1987), 25 of the 32 VRAs protecting the US market in 1986 covered steel and steel products.

The EC-US steel dispute of the early 1980s was the result of both cyclical and structural factors. On the cyclical side, the year 1982 was especially disastrous for world demand, affecting both EC and US steel producers. The latter were, however, also affected by the sharp appreciation of the US dollar, which resulted in the deterioration of their relative competitiveness. On the structural side, the situation in

⁹ See Hudec (1988) and Tarr (1988).

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the early 1980s was the continuation of three long-term trends that had started a decade earlier: stagnant world steel consumption; the relative decline of the EC and the US in the world steel market due to the entry of new suppliers; and improvements in productivity. The combination of these three trends meant enormous restructuring for the EC and US steel industry. In the absence of well-functioning GATT safeguard rules, such restructuring, especially if combined with difficult cyclical conditions, was bound to result in bitter trade disputes between the two economic giants

3. EC-US Trade Conflicts Since 1995

Quantitative Sketch

Recent years have once again witnessed a sharp intensification of trade disputes
between the European Community and the United States. Bilateral EC-US conflicts -
on bananas, beef hormones or steel – have become regular headlines in the
international media.

Compared with the bilateral EC-US GATT litigation in the early 1980s, the annual volume of bilateral EC-US WTO litigation for the period 1995-2001 has increased substantially. However, as shown in Table 1, the threefold increase in the number of annual bilateral EC-US litigation must be seen against a fivefold rise in the annual number of total disputes brought to the GATT/WTO settlement system. Table 1 shows several interesting facts regarding the 251 cases brought to the WTO from its inception till March 31, 2002:

1. Since 1995, disputes between the EC and the US account for about 20 percent (48 of 251) of all WTO disputes. This proportion is substantially lower than during the early 1980s, when it was one-third.

2. Three-fourths of all WTO disputes (184 of 251) involve either the EC or the US as one of the parties. While still very high, this proportion is significantly less than the 90 percent recorded in the early 1980s. Put differently, the proportion of cases involving neither the EC nor the US (67 of 251) has risen substantially since the early 1980s: from 10 to 25 percent.

3. One-fourth of all WTO disputes involving either the EC or the US are bilateral EC-US cases (48 of 184). This proportion is substantially lower than in the early 1980s, when it stood at nearly 40 percent.

4. In contrast with the early 1980s, the EC and the US have litigated less with each other than with the rest of the WTO membership since 1995. While half of the cases against the EC (25 of 47) are still brought by the US, only one-third of those against the US are initiated by the EC (23 of 63). Forty percent of the disputes filed by the EC (23 of 56) are against the US (compared to fifty percent in the early 1980s), and forty percent of the disputes launched by the US (25 of 66) are against the EC (compared to two-thirds at the beginning of the 1980s).

5. Since 1995, the US has initiated somewhat more WTO disputes than the EC (66 vs. 56 complaints). The US has also been a more frequent target of WTO disputes than the EC (63 vs. 47).

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Hence, it appears that, while still central, the role of the European Community and of
the United States in the GATT/WTO dispute settlement mechanism has somewhat
diminished compared to the early 1980s. More generally, it would seem that the
pattern of WTO litigation better reflects the pattern of international trade than was the
case in the early 1980s. Nonetheless, bilateral EC-US disputes still occupy a
disproportionate place in the multilateral dispute settlement system. The following
data illustrate these points:¹⁰

1. Together, the EC and the US account for 70 percent of world trade and 75 percent of WTO disputes.

2. Bilateral EC-US trade accounts for less than 10 percent of world trade, but 20 percent of WTO disputes.

3. Bilateral EC-US trade accounts for around 22 percent of EC trade, but around 47 percent of the WTO disputes involving the EC.

4. Bilateral EC-US trade accounts for about 20 percent of US trade, but 37 percent of the WTO disputes involving the US.

5. Trade between the EC and its preferential partners in Europe and Africa accounts for about 32 percent of EC trade, but there is not a single WTO dispute between them.

6. Trade between the US and its NAFTA partners accounts for about 33 percent of US trade, but 10 percent of WTO disputes involving the US.

7. Trade between the EC and its non-preferential WTO partners (excluding China, Russia, the Middle East - all non-members of the WTO prior to 2002 - and the United States) accounts for about 31 percent of EC trade, but 53 percent of WTO disputes involving the EC.¹¹

8. Trade between the US and its non-preferential WTO partners (excluding China, Russia, the Middle East and the European Community) accounts for about 38 percent of US trade, but 53 percent of WTO disputes involving the US.¹²

These data clearly indicate that the disproportionate share of bilateral EC-US WTO disputes is partly the result of the tendency of the EC and of the US to resolve their disputes with preferential partners outside the WTO system. In fact, if one computes the ratio of disputes to trade between relevant partners, one observes that the coefficient of EC-US WTO disputes (47% divided by 22%) is barely 25 percent higher than the coefficient of EC disputes with other non-preferential partners (53% divided by 31%). The difference is slightly more pronounced for the United States, with a coefficient of EC-US disputes (37% divided by 20%) which is 33 percent higher than the coefficient of US disputes with other non-preferential partners (53% divided by 38%).

Despite these observations, the fact of the matter is that bilateral EC-US trade disputes retain their full potential to disrupt the world trading system simply because of the sheer size of the two partners within the world trade matrix.

¹⁰ The trade figures are for 2000 and are shown in Table 2. Those for WTO disputes are for the period from January 1, 1995 to March 31, 2002.

¹¹ More than half of these disputes (30 of 55) involve just 4 trade partners: Canada (9), India (8), Brazil (7) and Japan (6).

¹² Half of these disputes (40 of 81) involve just 4 trade partners: Japan (12), Canada (10), Korea (10) and Brazil (8).

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L.C.J.

In terms of subject matters, the bilateral EC-US WTO trade disputes recorded since 1995 bear much resemblance, but also several striking differences, with the bilateral EC-US GATT disputes of the early 1980s.

## Agricultural Disputes

The EC's Common Agricultural Policy continues to be a major source of friction between the European Community and the United States. However, the specifics of the WTO lawsuits filed by the United States against the EC's agricultural policy has greatly changed over the past 20 years. Since the inception of the WTO in 1995, the US has filed no action against EC agricultural subsidies. This is, clearly, the outcome of two important elements in the Uruguay Round negotiations: the reintegration of the agricultural sector under GATT discipline (the Agriculture Agreement), and the Subsidies and Countervailing Measures Agreement which provided a considerable improvement over the Tokyo Round subsidies code. This relative peace between the European Community and the United States was, by no means, a foregone conclusion at the beginning of the 1990s. For instance, Tim Josling, one of the most knowledgeable experts on EC-US agricultural conflicts stated a few months before the conclusion of the Uruguay Round that "few would put the probability of a strong agreement very high. More likely is a continued period of tension, with both the EC and the US trying to interpret the terms of a weak agreement in their favor, at the same time accusing the other of bad faith. The prospects for a peaceful decade in farm trade do not look very bright." (1993, p. 572).

The decade has certainly not been entirely peaceful. During the 1990s, the United States has brought successful WTO action against relatively two new developments in the EC's agricultural policy: the prohibition of beef hormones and the banana regime. The two cases are well known.¹³

In 1989, the EC started to ban the use of six growth hormones used for cattle and to forbid the imports of beef containing such hormones. The ban led to a GATT lawsuit, and later to a WTO dispute settlement case filed in 1996 by the United States and other beef-exporting nations. The Panel, and subsequently the Appellate Body, ruled that the EC ban violated the EC's WTO obligations. In view of the non-compliance by the EC with the WTO ruling, the Dispute Settlement Body authorized, in 1999, the United States to impose retaliatory tariffs on imports from the EC of $117 million per year.¹⁴ The measure is still active.

In 1993, following the implementation of the Single Market, the Community instituted an EC-wide system of import quotas for bananas to replace a long-standing system of national quotas, which had become unmanageable with the removal of national border controls. The new system led to two GATT lawsuits, and later to two WTO dispute settlement cases filed in 1995 and 1996 by the United States and several Latin American countries.¹⁵ The Panel, and subsequently the Appellate Body, ruled that the EC system violated the EC's WTO obligations. In view of the non-compliance by the EC with the WTO ruling, the Dispute Settlement Body authorized,¹⁶

¹³ See, for instance, Messerlin (2001).

¹⁴ Canada received a similar authorization at the same time as the United States.

¹⁵ The United States were not a party to the original GATT lawsuits.

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in 1999, the United States to impose retaliatory tariffs on imports from the EC of $191
million per year.¹⁶ The measure was deactivated in 2001, following an agreement
between the European Community and the United States.¹⁷

These two highly-publicized WTO dispute settlement cases - the only two where
authorized retaliation has taken place - have an important common feature. *Bananas* and *Beef Hormones* were both largely viewed as simply pitting the United States against the European Community, although the US was neither the only complainant nor the only party authorized to retaliate against the EC. This illustrates the point of Bown (2002) and others that "the retaliation-as-compensation approach requires that affected trading partners have the *capacity* to retaliate" (p. 56; italics in the original). A key determinant of the capacity to retaliate is the size of the retaliating country, i.e. its ability to affect the partner's terms of trade. With the exception of raw materials, the European Community and the United States are probably the only two truly 'large countries' in the world. They alone have the capacity to retaliate by inflicting welfare losses on their partners.

## Steel Disputes

Steel disputes are another recurrent theme on the bilateral EC-US trade relations agenda. In 1992, following the termination of a broad network of VRAs that had been in force since 1982 and the collapse of negotiations on a Multilateral Steel Agreement (MSA) that would have imposed certain controls on international trade in steel, US producers filed nearly one hundred antidumping and countervailing duty petitions against imports from 21 countries, including several EC members. In response to these demands, the US Government imposed antidumping and countervailing duties on two categories of steel products. This led to a flurry of GATT complaints, including seven by the EC or by soon-to-be EC members (Finland and Sweden), which did not succeed, however, in removing the US measures.

The EC continued to challenge the GATT-conformity of the US measures after the entry into force of the WTO Agreement. In 1998, the EC filed a WTO dispute settlement case against the continued imposition of countervailing duties on imports of certain steel products by the United States. The Panel, and subsequently the Appellate Body, ruled that the measures by the United States were inconsistent with its WTO obligations under the Subsidies and Countervailing Measures (SCM) Agreement. The EC filed two further related WTO dispute settlement cases in 2000. The following year, it also brought a case challenging the continued imposition of antidumping duties on imports of certain steel products by the United States. Around the same time, the US Congress introduced a new piece of legislation (the 'Continued Dumping and Subsidy Offset Act of 2000' known as the 'Byrd Amendment') which gave the tariff revenue generated by antidumping and countervailing duties to the affected domestic producers, thereby raising their incentive to petition for antidumping and countervailing measures. In 2001, the EC and eight other nations filed a WTO dispute settlement case against the Byrd Amendment, which had been written into law at the instigation of the US steel industry.

¹⁶ Ecuador received a similar authorization in 2000.

¹⁷ An agreement between the EC and Ecuador was also reached in 2001.

10

Faced with growing challenges in the WTO towards its antidumping and countervailing measures, the US Administration decided to add another instrument to its panoply of measures aimed at protecting domestic steel producers against import competition. In 2000, the United States imposed definitive safeguard measures on imports of two relatively narrow categories of steel products against suppliers from the EC and other countries, while deliberately excluding its two NAFTA partners from the measures. In response to these measures, Korea and the EC filed two separate WTO dispute settlement cases. In the case brought by Korea, the Appellate Body ruled at the beginning of 2002 that the measures by the United States were inconsistent with its GATT/WTO obligations under the Subsidies Agreement and Article XIX. However, it rejected Korea's claim that the United States violated its GATT/WTO obligations by exempting Canada and Mexico, its NAFTA partners, from the measures. No report has yet been issued in the case filed by the EC.

In spite of the outcome in the previous case, the United States decided in March 2002 to impose definitive safeguard measures on imports of a broad range of steel products against suppliers from the EC and other countries, again deliberately excluding Canada and Mexico as well as two other FTA partners (Israel and Jordan) from the measures. In response to these measures, the EC, Japan and Korea immediately filed three separate WTO dispute settlement cases. The EC also immediately adopted its own provisional safeguard measures so as to protect its market against the potential diversion of steel trade due to the shutting of the US market.

These recent episodes suggest the European Community and the United States have made little or no progress in resolving steel trade disputes that have plagued them and the world economy for more than 30 years. Since 1970, the beginning of each decade has witnessed a torrent of trade measures by the US and the EC seeking to protect their domestic producers from each other and from third-country producers. The voluntary restraint agreements of the 1970s and 1980s were replaced in the 1990s by antidumping and countervailing measures that have now been supplemented by safeguard measures. In the United States, there are clear cyclical reasons behind this periodicity of trade protection measures: according to the National Bureau of Economic Research, recession hit the country in 1969-1970 and 1973-75, in 1980 and 1981-1982, in 1990-1991, and resurfaced in 2001. Two of these episodes were either immediately followed by, or in the midst of, a large US trade deficit, situations which tend to exacerbate the pressure for trade protection measures. There are good reasons to fear, therefore, that 2002 could see a repeat of the situation in the early 1980s, when the US, and the EC,¹⁸ instated comprehensive systems of trade distortions affecting the entire world steel market.

The current situation demonstrates that the Uruguay Round Safeguard Agreement, which established rules for the application of Article XIX measures, did not address the "fundamental flaw in the safeguard provisions of GATT" (Baldwin, 1995, p. 166). The Safeguard Agreement succeeded in rooting out 'grey-area' measures such as voluntary restraint and orderly marketing agreements. It also had the merit of spelling

¹⁸ There has not been a single WTO dispute settlement case filed either by the United States or by another WTO member against the EC in the area of steel. This does not mean, however, that the EC steel industry has not been protected by a variety of measures. Messerlin (2001) reports that there were 111 antidumping cases lodged by the EC steel industry between 1980 and 1999, most of which resulted in antidumping measures.

out in more details the procedures that must be followed in Article XIX determinations and in defining such key concepts as 'serious injury'. On the other hand, it failed to address the time-consistency issue inherent in GATT/WTO safeguard provisions. By allowing governments to provide import protection to domestic industries 'seriously injured' by increased imports, GATT/WTO-sanctioned safeguard measures do not tend to foster an economically efficient structural adjustment process. This is especially true in politically-powerful industries like steel.

The recent steel disputes also illustrate another worrisome trend. The United States seems to be explicitly using safeguard measures to send the message to third countries that they better sign up to free-trade agreements if they want to maintain access to the world's largest import market.¹⁹

## New Disputes: Services and Intellectual Property Rights

One of the major achievements of the Uruguay Round agreements was the decision that all WTO signatories must accept commitments in two other areas besides trade in goods covered by the GATT: trade in services covered by the GATS, and trade-related intellectual property rights covered by the TRIPs Agreement. What has been the impact of this extension of multilateral trade rules on bilateral EC-US WTO dispute settlement cases?

Trade in services is a substantial component of the bilateral EC-US trade relation. In 2000, services trade amounted to more than one-third of the total goods and services trade between the European Community and the United States. At the same time, bilateral EC-US trade in services represented about 40 percent of total (extra-) EC trade in services - compared to about 20 percent for trade in goods. Yet, it seems that there have been only two bilateral EC-US WTO dispute settlement cases concerning the GATS.

In *Bananas*, the United States and several Latin American countries claimed that the EC regime for the importation, sale and distribution of bananas was inconsistent with several of the EC's WTO obligations, including those under the GATS. The heart of the case as far as the United States was concerned were issues relating to distribution activities. The presence of the United States among the complainants obviously changed significantly the nature of the *Bananas* case compared to the situation in the early 1990s, when Latin American banana-growing countries had been alone in their two GATT dispute settlement cases against the EC. The EC actually attempted to invalidate the presence of the United States in the case by arguing that its banana import regime falls solely under the GATT because: (1) the GATT and the GATS may not overlap in application to a measure; and (2) the import regime does not touch the service providers of the complaining parties in their wholesale service activities, but only in their import activities, that is, in their activities in the goods sector. Both arguments were rejected by the Panel and the Appellate Body.

¹⁹ In a press briefing held in The White House on March 5, 2002 US Trade Representative Zoellick maintained that Brazil and other Latin American countries were receiving a preferential treatment by being exempted from safeguard measures. He added: "So it's a Western Hemisphere arrangement that I think will be -- go down rather well."

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In 1997, the United States brought a WTO dispute settlement case against Belgium for measures affecting commercial telephone directory services. The case never went beyond formal consultation.

There have been a number of bilateral EC-US WTO dispute settlement cases relating to intellectual property rights rules, some filed by the EC, others by the US. Only two cases, both brought by the EC, went beyond formal consultation.

In 1999, the EC filed a case regarding Section 110(5) of the United States Copyright Act as amended by the "Fairness in Music Licensing Act" enacted in 1998. The EC alleged that Section 110(5) of the US Copyright Act permitted, under certain circumstances, the playing of radio and television music in public places (such as bars, shops, restaurants etc.) without the payment of a royalty fee, in violation of the US obligations under the TRIPS agreement. The Panel ruled that parts of Section 110(5) did not meet the obligations of the United States under the TRIPS Agreement. Furthermore, the Arbitrators determined that the level of EC benefits which were being nullified or impaired as a result of the operation of Section 110(5) amounted to $1.1 million per year.

The same year, the EC filed a case regarding Section 211 of the United States Omnibus Appropriations Act of 1999. Section 211 was designed to diminish the rights in the US of owners of trademarks and trade names that previously belonged to a Cuban national or company that was expropriated in the course of the Cuban revolution. It was introduced into the Omnibus Appropriations Act of 1999 at the behest of Bacardi, Ltd., a Bermuda-based corporation, in order to bar Havana Club Holdings (HCH) from protecting its trademark *Havana Club* in the US. *Havana Club* is a premium rum produced in Cuba and marketed worldwide by HCH, a joint venture between a Cuban company and Pernod Ricard of France. The EC claimed that Section 211 was not in conformity with the US obligations under the TRIPS Agreement. The Panel, and subsequently the Appellate Body, ruled in favor of the EC. The Appellate Body insisted that its ruling was not a judgement on confiscation *per se*. Instead, it was a matter of ensuring that where confiscation of intellectual property rights takes place between two countries, its effects on other WTO members must comply with the TRIPS Agreement, and in particular with its obligations of national treatment and most-favored-nation treatment.

## 4. Conclusion

Several conclusions may be drawn from the analyses in this paper.

*First*, there has been a sharp rise in the total number of trade lawsuits since the introduction of the new WTO dispute settlement system. The number of cases during the first 7 years of the WTO (1995-2001) far exceeded the number recorded during the early 1980s, or even during the last 15 years of the GATT (1980-1994).²⁰

*Second*, although their relative importance has somewhat decreased compared to period prior to 1995, the EC and the US still account for the lion's share in the total

²⁰ See Hudec (1993 and 2002).

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number of WTO dispute settlement cases. Nearly three-quarters of all WTO disputes involve the EC and/or the US. This situation, which is largely attributable to the dominant role of the European Community and of the United States in the world trade matrix, confers a great deal of importance to the bilateral EC-US trade relation.

*Third*, in line with the overall trend, there has been a significant increase in the number of bilateral EC-US dispute settlement cases since the inception of the WTO. Several of these disputes are not simply about bilateral EC-US trade, but also (or even sometimes mainly) about third country markets where EC and US exports compete. The latter situation is well illustrated by the WTO dispute about the US special tax treatment for *Foreign Sales Corporations*.²¹

*Fourth*, the subject matter of EC-US WTO dispute settlement cases is largely the same as the subject of EC-US GATT litigation cases: it is still dominated by agriculture and steel, two sectors that enjoy powerful political clout on each side of the Atlantic despite their relatively limited economic importance.

*Fifth*, disputes about agriculture and steel should not be blown out of proportion. However vexing, these long-standing disputes concern but a small fraction of the bilateral EC-US economic relation. In fact, trade is altogether a small proportion of the transatlantic economic relation.²² Foreign direct investment (FDI) is at least as central to bilateral EC-US economic relations as trade.²³

*Finally*, cases such as *Bananas, Beef Hormones* or *Foreign Sales Corporations* plainly illustrate the contention of Weiler (2000) that “[t]he diplomatic ethos which developed in the context of the old GATT dispute settlement tenaciously persists despite the much transformed juridified WTO.” In the old GATT, politics and diplomacy played an overt role in the dispute settlement process, since the consent of the disputants was required at several stages, including for the adoption of the final ruling. A major outcome of the Uruguay Round was the strengthening of the dispute settlement system through the introduction of the principle of ‘automaticity’. Formation of panels, adoption of their reports and, if rulings are not complied with, retaliation have all become automatic. This judicialization of the system is severely tested by trade diplomats and politicians in Brussels and Washington when they engage in high-profile disputes, which they find difficult, or even impossible, to resolve without recourse to retaliation. As several authors have noted, there tends to

²¹ The EC challenged the FSC as a violation of the Uruguay Round SCM Agreement, which considerably reduced the possibility of tax exemption compared to the Tokyo Round subsidies code. The Panel, and subsequently the Appellate Body ruled in favor of the EC. The Arbitrators will determine that the level of EC benefits which were being nullified or impaired as a result of the FSC tax treatment by the end of April. It is generally expected that it will amount to over $1 billion per year, which would make it the largest award ever granted in a WTO dispute settlement case.

²² According to Barba Navaretti, Haaland and Venables (2002), sales of manufacturing products by EC subsidiaries in the US, and by US subsidiaries in the EC, are nearly four times larger than bilateral EC-US trade.

²³ According to Barba Navaretti, Haaland and Venables (2002), the US accounts for about 50 percent of (extra-EC) inward FDI stocks (in goods and services) into the EC, and for about 50 percent of (extra-EC) outward FDI stocks (in goods and services) from the EC. By contrast the US only accounts for 20 percent of extra-EC trade in goods and 40 of extra-EC trade in services. The share of the EC in inward FDI stocks into, and outward stocks from, the US is also about one-half.

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be a fundamental contradiction between the escalating judicial activism of the
European Community and of the United States, on the one hand, and their refusal to
comply with WTO rulings and to engage in retaliation, in the other. The price of this
contradiction is the weakening of the WTO's fledgling legal order and of its
legitimacy.²⁴ This situation has led some observers, such as Barfield (2001), to argue
for the reintroduction of explicit political and diplomatic factors in the WTO dispute
settlement system. Others have suggested that the European Community and the
United States should resolve more trade problems outside the WTO. Both solutions,
however, open up new problems.

²⁴ See, for instance, Porter et al. (2001).

References

Baldwin, Robert E. (1995), "An Economic Evaluation of the Uruguay Round Agreements", *The World Economy - Global Trade Policy 1995*: 153-172.

Baldwin, Robert E., Carl B. Hamilton and André Sapir (eds.) (1988), *Issues in US-EC Trade Relations*, Chicago: The University of Chicago Press.

Barba Navaretti, Giorgio, Jan I. Haaland and Anthony Venables (2002), *Multinational Corporations and Global Production Networks: The Implications for Trade Policy*, Report prepared for the European Commission, London: Centre for Economic Policy Research.

Barfield, Claude (2001), *Free Trade, Sovereignty, Democracy: The Future of the World Trade Organization*, Washington, D.C.: The AEI Press.

Bown, Chad P. (2002), "Why are Safeguards under the WTO so Unpopular?", *World Trade Review* 1: 47-62.

Finger, J. Michael and Andrzej Olechowski (eds.) (1987), *The Uruguay Round: A Handbook on the Multilateral Trade Negotiations*, Washington, D.C.: The World Bank.

Hudec, Robert E. (1988), "Legal Issues in US-EC Trade Policy: GATT Litigation 1960-1985", chapter 2 in Baldwin, Hamilton and Sapir (1988).

Hudec, Robert E. (1993), *Enforcing International Trade Law: The Evolution of the Modern GATT Legal System*, Salem, N.H.: Butterworth Legal Publishers.

Hudec, Robert E. (2002), "GATT Dispute Settlement Cases Initiated from January 1, 1990 to December 31, 1994", mimeo.

Hufbauer, Gary Clyde (2002), "The FSC Case: Background and Implications", Washington, D.C.: Institute for International Economics.

Jackson, John (1969), *World Trade and the Law of GATT*, Indianapolis, Ind.: Bobbs-Merrill.

Josling, Tim (1993), "Agricultural Trade Issues in Transatlantic trade relations", *The World Economy* 16: 553-573.

Messerlin, Patrick A. (2001), *Measuring the Costs of Protection in Europe: European Commercial Policy in the 2000s*, Washington, DC: Institute for International Economics.

Porter, Roger B., Pierre Sauvé, Arvind Subramanian and Americo Beviglia Zampetti (eds.) (2001), *Efficiency, Equity, and Legitimacy: The Multilateral Trading System at the Millennium*, Washington, D.C: Brookings Institution Press.

Sampson, Gary (1987), "Safeguards", chapter 19 in Finger and Olechowski (1987).

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Stern, Robert and Bernard Hoekman (1987), "The Codes Approach", chapter 9 in
Finger and Olechowski (1987).

Tarr, David G. (1988), "The Steel Crisis in the United States and the European Community: Causes and Adjustments", chapter 7 in Baldwin, Hamilton and Sapir (1988).

Weiler, Joseph H.H. (2000), "The Rule of Lawyers and the Ethos of Diplomats: Reflections on the Internal and External Legitimacy of WTO Dispute Settlement", *Journal of World Trade* 35: 191-208.

17

Mr President,
Dean,
Ladies and gentlemen,

I want to thank everyone who has given me this chance to talk to you today:

- the Minda de Gunzberg Center for European Studies, and in particular Renée Haferkamp,

- the Weatherhead Center for International Affairs,

- the Belfer Center for Science and International Affairs,

- and, of course the Kennedy School of Government for hosting this event.

The war in Iraq makes this a difficult and painful time for all of us. It is a time of high emotion. Many of you will have friends or family members somehow involved in this war. My thoughts are with you. My thoughts are with those called upon to serve your country. And my thoughts are with those many innocent people caught up in the horror of war. Now that the war has started, we want the coalition to succeed quickly. We all hope that lives lost will be few. And I know that your Administration is doing its utmost to limit Iraqi casualties. This is a time for honest reflection and thought among friends. That is the spirit in which I want to talk to you today.

Ladies and gentlemen, the President who gave his name to this great School of Government once said, "we (Americans) do not regard a strong and united Europe as a rival but as a partner." He even proposed that a declaration of interdependence be made between what he described as "the new union emerging in Europe and the old American union." Such sentiments seem far removed from the mood today.

Some subtle and thought-provoking analyses of our differences have been made recently, including that of Robert Kagan. Popularising subtle ideas is never easy. It has led to some rather amusing exaggerations and simplifications. Europeans and Americans it seems no longer inhabit separate continents, but separate planets - divided by a fundamentally different world outlook. I am from Venus, which, according to its detractors, is faint-hearted, soft-headed and militarily and politically weak. You are from Mars, which I am told is powerful, virile, dynamic: a land of moral clarity and resolute action. In the real cosmos there is a planet that lies between the two. It is the Earth, a planet that we will have to share for the foreseeable future.

Why does President Kennedy's suggestion of interdependence seem so out of place today? Do we really face a crisis in transatlantic relations? If so why and what can we do about it?

I want to begin by offering some *perspective*. The first *perspective* is that of history. Outlooks on the two sides of the Atlantic, while often similar, have rarely been identical. We have had our differences before, and will no doubt have them again. Nor is this the first time in recent history that transatlantic views have differed on the wisdom of using force. And it would be wrong to characterise Europeans as being overly cautious legal zealots. Just a few weeks ago in the middle of the Indian Ocean a rather daring military operation took place. A ship was boarded from helicopters on the high seas. It was carrying missiles from North Korea to the Yemen. What happened? The lawyers in another country got together and decided that action was illegal and had to be called off. Who were the people who boarded the ship? They were Europeans, Spaniards as it happens. Who were those who insisted on the operation being ended because of international legal norms. The United States Government.

Perspective comes also from acknowledging that a spectrum of views exists on both sides of the Atlantic. Our attention is drawn to extreme positions. We often fail to notice the overlaps, the middle ground. There is no denying the fact that on the issue of Iraq the centre of gravity of our public opinions differs greatly. But public opinion is not monolithic. There are opponents of the war here in the United States, here on this campus, just as there are supporters of the war in Europe. If one asks about the aim of Iraqi disarmament, rather than the means chosen, there is a very great overlap of views. Broader polling data is unequivocal: a very substantial overlap of transatlantic opinion persists. It is deep and it is wide. Not many on either side of the Atlantic want to see a world dominated by an imperial USA, an "American Rome" so to speak.

From the economic perspective we have to conclude that, declaration or not, the interdependence that President Kennedy proposed has arrived. There is today an unprecedented degree of economic integration between the United States and the European Union. If you are not convinced, consider the following facts, (published recently in a study by Joseph Quinlan of the Center for Transatlantic Relations):

- for all the talk about NAFTA or the "Asian century," over the past eight years American investment in the Netherlands alone was twice what it was in Mexico and 10 times what it was in China.

- There is more European investment in Texas than all the American investment in Japan.

- More than twelve and a half million Americans and Europeans owe their livelihoods directly to the $2.5 trillion transatlantic commercial relationship.

Politically also, there has been a real intensification of policy co-operation. I could mention many areas. Let me choose just one: the Balkans. Think back to the early and middle 90s. Europe was

2

divided, the UN was divided, NATO was inactive, transatlantic relations were in terrible shape. And the Balkans was the scene of tragedy and atrocities. And then fast forward to the present, a solid transatlantic consensus. Daily co-operation between the European Union and NATO. The UN playing a useful role with the full backing of the major powers. And the European Union active, united, and pursuing a long term strategy.

Why then, against this very positive background, do we have a sense of crisis? It is I think because we are at a turning point. Of course, ever since the end of the Second World War people have been telling us that we are at a turning point in history. This time I think it is true. Europeans find current events profoundly unsettling, and all the more so since they detect that these events herald the arrival of a new era. New eras are always unsettling.

The war in Iraq is something new. It may be the first war of a new era. It is a dramatic display of America's dominance at a time of an unprecedented sense of America's vulnerability. For America, this is a preventive war. Many Europeans wonder whether war may have been prevented, whether all the possibilities for peaceful resolution had been exhausted. For all of us the war raises a serious question - how to deal with the threat of weapons of mass destruction.

The Iraq question has divided the European Union, NATO and the United Nations. It has divided in some cases governments from populations. Those European governments that support the war have done so against the tide of their public opinion, and at some political risk. Very large parts of European public opinion have not been convinced by the arguments of the US Administration. We have had some rather "frank exchanges", as they say, at very senior levels. Some of these things have happened before but I do not think they have ever happened together, or that the divisions have been quite so sharp.

On the European side of the Atlantic these divisions cause the deepest unease. There is a strong wish to end them. European scepticism should not be mistaken for hostility, anti-Americanism, or pacifism. It must be possible to disagree and still remain friends and partners. So we must work together to re-establish civilised dialogue and common approaches. That is part of the reason I am here in the United States at this time. But we must also see this point in time as an opportunity. It is an opportunity to address some profound questions that we need to sort out together if we are going to construct a transatlantic relationship that is up to the challenges of the 21st century. Some of these questions – to put it rather dramatically – are about the world order.

The first thing that strikes me about the problems of today's world is that they are common problems: weapons of mass destruction, terrorism, state failure, the Middle East crisis. All these affect both Europe and the USA profoundly.

Europe will come within range of potentially hostile missiles from many countries of concern long

3

before the US does. Some of those missiles could carry weapons of mass destruction as warheads. We are also subject to terrorism and have been for many years. We have not suffered the same kind of catastrophic attack that so profoundly changed America 18 months ago but it could happen to us too at any minute. Failed and failing states present real problems, as we saw in Somalia and in Afghanistan.

The great crisis in the Middle East, which affects the whole region in different ways from Afghanistan to Morocco, has been a central item in foreign relations for both the US and Europe for many years now. The US has been the dominant power in the Middle East since the Second World War. But the Middle East is our neighbour and whatever happens there has a deep impact on Europe. We have been working on this together for quite some time now. I was a member of the Mitchell Committee two years ago. The ideas put forward then were right. We knew where we had to go, but the fact is that we did not get anywhere; the train has simply got stuck in the station. Meanwhile, more than 2,000 people have died. It is time to break the stalemate and to start moving. I therefore welcome what President Bush has had to say about the roadmap. Now is the time to implement it, to "get on the road", that is.

These are common problems and if there are going to be solutions they will have to be common solutions. It is not just the US and the EU that are involved. We need the support of Japan, Russia, China, and many others in dealing these questions. But I cannot imagine that we will be able to tackle any of them unless we have a common purpose across the Atlantic and the most intimate and detailed co-operation.

How can we re-establish this sense of common purpose? We can do so by re-committing ourselves - on both sides of the Atlantic - to four key principles. First, we are allies and partners. Second, we make fair contributions. Third, we tackle causes and not just symptoms. Finally we act together to sustain a world based on rules. These are not new ideas. They have constituted the bedrock of our relationship for more than fifty years.

We must begin by reaffirming that we are partners and we are allies. Treat your friends like allies and they will behave like allies. Partnerships and alliances bind. They allow for and legitimise leadership by providing a forum for talking and for listening, for defining common tasks and identifying the means to accomplish them. The alliance should determine the mission. This is not code for a de facto European veto on American initiatives. It is the best hope of restoring our joint sense of purpose. The alternative is to pick your partners, as you would select tools from a toolbox. Sometimes there may be no alternative. But in the long run it is not a recipe for restoring common purpose. Most of us would prefer to be called an "ally" or a "partner" than a "tool" in a box.

Effective alliances and partnerships need effective capabilities, to which all members contribute. That must be our second principle. It follows from the first. Contribute like an ally and you will be

4

treated like an ally. There has been much American criticism of Europe for not doing enough on
defence. Some of that criticism is justified. It is a criticism I myself make when arguing that
Europe needs to spend more and spend better.

But let me say a few things in our defence. Europe's leaders recognise that military capabilities need to be upgraded and be made more inter-operable. They set themselves targets in Helsinki in 1999 to encourage that process. Real progress is being made. But, as far as contemporary security is concerned, there is no standard "unit of account". How much additional security does an aircraft carrier bring? Is it more or less than spending the equivalent amount of money on peacekeeping or the reconstruction of failed states? Security today is a multi-dimensional concept. Bringing peace, stability and order is an effective way of "draining the swamp". Nation building is not for wimps, as we have found out in Afghanistan and as we will be reminded in Iraq. And Europe's security contribution and her ambitions are relevant and useful.

My third principle is that we use our shared capabilities to address causes as well as symptoms. That is just plain common sense. Applying that common sense is not always as easy as it would seem. President Bush was right to point out that "we must confront the worst threats before they emerge... that if we wait for these threats to materialise, we will have waited too long". This, in our view, certainly applies to issues such as climate change, sustainable development and regional conflagration. We need active policies to address and anticipate these problems. We must see these issues in terms of their potential for security, and consequently adopt preventive strategies.

Looking at causes also means addressing the political environment from which terrorism grows with the same determination that we address acts of terrorism. No cause justifies terrorism, but there is no justification for ignoring the causes of terrorism. Potent threats are the product of a combination of motivation and capabilities. While not ignoring the capabilities of our enemies, we must also address the motivations that drive them to acquire those capabilities. We are right to be concerned about the dangers of weapons of mass destruction coming into the hands of terrorists. It is a nightmare that we must do everything to avoid. But as September 11 tragically showed us, armed only with the crudest of capabilities, the *motive of mass destruction* has dreadful potency.

Getting others to want what you want can be much more efficient than getting others to do what you want. I do not need to lecture you on that point. It is a point that others here today can make more eloquently than me. However, I can give you a compelling illustration of the power of this argument. Next week I will have the honour to attend a ceremony at which ten countries will sign the treaties for their accession to the European Union. Eight of those countries are part of what we used to call the Soviet bloc. The prospect of EU membership has been a wonderful incentive for those countries, and for the others that will follow in their wake, to transform large parts of their political, economic and legal systems. We have helped them and given them encouragement. But the *motivation* to reform has been theirs and the extent of their successful transformation all the

5

greater for that fact. More than regime change has been achieved: system change has been achieved.

This leads me to my fourth and final principle: that we act together to sustain and strengthen a world based on rules. No other route offers a better way to remove the destructive motives and capabilities that we fear.

Some people pretend that there is some kind of opposition between power, the US method, and law, which is the European method. In fact law and power are two sides of the same coin. Power is needed to establish law and law is the legitimate face of power. Sometimes European countries have tended to forget that law and international norms have to be backed by force. And occasionally I have heard American voices that seem to have forgotten that, if it is to have lasting effect, force needs to be backed by legitimacy. The successful defence and promotion of transatlantic values depends on a common **advocacy, acceptance** and **enforcement** of rules and norms.

We have too quickly forgotten how powerful legitimacy can be. It was one of the keys to success in the Cold War. The progress we have made on weapons of mass destruction so far is due in part to the fact that we have established a taboo on nuclear weapons. This does not solve the hard cases but it creates a background against which we can get ready to act on them. We have been less successful in this respect for biological or chemical weapons. But there will be no solution to these problems unless we can maintain and reinforce the legitimacy of our position and the actions we want to take. Similarly, making sure that the fight against terrorism is seen as legitimate is a key to its success. Legitimacy depends on creating a wide international consensus.

A rules-based approach is not a ploy to constrain the US. Americans wrote much of the great body of international law that has served us so well in the post-war period. Upholding and strengthening the rule of law is the best means for America to preserve her position as the benign world power and to continue to project her values. Alternative strategies are not very attractive either for the US or for her allies:

- US isolation? It's been tried, it wasn't very successful then and it would be a disaster now;

- Dominance through force? We must be prepared to use sticks sometimes, but do we want a wholesale return to the politics of the caveman, where the guy with the biggest stick carries the argument (until he turns the next corner)?

Issues of rules, force and legitimacy have come together in the case of Iraq. Not everyone sees the war as legitimate – a fact we need to face. We must make sure that the peace is seen as legitimate. That is why the role of the UN in the political reconstruction is important. Otherwise we face what

6

Hegel described as "the impotence of victory", when talking of Napoleon in Spain.

Power is a relative concept. American power is also European weakness. We are addressing this, and it is important that all of us, Americans and Europeans, accept that it is in both of our interests to do so. It will take time, but so did the construction of the US. The construction of Europe is a very different kind of project, but in some ways the progress achieved in the first fifty years of European construction is more spectacular than in the first 100 years of the United States. The US after all adopted a single currency only in 1862, and established a central bank only in 1913.

I realise that the European Union is not always an easy body to deal with. Despite this, it would be a mistake for the US to "cherry-pick" from among its European allies. To do so would ignore the fact that, collectively, the EU has capacities that its individual members lack. Historically, the US has brought an enormous contribution to ending the quarrels between European countries. It would be your loss and ours if we were to start quarrelling again. Attempts to divide Europe only strengthen those who argue, misguidedly, that European identity lies in opposition to the US. A policy of "divide and rule" would become "divide and fail". What we want is more Europe, not less America.

Ladies and gentlemen,

We do not have the luxury of living on separate planets. On this small planet, whose problems abound, neither the United States nor the European Union will find an alternative substantial partner which shares to such a complete degree values and interests. A little perspective and a re-commitment to some guiding principles are modest but useful starting points if the most successful partnership of the 20th century is to prove itself up to the challenges of the century ahead.

Finally, although my training is in physics and not the classics, I seem to recall that it was only in the arms of Venus that Mars found peace. And was their beautiful daughter not the goddess Harmonia?

Thank you.

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