A vengeful United States is snubbing its German allies for opposing
the war against Iraq. Prickly France has become a porcupine sitting
on America's lap; Moscow and Beijing have followed Paris' lead since
the United States and Britain subdued Ba'athi Iraq. Some opine, and
others worry, that a belligerent United States or a reactive European
Union will throw NATO into the dust bin of fast-moving history. The
United States may think it does not need Europe, and Europe may
reject association with the American hyperpower. Some Continentals
now call more openly for European balancing against a "rogue United
States."

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

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

America Needs Europe

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

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

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

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

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

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

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

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

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

Europe Needs America

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

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