America and Europe: Clash of the Titans? Author(s): C. Fred Bergsten Source: Foreign Affairs, Vol. 78, No.

2 (Mar. - Apr., 1999), pp. 20-34 Published by: Council on Foreign Relations Stable URL: http://www.jstor.org/stable/20049206 Accessed: 17/12/2010 06:36
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America Clash of

and

Europe:

the Titans?

C. Fred Bergsten

CONTINENTAL

DRIFT

The

launch

national

of the euro offers the prospect of a new bipolar s economic order that could replace America hegemony

inter since

World War II.The global trading system has already been jointly run
since the early days of the European Common Market, which enabled to to integrate its commerce and exercise power equivalent Europe that of the United States in that domain. Now Euroland will equal or exceed the United States on every key measure of economic strength and will speak increasingly with a single voice on a wide array of euro is likely to challenge the international issues. The economic financial dominance of the dollar. Moreover, the end of the Cold War has sharply reduced the importance of U.S. military might for Europe and pulled aside the security blanket that often allowed both sides to cover up or resolve their economic disputes for the greater good of alliance. the anticommunist preserving the United between States and the European on a foundation rest increasingly of virtual Union will therefore to this new States will either have to adjust equality. The United or conduct a series of rear-guard defensive actions that will be reality Economic relations the British did for many decades increasingly futile and costly?like eu will either have to exercise as their leadership role declined. The
for International Eco

C. Fred nomics National

Bergsten and was

isDirector

of the Institute

national Affairs Security

formerly Assistant Secretary for International and Assistant Council. Copyright ?

for Inter of the Treasury to the Economic Affairs

1999 by C. Fred Bergsten.

[20]

America positive at home

and Europe: Clash of the Titans?

it now can do, or become highly frustrated leadership, which and a spoiler abroad. as a result of these seismic shifts, transatlantic economic Partly and joint responsibility for global leadership have interdependence

grown rapidly for both economic superpowers. Europe and America therefore need to devise new strategies and institutional arrangements to manage both their bilateral economic relations and global economic a "common issues. Such strategies can be constructed with or without security issues; European foreign policy" that embraces traditional has far faster than it has politically. itself Europe integrated economically a partner in some elements of this collaboration. Japan will also be But until that country and the rest of Asia recover from their prolonged economic woes?which may take half a decade or more?transatlantic relations will be the crucial pivot for global aswell as bilateral economic progress. And since Japan did not play a very forceful international role or even the even prior to the Asian crisis, the timing possibility of its core in full participation the leadership group remains highly uncertain. The eu and the United States have yet to develop the required new on approaches, however. Recent official discourse has focused instead a range of narrow, and even bureaucratic issues: technical, highly bananas (which the United States as a country does not even directly for pharmaceuticals, the appropriate testing procedures export), of Euroland, which international committee should representation devise reform of the global financial system, and many other relatively minor matters. At their December the two superpowers summit, new to could agree only consider standards. Although the winemaking over lesser issues?which are inevitable two sides need to address disputes given their high levels of trade, finance, and investment?the gulf between policy requirements and operating reality is enormous. a remains unresolved. Meanwhile, long list of serious challenges are at over America and Europe and loggerheads global warming extensive efforts, they have not resolved the energy policy. Despite bitter dispute over the extraterritorial impact of American foreign a collision over antitrust sanctions and averted policy only narrowly case.While in the many countries policy Boeing-McDonnell Douglas are still reeling from the global financial turmoil, the two economic superpowers snipe at each other about how to share its adverse FOREIGN AFFAIRS-March/Aprili999 [21]

C Fred Bergsten effects regional in other parts of the developing Their greatest failure, however, lies with the looming problems at s trade the heart of the transatlantic economic relationship. America initiatives slowdown in the U.S. economy could trigger strong protectionist from industries of central importance pressure as is to Europe, already occurring in steel. In addition, the huge U.S. trade deficit and the on their own economies and about their competing world.

and current account deficits will probably hit $300 billion in 1999.Any

A U.S.

economic

slowdown could trigger

protectionist pressures.

likely worldwide

shifts of capital into the

euro could euro up sharply against push the the dollar in the near future. In turn, a stronger euro would hurt Europe's competitive its unemployment and seriously exacerbate problem, while position the weaker dollar would push U.S. prices and interest rates upward, across the Atlantic. igniting additional tensions The bilateral

toward crisis. is thus drifting dangerously relationship are In addition, the global superpowers only partially confronting and several key systemic questions. On the monetary side, America seem to be countries, moving along with several key Asian Europe, reforms in the "international financial architecture" to toward modest more rigorous adherence incorporate greater transparency in markets, in International to global financial norms, and modest improvements have But the two superpowers Fund (imf) procedures. Monetary fundamental solutions to the let alone implement, failed to propose, crisis that could stabilize capital flows and the financial unfolding monetary system. if discussion of the momentous little There is any changes presaged creation the of euro?the the change in global finance biggest by to become the world's since the dollar surpassed leading sterling no has been U.S. interwar in the There currency willingness period. now endorsed to even discuss Germany's the other key by proposals, and Japan, to avoid the destabilizing currency Europeans over the past quarter-century. so have been that disruptive gyrations aMillennium Round of the eu has proposed On trade matters, at the World Trade Organization (wto) to open markets negotiations the United further and improve the global trading system, while continental
[22] FOREIGN AFFAIRS-Volume 78No. 2

international

America

and Europe: Clash of the Titans?

later this year to plan States will host the next wto ministerial meeting international trade policy for the early 21st century. Until quite recently, initiatives and States had resisted the European however, the United has still offered no detailed proposals of its own. In short, there is no on either trade or money. on how to proceed meeting of the minds out any strategy the two sides have not worked Furthermore, to to the potent backlash against globalization respond politically on both sides of the the observed around world, including already resentment Atlantic. That could severely impede progress on key as has already demonstrated with its refusal Congress specific issues, to authorize new trade negotiations and its reluctant support for the a imf. The of the international result could be gradual undoing or two economic of the past three decades and a pro liberalization found alteration in policy around the world. Economic relations between America and Europe are approaching a paralysis just when daunting policy agenda and the advent of full new initiatives. Officials devote require bipolarity cooperative enormous to minutiae attention but none to common strategy or for tackling a growing number the requisite institutional mechanisms of acute challenges. They react on an ad hoc basis to virtually every to anticipate that arises while failing problem readily foreseeable obstacles. To be sure, extensive trade and investment ties limit the

probability of the kind of blowups that theUnited States and Japan

have experienced, is skilled at keeping and transatlantic diplomacy of America and Europe, problems under wraps. But the economies re not to mention transatlantic relations and the world economy, main at considerable risk.

THE

TRADE

DIMENSION

The

United

States

sion. The economy be seen. The underlying competitiveness of most American companies is strong. The government budget is in surplus. Although the trade deficit is soaring to record levels, much of this is due to America's superior as overvalued as in not and the is the dollar Asian crisis; growth nearly the mid-1980s. FOREIGN AFFAIRS March/April i999 [23]

is entering its eighth year of economic expan is at full employment. Price inflation is nowhere to

C Fred Bergsten it is particularly worrisome that American trade the strength of the policy has been stalemated for four years. Despite of globalization have successfully economy, opponents stymied any new trade since the negotiating authority Congress approved North American in 1993 and the Free Trade Agreement (nafta) Round and wto, which stemmed from the General on Tariffs and Trade came in 1994. Congress (gatt), Agreement new U.S. contributions to the imf?an close to blocking imperfect to the but agreed instrument for responding financial crisis global that was sweeping the globe. We know from history that trade policy tends to backslide toward pro Uruguay tectionism multilateral unless liberalization agreements information and financial services?followed services, technology, momentum the Uruguay Round and maintained for several years. was on to the basis of residual States able (The United participate the Asia initiative continues moving forward. Fortunately, in several key sectors?telecommunications For these reasons

from earlier legislation.) Since the failure of authority Pacific Economic (apec) forum's sectoral Cooperation

and the flagging talks of the Free Trade Area of the Americas

in

no is under way trade liberalization 1998, however, significant in the world. Not the U.S. steel industry anywhere surprisingly, to seek has entered the vacuum relief. Top adminis widespread to follow tration officials expect a number of aggrieved bedfellows textiles and tools, semiconductors, shortly: machine shipbuilding, some sectors, and perhaps others. agricultural apparel, trade policy of the past 65 years is at risk. America's bipartisan true with aweakened is especially administration that openly This a to huge debt organized labor for its surprise November acknowledges and 1998 "victory" within the Democratic a modest slowdown shrinks from reopening NAFTA-style splits as it eyes the elections 2000. Even in Party in in economic small upticks growth with

A relapse could tilt the balance toward protectionism. unemployment actions restrictive and substantial into recession could unleash even legislation. relations for two reasons. threatens transatlantic This prospect are from Europe itself: machine First, many of the imports in question tools from Germany,
[24]

sweaters

and other woolens

from Italy and the

FOREIGN

AFFAIRS-

Volume 78No. 2

America United

and Europe: Clash of the Titans?

the region. Even U.S. and steel from throughout Kingdom, restrictions on imports from other countries, such as steel from Russia or relations if ships from South Korea, could inflame transatlantic are deflected toward European markets those restricted products

already hit by high unemployment and rising imports. The United

to retaliate against restrictions States is already threatening European on banana is beef, while Europe imports and hormone-treated as as to counteract the U.S. those American well steps threatening in and sanctions on European Iran Libya. companies operating restrictions would Second, even the threat of American seriously the the "trade bilateral between United G-2" relationship disrupt that has managed and Europe global commercial policy for almost 40 years. Europe has spoken with a single voice on most trade matters since the creation of the original Common Market. Hence, it has been able to convert its status as the world's largest trading into with the United States on effective entity negotiating equality liberalization initiatives?the trade. The three major gatt Kennedy, on agreements and Uruguay Rounds?ultimately depended Tokyo, between Europe and America. The more recent sectoral agreements also hinged on their cooperation. A policy reversal by the United States now, or even its failure to overcome the recent stalemate, would States undermine the partnership that has been so vital to both regions and to the world trading system. To its great credit, the eu has recognized the pending threat and a new "Millennium to Round" improve and expand the proposed wto system, restarting the liberalization process and strengthening a the multilateral framework. Such would include negotiation sectors, notably agriculture and services, that would greatly expand American States and the eu share an exports. Indeed, the United as far as toward global free trade. They possible have already eliminated most of their own import barriers, so such an initiative would to catch up with require the rest of the world interest in moving their exports and creating high-paying them, expanding jobs. The administration failed to endorse the eu strategy until very recently, however, and has still made no specific proposals of its own, despite its role as host of the next wto ministerial meeting in late 1999. It has or to the American failed to convey to Congress public the huge FOREIGN AFFAIRS March/April i999 [25]

C Fred Bergsten for expanding U.S. exports, thereby undercutting the new negotiations. approval for any Both sides now run the risk of drift and even paralysis in transat severe lantic trade policy?with for the potentially repercussions or even a failure to rest of the world. A slide into protectionism new on the a continue markets would have opening major impact we then expect Asian economies, who global trading system. Could on to emerge from their expanded exports deep recessions, depend own markets to their the transition Would economies keep open? in the former Soviet Union, Eastern Europe, and Asia stick to their the backlash liberalization strategies? With against globalization opportunities effort to win already evident everywhere, ist and nationalistic policies could reemerge once again. A failure of transatlantic the ominous that the world inward-looking has rejected protection so decisively

re leadership would make such policy versals particularly States and the eu are the likely. The United and the only two regions superpowers only economic enjoying gatt economic the created reasonable system and, growth. They own more wto. their occasional transgres recently, the Despite its the system throughout sions, they have nurtured and defended over the past 50 years. While evolution Japan has been important on a few issues and the countries played an encouraging developing role in the Uruguay Round, the Atlantic powers built and sustained failure to maintain that commitment the world trade order. Their would devastate the entire regime.

WHITHER

THE

DOLLAR?

Although

in trade looks shaky, the partnership as the euro could prove even more disruptive financial dimension becomes amajor global currency. The euro now represents an economy States and will be even larger when all almost as large as the United It enjoys considerably 15 eu countries become members. larger trade transatlantic flows

the

reserves and can boast a far stronger external and monetary net financial position as a sizable creditor area; in contrast, America's now $2 trillion. As soon as the European foreign debt approaches its credibility, the euro will become a global Central Bank establishes
[26] FOREIGN AFFAIRSVolume 78No. 2

America

and Europe: Clash of the Titans?

diversification from dollars financial asset and produce a portfolio into euros by private investors and central banks that could ultimately

reach $500 billion to $1 trillion.

is that the shift from dollars to euros short-term problem a could lead to broad swing in the dollar-euro exchange rate. Americas are certain to a soon huge trade deficits produce sharp fall in the dollar anyway, as they have done about once per decade since the early 1970s. The dollar fell 25 percent against the yen_ during the second half of 1998, and large The

America

needs

swings have often preceded general to in the dollar. Europe's unusually currency correction gyrations reduce its trade deficit. large trade surplus, by far its greatest since s the mid-1980s, that the of dollar suggests part decline will be against the euro. The portfolio shift into the euro could trigger this event and amplify the dollar's on the heels of Americas trade deficit. decline, already expected euro Some European that the could rise by as experts have predicted much as 40 percent against the dollar. This is far more than the 10 or so that economic conditions percent suggest but underlying is plausible, nonetheless since currency markets often substantially overshoot their long-run equilibrium levels. An of the euro would excessive hurt European appreciation and push Europe's unemployment up at a time when competitiveness to get it the new governments the region are determined throughout are in fact loath to down. French officials and German industrialists dollar-yen any further decline of the dollar, and some even believe contemplate that the dollar is now undervalued. Although they will have to accept some fall in the dollar to correct excessive trade deficit America's help rate could and ease U.S. protectionist the pressures, exchange again become another highly contentious issue across the Atlantic. a currency correction to America obviously needs help reduce its trade deficit. In light of the lag between shifts and exchange-rate must come sooner trade flows, the administration hope that it will rather than later so that results, especially for industrial workers, show before the 2000 election. But a sharp general fall in the dollar could labor market trigger latent inflationary pressures as long as the U.S. remains tight. In turn, the dollar's decline could push up interest rates FOREIGN AFFAIRS March/April i999 [27]

C. FredBergs on inflation

ten

fears and foreign demand for higher returns in a falling slowdown currency. The stock market could drop and the impending could even tilt into recession. In short, the result could be an abrupt termination of America's

"economic miracle." states that the creation of the euro The official American position if it is good for Europe." This is correct but banal, "is good for America euro could have on the fundamental given the strong impact that the economic variables on both sides of the Atlantic. At aminimum, the to agree on a dollar-euro range that would reflect their economic conditions. They should then devise respective domestic new mechanisms, such as clear policy statements and direct interven to keep the rate from straying too far from these tion in the markets, fundamentals. underlying Renewed transatlantic currency instability, and especially a corre increase inU.S. interest rates, would also be poisonous for sponding recover to countries from Asian and other emerging market trying rates current increase the interest would crisis. Higher American the two sides need cost of servicing send much-needed needy economies. could their largely dollar-denominated foreign debts and to America instead of to their own capital flows A failure to manage the dollar-euro thus have

relationship severe consequences worldwide. effectively These examples only begin to reveal the impact of the new monetary conditions on the United States and the world economy. The existence to the dollar means States will that the United of a real competitor have to pay higher interest rates to attract foreign capital to finance its the United large external deficits. Such competition will be healthy for an incentive to avoid States over the longer run by providing huge even it and deficits inflation; eventually might double-digit budget could be quite eliminate its trade imbalance. But the new competition for awhile. uncomfortable affect the environment will also substantially The new monetary world economy. The dollar and the euro will probably account for financial assets. roughly equal shares of the great bulk of international them will between generate similarly Prolonged misalignment skewed results for other countries that peg their units to either currency. Indeed, the dollar's sharp rise against the yen from 1995 to 1997 partially caused the Asian crisis, since most of theAsian currencies were effectively
[28] FOREIGN AFFAIRS -Volume jS No. 2

America

and Europe: Clash of the Titans?

tied to the dollar. Moreover, misalignments among the major currencies to contribute pressures?with particularly protectionist disruptive costs for developing and other heavily trade-dependent countries. large even without In addition, considerable dollar-euro instability is likely because both superpowers will be continental prolonged misalignment reliance on trade. Europe may be economies with only a modest to emulate America's periodic "benign neglect" of the exchange tempted to focus rate, especially given the European Central Bank's mandate on at the cost of hurting smaller countries more price stability?but to instability. for As with trade, the two partners bear enormous responsibility the high stakes, however, there the global monetary system. Despite no serious let alone strategic preparation is still evidence of discussion, or is above. Why against the risks outlined contingency planning the challenges of economic policy and the there such a gap between States and the eu? There is certainly apparent responses of the United no dearth of summits and The leaders hold semiannual meetings. sensitive have officials get together constantly. The governments been quite adept at declaring the launch of new transatlantic "dialogues," and "marketplaces," but the fundamental problems "partnerships," lower-level
remain unresolved.

CLOSING

THE

GAP

to go around for this lack of preparation. plenty of blame Europe has been preoccupied with regional initiatives, most notably its enlargement of membership with and the euro but also with Its relentless of regional finances. of trade expansion reordering There
association agreements now encompasses more than 80 countries

is

and failed

raises to

doubts

multilateralism national design financial

to its commitment nondiscriminatory a its for Millennium It has Round). proposal (despite to in inter effective procedures represent Euroland about councils, with This member states jealously defending has frustrated Americans

prerogatives. approach (and others) who had anticipated more streamlined decision-making. To paraphrase Henry Kissinger, the United States still does not know who to call in Europe when new crises hit. Europe's failure to effectively FOREIGN AFFAIRS March/April i999 [29]

their national

C. FredBergs tackle foreign policy problems has invited and now Kosovo,

ten

in its own backyard, notably Bosnia and even ridicule over the disrespect

prospect of real partnership. the Europeans have begun to address As I noted above, however, a Millennium the transatlantic and global agendas, such as proposing to restart the trade momentum. have also floated Round They for improved that could management suggestions exchange-rate detailed and instability. Although reduce the risks of misalignments these ideas have yet to be laid out and for implementing blueprints the Europeans tried to caution have nevertheless still prevails, launch the process. to the two For its part, the United States has contributed key lag in the backlash domestic First, ways. adversely against globalization its and the rest of the world. Given affects relations with Europe concern for lower-income Americans and the disruptions generated the has been administration curiously change, by rapid technological ineffective in improving the domestic adjustment programs and safety nets that could buffer trade-induced job insecurity and downward It has failed to work out credible international pressure on wages. on labor standards and and environmental initiatives concerns, nor the business the Republican-led community Congress has demonstrated the necessary flexibility to foster a political consensus on those key topics. Instead, the administration has mostly backtracked an effective response, in the face of resistance rather than mounting neither for tackling the economic the prospects undermining a ahead. In short, it has failed to reestablish political challenges can economic for a sustainable foundation policy. Europe foreign as view the United States as inward-looking, just understandably can level that at Americans charge Europeans. on the inter suffers from schizophrenia States the United Second, national front. On the one hand, it claims that Europe (and, during better times, Japan) should assert greater international responsibility and "share the burdens of leadership." On the other hand, its revealed thereby while dominance?even is to try to maintain American preference to to pay the bill?and exploit national differences asking others are also no within (The Europeans Europe whenever possible. talk of "a common foreign policy" strangers to this; they continually
[30] FOREIGN AFFAIRS -Volume 78No. 2

America but almost officials

and Europe: Clash of the Titans? One senses that some American

ideas simply because the cause, the administration elsewhere. Whatever they originated or to studied indifference has responded with outright hostility constructive trade and monetary European proposals. not to these the Clinton administration has Regrettably, replied own. Instead, suggestions with any strategic visions of its European was it has reacted rather than led, whether the challenge international

act nationally.) always or other resist European

international

(like theAsian financial crisis) or domestic (like the antiglobalization

Such a lack of initiative, or even a thoughtful response, campaign). costs the United States dearly when confronting major developments such as the advent of a new economic superpower and a challenger calls for a currency. Even beleaguered Japan has endorsed Europe's to currency management. Round and new approaches Millennium The United States must realize that itwill be outflanked on economic issues by the other two industrial giants if it continues its passivity. An important part of the problem is bureaucratic buck-passing. Even intervene when forced by events, monetary though they eventually on authorities both sides of the Atlantic like "freely flexible" exchange can then blame currency on "the market" rates because they problems rather than themselves. Central banks in particular resist any policy framework that might place even the most limited constraints on their cherished independence. Moreover, neither America nor Europe is good at the interaction between monetary and trade issues?with managing in charge of each domain different ministries the obvious economic between them?despite and little coordination linkage.

MANAGED

CARE

not be easy to convert the current transatlantic malaise It will into an effective States faces significant domestic partnership. The United both economic and political, and Europe has a full constraints, "domestic" agenda. Governments always find it hard to take forceful preventive formidable turf problems described above represent can be done? practical barriers. So what is no need for new transatlantic There "grand designs." Instead, the eu and the United States need to install effective working The FOREIGN AFFAIRS March/April i999 [31] actions.

C. FredBergs

ten

to address the serious problems ahead, both in their arrangements bilateral relations and in the joint challenges of global leadership that and years. even more difficult in the coming months will become to financial and trade issues. should take separate approaches They to front is modest: The immediate goal on the monetary keep the dollar-euro exchange rate from straying so far from underlying economic fundamentals that it damages their economies, the transatlantic relation and Europe should retain flexible America ship, and the global system. but plan their management rates as the basic paradigm exchange too late, as at pre rather than deploying ad hoc measures preemptively sent.Monetary authorities could agree on a fairly wide range, perhaps 10 1.00 = $i.25-$i.30, of to 15percent on either side of an agreed midpoint Such a band includes the limit dollar-euro fluctuations. that would 1.00 = $1.17 but prevents any significant dollar apprecia startup rate of tion from that point or any dollar depreciation beyond its previous lows should currencies. The authorities against the constituent European to convey clearly their official intention to announce their agreed range the markets. A qualified majority vote of the eu Council of Economic could endorse such an incremental alteration in and Finance Ministers floating managing Bretton Woods-style any major reform (like a return to fixed need its unanimous approval. parities) would such new arrangements would provide a help their modesty, Despite and Europe to agree on appropriate ful operational focus for America of the markets rates. They would require close monitoring exchange for joint intervention to protect and creation of an effective mechanism some also encourage the ranges. They would policy coordination, to the rate moves the when of monetary exchange policy, including band and something more than direct inter edge of the very wide is required. They would help stabilize vention and official statements rates, while fluctuations; the absence

tolerance of private capital flows by indicating the limits of official

often encourages of government guidance when a currency comes under capital flows contagion and destabilizes The relative stability of the two major currencies (or speculative siege. for the three currencies, when Japan reaches comparable agreements for be enormously and Europe) would helpful yen with America other countries, who could then peg their unit to one of the key currencies without running the risk of prolonged misalignments.
[32] FOREIGN AFFAIRS Volume y 8No. 2

America The scheme would

and Europe: Clash of the Titans'?

be truly cooperative, based on initial proposals out in detail with the United and Japan and worked from Europe a outcome of would be concentric network States. The largely informal affairs: a core international economic and monetary groups to manage g-2 comprising States and Europe; a G-3 including Japan; the United the existing G-7, G-10, and G-22 to engage the next tier of key countries; of like the imf, for formal implementation and the global institutions, the more far-reaching reforms. The involvement of the broader groups will ensure that the g-2 does not collude against the rest of the world and promote its own interests at everyone else s expense. On trade, both sides must restart the process of global liberalization to counter the protectionist States and the broader tide in the United States and the eu pressures everywhere. The United antiglobalization endorse the early should agree that the 1999 wto ministerial meeting a aim to pro The should Round. launch of Millennium negotiations duce tangible results every two or three years, to demonstrate progress and broaden market access in countries that still place large restraints on key issues of discord, including of the wto rulings agriculture, competition policy, the implementation in the rules and the banana have been crucial case), (which governing environmental should the And address they regional arrangements. imports. They should also work out

and labor issues that help drive the backlash against globalization. On the institutional side, the g-2 relationship must be reinvigorated. It should again function as the core of the quadrilateral group with Japan itself. Such a strategy, along with and Canada, and then the full wto more responsive U.S. domestic policies, should deflect enough protec tionist pressure to get the two economic superpowers back on track in managing bilateral trade policy and their global responsibilities.

THE

TRANSATLANTIC

CENTURY?

Not

was much debate over whether the next long ago, there or "Asian" century. Now, that hundred years would be the "Japanese" seems a more looks less likely. The century" likely "European or even a "second Some observers have American prospect, century." a on 21st "trilateral" focus century will have Europe, suggested that the too and the United States. But the most plausible candidate for

Japan,

FOREIGN

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March/Aprili999

[33]

C. FredBergsten success and global leadership may instead be the transatlantic If the United States and the eu can begin to cooperate partnership. now as even arena alone, in the economic equal partners, they could own resuscitate the vitality of their and provide effective relationship economic like tectonic

global leadership. If they fail to do so theywill continue to drift apart

severe consequences both for themselves and plates, with for the world economy. over the past The economic integration of Europe half-century, success most in the dramatic euro, represents history's culminating in institutionalizing It has also been the most interdependence. instance of nations voluntarily sensational their sover relinquishing aswell eignty in favor of international collaboration. It has assured peace as prosperity through judicious economic amalgamation. The countries of the North Atlantic will probably never choose integration as deep as that of Europe and are unlikely to heed the call of former Secretary of State James A. Baker III to keep pace with Europe's course. But the economic evolution provides the basis for completion of the European a similar, ifmore an effective transatlantic partnership that could herald success story over the next 50 years. It could also presage the modest, next the world economy? major step forward inmanaging

[34]

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AFFAIRS

-Volume 78No. 2