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The Euro Crisis and US Strategy
Aaron L. Friedberg

For 45 years after the end of the Second World War, American strategists
worried far more about Europe’s perceived political, economic and military
weakness than they did about its potential strength. Following the fall of the
Berlin Wall and the end of the Cold War this pattern was briefly reversed.
With the signing of the Treaty of Maastricht in 1992 the birth of a ‘United
States of Europe’ seemed finally to be at hand. Possessed of a vast market
and nascent institutions of central governance, this new entity was widely
seen as having the potential to become a major player on the world stage.
While it had long supported the principle of European integration,
Washington met these developments with a measure of ambivalence. Some
observers feared that a more closely integrated Europe would use tariffs
and subsidies to gain an unfair advantage in global economic competition.
Others warned that it might launch off on an independent course in foreign
and defence policy, diverting resources from traditional mechanisms for
transatlantic cooperation, such as NATO, and putting itself at odds with the
United States over how best to handle sensitive issues such as Middle East
peace and nuclear non-proliferation.
The last several years have seen a reversion to the post-war norm, but
with one important modification. American policymakers are concerned
once again with Europe’s weakness but, in contrast to the Cold War, they no

Aaron L. Friedberg is Professor of Politics and International Affairs at Princeton and the author of A Contest
for Supremacy: China, America and the Struggle for Mastery in Asia. An earlier version of this essay, entitled
‘Beyond the Euro Crisis: Implications for U.S. Strategy’, was published by the German Marshall Fund as part of
its EuroFuture Project.

Survival | vol. 54 no. 6 | December 2012–January 2013 | pp. 7–28DOI 10.1080/00396338.2012.749625

8 | Aaron L. Friedberg

longer regard the continent as the primary focus of their attention. Instead,
over the last two decades, the centre of gravity of American strategy has
migrated steadily eastward, from Europe to the Middle East and the Persian
Gulf and now, with the Obama administration’s self-proclaimed ‘pivot’, to
East Asia. As seen from Washington, Europe is becoming a strategic side-
show and, what is more, it appears increasingly to be a hindrance in dealing
with other challenges, rather than a help.
If the present crisis results in an economic implosion, Europe could drag
others down with it, making it more difficult for the United States to gener-
ate the resources necessary to meet other pressing geopolitical challenges.
Even if it avoids the worst, Europe as a whole seems unlikely for some time
to come to have either the inclination or the energy to do more than cope as
best it can with its own problems. While the more extreme predictions about
Europe’s future may turn out to be too pessimistic, they are certainly within
the realm of possibility.

Causes
The euro crisis and the bursting of the American real-estate bubble are caus-
ally connected, but the two catastrophes also bear a striking resemblance to
one another.1 In each case the sources of danger were identified in advance
by a handful of astute observers and appear obvious in retrospect, but they
were either discounted or overlooked entirely by the majority of analysts
and decision-makers. In the words of Martin Feldstein, one of those who
anticipated Europe’s troubles over a decade before they began to unfold,
recent events are ‘not an accident or the result of bureaucratic mismanage-
ment but rather the inevitable consequence of imposing a single currency on
a very heterogeneous group of countries’.2
With the introduction of a common currency in 1999 the nations of the
eurozone surrendered the ability to set their own monetary policy, but they
retained the right to tax and spend as they saw fit. In deference to long-
standing German fears of inflation, the European Central Bank that was set
up to administer the new currency had ‘price stability’ as its primary objec-
tive. Over the course of the subsequent decade, the bank worked to keep
inflation and interests rates low. This helped Germany restrain wage growth,
 The Euro Crisis and US Strategy | 9

implement much-needed labour-market reforms and improve productivity,

which, in turn, enabled increased competitiveness, leading to rising exports
and growing current-account surpluses. But low interest rates throughout
the eurozone also made it easier for governments and households in other
countries, especially in the south, to borrow, spend and go more deeply into
debt. Cheap money helped sustain large public sectors, generous social-
welfare programmes and consumer spending. In several countries, as in the
United States, low interest rates also fuelled a rapid run-up in real-estate
prices. In contrast to Germany and some of the other northern economies,
reforms were deferred, labour costs grew relatively rapidly, competitive-
ness declined and current-account deficits ballooned.
In pre-euro Europe such imbalances would have been corrected by some
combination of rising interest rates and declining exchange rates. Under
the new dispensation, however, national governments no longer had the
ability to manipulate these instruments of policy. Provided that others were
willing to buy their debt they could, however, continue to borrow in order to
fund their growing fiscal and current-account deficits. Until the onset of the
global financial crisis investors made no distinction between bonds issued
by Germany and those of Greece or Ireland or Spain; all were assumed to
carry equal, minimal risk. This began to change in the wake of the global
crisis. As growth slowed across much of the advanced industrial world, tax
revenues declined, government spending increased, debt deepened and the
ratio of debt to GDP rose. Countries in which this indicator was already
relatively high saw an especially alarming deterioration.
Fearful that some governments had now gone so deeply into debt that
they might be unable to make good on their obligations, investors began to
demand higher interest rates to compensate for this perceived increase in
risk. Starting in early 2010 the yields on long-term bonds issued by various
eurozone nations began to diverge, with those of Greece, Ireland, Portugal
and, to a lesser extent, Italy and Spain increasing the most dramatically.
Albeit to varying degrees, all of these countries were soon seen to be in
danger of slipping into a self-reinforcing downward spiral, in which higher
borrowing costs would contribute to deeper government deficits, mount-
ing debt, rising investor fears, further increases in interest rates and debt
10 | Aaron L. Friedberg

burdens, and ultimately, the possibility of default. National financial crises

also threatened the solvency of commercial banks in the affected countries,
many of which saw their large holdings of government bonds diminish in
value at the same time as they were forced to write off bad private-sector
loans.
As the crisis deepened there were growing worries about contagion.
Even in countries with comparatively healthy public finances, such as
France and Germany, banks holding substantial quantities of private and
sovereign debt in troubled economies found themselves at risk. As always
in such situations, psychological factors loomed large. Whatever the objec-
tive indicators might suggest at any given moment, investor anxieties about
the future threatened to create self-fulfilling prophecies, as the demand for
ever-higher risk premiums pushed one country after another to the brink of
default.

Three scenarios
Since the start of 2010 a combination of actions by national governments
and multinational institutions has been sufficient to stave off disaster,
but even the most optimistic observers do not believe that these meas-
ures have put Europe on a clear path to stability and sustained growth.
Across the continent, governments have sought to reduce fiscal deficits by
slashing spending and raising taxes. In the most serious cases, austerity
has been imposed as a precondition for loans intended to enable govern-
ments to continue to finance their debt at sustainable cost from regional
and international financial institutions. Low-cost lines of credit have also
been made available to prevent bank failures and insure the continued
functioning of the European financial system. In addition to their more
concrete effects, all of these emergency measures are intended to reassure
investors, stabilise markets and restore the normal processes of economic
growth.
As of autumn 2012 the situation remained highly volatile and the array
of alternative futures was exceptionally broad. Depending on how events
play out, Europe, and the world, could look very different six months or
a year from now. That said, and acknowledging the possibility of hitherto
 The Euro Crisis and US Strategy | 11

unforeseen ‘black swans’, there are three basic scenarios (or families of sce-
narios) that together incorporate a significant portion of what appear at this
point to be plausible outcomes.

An ‘Alexander Hamilton moment’

The very gravity of the current crisis, and the deep flaws it has revealed
in the foundations of the European project, could provide the impetus for
fundamental reforms. Faced with the prospect of collapse and even chaos,
leaders and publics may be willing to accept measures that they have
hitherto rejected. More specifically, national governments may consent to
granting even greater control over economic policy to central European
institutions. Some observers have drawn an analogy to the early years of
US history. The American Founders tried at first to build a nation in which
virtually all decision-making authority was dispersed among the 13 original
states. Within a few years they were forced by the evident weakness of their
initial design to draft a new constitution that granted considerable authority
to the federal government.3
Similarly, if they wish to preserve their Union, the individual European
states may have no choice but to endow it with a great deal more power.
In this view, as two high-ranking former officials put it, the only cure for
what ails Europe is ‘more Europe’.4 The precise details of what this might
entail are a topic of intense debate, but most observers agree that, if the
euro (and perhaps the EU) are to survive, the states of the eurozone will
have to harmonise their tax and spending policies, perhaps creating some
kind of fiscal union with the power to do more than set notional targets for
national governments.5 Some also urge enhancing the powers of Europe’s
central banking institutions, giving them the resources and the authority
necessary to insure deposits, buy the debt of troubled economies, and issue
‘eurobonds’ backed by the full faith and credit of the entire EU.6
All such proposals face strong political opposition. States in poor finan-
cial condition worry that they will be subjected to harsh austerity measures
for many years to come. Those in better shape fear that they will be forced to
pay part of the price for their neighbours’ improvidence. Successful reform
would appear to depend on the ability of political leaders to generate
 12 | Aaron L. Friedberg

precisely the sense of European solidarity, and faith in European institu-

tions, that are now in very short supply.
Assuming that an immediate catastrophe can be avoided, and these
political obstacles overcome, Europe as a whole could be on a path to sus-
tained stability and renewed growth. But the road to recovery will not be
short and success is by no means assured. Reducing fiscal deficits and debt-
to-GDP ratios will take time and the process will tend to depress economic
growth for years to come. As they struggle to put their finances in order,
the nations at the centre of the crisis will also have to undertake structural
reforms that are going to be all the more painful for having been deferred
for so long.7 To boost their competitiveness and increase exports, these
countries are going to have to reduce costs, presumably
through some combination of labour-market reforms that
The road to will suppress the growth in wages, and through the intro-
duction of new technologies and management techniques
recovery will to improve productivity.8
not be short Nor is this a challenge faced only by Europe’s weaker
economies. Over the last two decades the gap in labour
productivity between the EU’s original 15 members and the United States,
which narrowed considerably between the 1970s and the mid-1990s, had
begun to widen once again. As a matter of simple arithmetic the only way
to sustain increases in national income, aside from population growth, is
through improvements in productivity. The low birth rates prevailing
across much of Europe, and the likelihood that it will be less open to immi-
gration during a prolonged period of slow economic growth, mean that
such increases in output per worker are essential to its future prosperity. As
a recent analysis by McKinsey’s Global Institute concludes, ‘given Europe’s
stagnant population growth, it could be trapped in low GDP growth at or
around 1.5 per cent unless it can capture some new driver of accelerated
productivity growth’.9 Unfortunately, at this point it is not clear whether,
and if so where, such a driver can be found.
In sum, even if Europe has its ‘Alexander Hamilton moment’ and emerges
from the current crisis not only intact, but more unified, it will still have
its work cut out for it. Merely avoiding catastrophe will not be enough to
 The Euro Crisis and US Strategy | 13

preserve Europe from a future of slow growth and a dwindling share of

world wealth and power.

Meltdown
At the opposite end of the spectrum of possibilities would be a series of
developments leading to the unravelling of the eurozone and perhaps,
although the first would not necessarily guarantee the second, the collapse
of the European Union itself. This outcome would most likely be the result
of some mix of policy errors and market panic. If one country abandons the
euro (Greece being the most likely candidate at this point), defaults on its
debts, and reverts to a national currency, it may trigger a cascade of events
that would be difficult, perhaps impossible, to control. International capital
markets might respond to this decision in ways that would compel other
governments to follow a similar path, regardless of their initial intentions.
Feldstein describes one variant of this scenario: ‘If Greece leaves and deval-
ues, global capital markets might assume that Italy will consider a similar
strategy. The resulting rise in the interest rate on its debt might then drive
Italy to in fact do so. And the competitive pressure might force France to
leave the eurozone and devalue a new franc.’ At that point, Feldstein con-
cludes, European monetary union would collapse.10
The economic and political costs of such an eventuality are likely to be
so large that, until very recently, few observers were prepared to consider
it seriously. While it rated the probability of a break-up of the eurozone at
close to zero, a September 2011 study by UBS sought to estimate the impact
on individual nations of abandoning the euro. In the case of a weaker
country, the near-term effects would include a sharp drop in the value of
the restored national currency relative to the euro, a steep increase in the
cost of capital as borrowers demanded high-risk premiums in the wake
of sovereign and widespread corporate default, a decline in trade as other
countries imposed tariffs to offset the effects of currency devaluation, and
losses due to bank failures. Taking all these factors into account, the authors
concluded that withdrawal would result in a loss of 40–50% of GDP in the
first year alone, with continuing costs of roughly one-third that amount in
subsequent years. By contrast, a relatively strong country such as Germany
14 | Aaron L. Friedberg

would suffer severe but somewhat less drastic consequences on the order of
20–25% of GDP in the first year and perhaps half that much for an indefinite
period thereafter.11
The UBS study did not attempt to calculate the costs for Europe as a
whole of the unravelling of the eurozone, but it did suggest that these could
be even higher than merely the sum total of the losses incurred by each
individual nation. Because continent-wide economic turmoil could result
in civil unrest and possibly even interstate conflict with unforeseeable long-
term effects, the costs of a breakdown are ‘too great to quantify in bald cash
terms’.12 Without delving into such dark possibilities, Andrew Moravcsik
concludes simply that if the euro fails, ‘Europe will face a long-term eco-
nomic catastrophe that could drain its wealth and power for the rest of the
decade and beyond’.13

Muddling through
Despite drastic warnings and calls for dramatic action, it is possible that
the current crisis could end, not with a bang but with a whimper. If ways
can be found to limit the danger of contagion, one or two of the weaker
countries might be able to revert to their national currencies without
causing the entire eurozone to collapse. Alternatively, European gov-
ernments and institutions may be able to stitch together a package of
emergency programmes sufficient to stabilise the situation in the most
troubled economies and to achieve a degree of policy coordination ade-
quate to prevent an immediate recurrence of crisis conditions, without
necessarily creating new and more powerful mechanisms for centralised
economic management.
While the consequences of a diminished single-currency area are less
obvious and would presumably depend on which countries remained, the
preservation of the eurozone through a series of half measures is unlikely to
lead to marked improvements in economic performance. On the contrary,
almost by definition muddling through would leave underlying problems
unresolved and prone to re-emerge. Daniel Mockli of the Center for Security
Studies in Zurich describes the manifestations of this scenario (which he
regards as the most plausible):
 The Euro Crisis and US Strategy | 15

There will be more of the same in terms of austerity, adjustments, EU late-

night summit meetings, and rescue packages. For crisis-hit countries at
Europe’s periphery this will mean long periods of hardship, with ever
growing social costs. But the Eurozone and the EU proper face difficult
years ahead too ... The bottom line of all this is that the EU will likely
remain bogged down in crisis management for years to come.14

Implications for Europe

In his 1997 essay Feldstein warned that the creation of a monetary union
could paradoxically end up increasing the risk of war among its members.
Over time, efforts to hold the union together would inevitably lead to ‘con-
flicts over economic policies and interference with national sovereignty’
which, in turn, would tend to ‘reinforce long-standing animosities based
on history, nationality, and religion’. The fact that the founding docu-
ments of the EU and European monetary union contained no mechanisms
for withdrawal made matters worse. As Feldstein warned: ‘The American
experience with secession of the South may contain some lessons about the
danger of a treaty or a constitution that has no exits.’15
Whatever their differences over economic policy, it is thankfully
extremely difficult to imagine a scenario in which the members of the euro-
zone as presently constituted would have either the capability or the desire
to wage war on one another. Greeks may be angry at the German govern-
ment for imposing austerity on them, but Greece simply does not have the
means with which to project military power against Germany. Germans may
resent Greece for what they see as its fiscal irresponsibility, but they would
probably be happier to see it go than to fight to keep it in the eurozone.
The one caveat to these rather obvious points is that the further playing
out of the current crisis could lead to radical shifts in the domestic politics
of at least some of the countries involved. Nations in which unemployment
has reached unprecedented heights and social safety nets are fast unravel-
ling could be subject to severe civil unrest, dramatically increased support
for fringe political parties of the left and right, and perhaps even shifts in
the character of their domestic political institutions away from democracy
16 | Aaron L. Friedberg

and towards some form of authoritarianism.16 Seeking to rally support and

deflect popular resentment of poor economic conditions, extreme national-
ist governments might adopt belligerent attitudes towards other countries
or perhaps towards unpopular domestic minorities. With the possible
exception of conflicts involving immediate neighbours, most states would
still lack the capacity to use force in a meaningful or effective way against
their imagined foreign enemies, but this does not mean they could not do
considerable damage in trying.
Instead of conquering the world, or even one another, today’s European
nations are, in the words of François Heisbourg, ‘more likely to hurt them-
selves, along the lines of the wars of Yugoslav succession in the 1990s’.17 In
contrast to the immediate post-Cold War era, however, there might be few
mechanisms available with which to restore order and keep the peace. If the
EU unravels due to disputes among core member states NATO too could
be badly weakened and, without this traditional platform to support and
legitimise its actions, the United States would be far less likely to intervene.
Given its shifting assessment of its own interests, Washington might have
little inclination to do so in any event. As Heisbourg suggests, in the after-
math of a meltdown scenario ‘the U.S. may well turn its back on [a] newly
“Balkanised” post-EU Europe.’18
Putting aside such nightmarish possibilities, the playing out of the crisis
within the eurozone seems certain to result in heightened tensions among its
members. A protracted period of muddling through will likely yield further
frayed nerves and deepening resentments, especially between Germany and
the states of southern Europe, and perhaps between Germany and France.
Even if the present crisis leads eventually to a strengthening of central insti-
tutions and a greater harmonisation of national economic policies, it will
be as the result of a bruising process of negotiation and compromise that
will leave no one entirely happy or satisfied. A forced, ‘shotgun wedding’ is
more likely to be followed by an extended period of cautious reconciliation
and halting efforts to re-establish trust than by a blissful honeymoon.
To one degree or another, then, the current crisis is going to reinforce
pre-existing tendencies towards introversion. For some time to come,
the great bulk of the political energy in European capitals is going to be
 The Euro Crisis and US Strategy | 17

directed at consequence management, restoring growth, ensuring social

stability, preserving domestic support and managing relations with other
governments, and within the institutions of the EU, whatever their even-
tual form.
In the worst-case scenario of intra-European conflict, American policy-
makers would face decisions about whether and to what extent to commit
scarce resources to help keep the peace and restore stability. While there
might be some inclination to turn away and leave the Old Continent to its
own devices, in the end the United States would probably end up interven-
ing to help contain the economic, humanitarian and geopolitical costs of a
total European meltdown.
If Europe somehow emerges from the current crisis with its central insti-
tutions strengthened, Washington will need to learn how to work with them
effectively, perhaps taking the opportunity to finally shift its focus away
from NATO and towards truly independent and capable EU security insti-
tutions. On the other hand, if Europe muddles through the United States
will likely seek to keep traditional transatlantic security mechanisms afloat,
even as it pursues deeper strategic cooperation with a handful of key coun-
tries that retain some capacity for independent action. Of these, France and
the UK have already shown an inclination to work more closely with each
other, and with the United States. The biggest questions surround the future
disposition of Germany, which is likely to emerge from the crisis with its
influence enhanced, but which still has a strong aversion to employing the
instruments of hard power.

The ‘near abroad’

Even under the most optimistic assumptions about the course of the current
crisis, Europe faces a period of sustained, deep cuts in military budgets.
Here again, the trends are not new. By 2010 NATO’s European members
had collectively reduced military expenditures to an average of 1.7% of
GDP from 3.1% in the period 1985–89.19 Since the onset of the crisis, in
an effort to narrow budget deficits and bring debt under control, virtu-
ally every European government has made further reductions in planned
spending, with the larger and more capable states such as Germany and the
 18 | Aaron L. Friedberg

UK cutting close to 8%, the medium-sized powers 10–15%, and the smaller,
poorer countries such as Lithuania and Bulgaria as much as 30%.20
Coming on top of two decades of steady shrinkage, these dramatic
reductions are resulting in serious losses of capability. Systems necessary
for projecting power have been especially hard hit. Germany is retiring
existing submarines, transport aircraft and fighter-bombers and scaling
back plans for procuring new ones. France is closing many of its remaining
overseas bases and military installations, especially in Africa, and delaying
acquisition of aerial refuelling and transport aircraft. The decommissioning
of the aircraft carrier Ark Royal has sharply diminished the Royal Navy’s
ability to project military power and has been described by
one observer as having ‘essentially ended the era of Great
Further cuts Britain as a world power’.21
Further cuts may be in the offing. This is especially
may be in likely to be the case if Europe continues to muddle through,
the offing but even if the crisis results eventually in the strengthen-
ing of European institutions it will leave a fiscal mess that
could take years to clean up. At the start of 2011 the European Commission
estimated that the EU states as a group would have to devote 1% of their
collective GDP to loan repayments over the next 20 years, a figure equiva-
lent to half the total defence spending of NATO’s European members.22
While the situation will vary by country, the longer the crisis drags on,
the higher debt levels are likely to rise and the greater the downward
pressure on defence will become. With times tough at home, and external
threats abstract, at best, it is to be expected that European publics and their
elected representatives will continue to show a strong preference for
cutting military expenditure while struggling to preserve social welfare
programmes.
Numerous analysts have suggested that the fiscal crisis could present a
powerful inducement, indeed an imperative, for closer European defence
cooperation. While this is possible, and would certainly be desirable, there
are reasons to be sceptical of how much can actually be accomplished. In an
era of declining budgets, dwindling force structures and general economic
malaise, governments will be under considerable pressure to protect indig-
 The Euro Crisis and US Strategy | 19

enous capabilities, jobs and industrial capacity. In addition to economic

factors, there are serious political and strategic obstacles to a genuine pooling
and sharing of military resources. As differences over the recent interven-
tion in Libya suggest, European countries may at times disagree over when
it is appropriate to use force and the decision of one government to opt out
of a mission could cripple a truly joint operation. This would be especially
problematic if the states of Europe were to try to rationalise their collective
capabilities through a division-of-labour scheme in which different national
forces were given responsibility for particular tasks, such as reconnaissance
and lift.23 Even a Hamiltonian scenario that produced more closely coordi-
nated economic policies seems unlikely to dispel such concerns.
The impact of a eurozone meltdown on national military capabilities is
difficult to predict. On the one hand, the devastating economic effects of
such a disaster would impose even tighter constraints on resources. At the
same time, the unravelling of Europe could produce mistrust, resentment
and a more threatening security environment. In its aftermath, some states
might feel the need to bolster their military capabilities in order to defend
their borders, deal with internal unrest and prepare for a highly uncertain
future. Depending on the extent of the damage caused to institutions such
as the EU and NATO, a financial meltdown could result in the substantial
renationalisation of defence as well as economic policies all across Europe.
In sum, the playing out of the current crisis seems likely to result in a
further diminution in Europe’s collective military capabilities as well as its
appetite for using them. Although some may eventually emerge with bigger
budgets and stronger forces, even the nations that have traditionally had the
capacity to project power to other regions are going to experience cutbacks.
To the extent that American strategists hope to engage Europe as a whole in
new overseas military ventures, or even to rely on it to police its own back-
yard, for the foreseeable future they are likely to be disappointed.
Faced with these realities, US policymakers may prefer for the time
being to focus on developing a common, transatlantic soft-power approach
to dealing with the aftershocks of the Arab Spring. While their ability to
influence events will be limited, Americans and Europeans share a strate-
gic interest in seeing that the nations of North Africa and the Middle East
20 | Aaron L. Friedberg

that have cast off long-standing secular dictatorships do not become hostile
Islamist states or dissolve into chaos.
Unfortunately, non-military means have already proven to be insuffi-
cient to prevent a bloody civil war in Syria and they seem unlikely to be
adequate to dissuade Iran from moving further towards acquiring nuclear
weapons. If it decides to intervene in Syria, or is compelled to take action
against Iran, the United States will undoubtedly turn to its European allies
for help. Even if some of them have the will, as budget cuts proceed even
the most capable among them may lack the wherewithal to do much more
than provide a multilateral cloak for what would for all practical purposes
be unilateral American action.

Implications for Asia

Well before the announcement of the Obama administration’s ‘pivot’, the
United States had already begun to shift its strategic focus from Europe
towards Asia. The process of what has since come to be referred to as ‘rebal-
ancing’ started to get under way at the turn of the century but was delayed
for almost a decade by the terrorist attacks of 9/11 and the subsequent wars in
Afghanistan and Iraq. With the winding down of those conflicts, American
strategists have begun to lift their eyes from the Middle East and Southwest
Asia and to concentrate more intently on East Asia and the Indian Ocean.
For the time being, however, their ability to take action to counterbalance
what is widely perceived as China’s growing power and increasing asser-
tiveness has been limited by the onset of America’s own financial crisis.
In part because of the constraints under which they now feel them-
selves to be operating, American policymakers have been especially eager
to engage others in a collective effort to balance Chinese power. While
attention has naturally been concentrated primarily on America’s regional
friends and allies, in the last several years there has also been increasing dis-
cussion on both sides of the Atlantic of Europe’s stakes in Asia. In addition
to substantial economic ties, European governments have begun to consider
whether their countries have broader strategic interests in the region and, if
so, how these can best be served. At a minimum there is growing recogni-
tion, first, that conflict in Asia would have a direct and harmful impact on
 The Euro Crisis and US Strategy | 21

the functioning of the global economy and, second, that Chinese behaviour
could itself be a source of instability.
Europe’s contributions to the Asian balance of power were never going
to be primarily direct and military, a fact that is merely underscored by
recent and planned reductions in defence budgets. Despite this obvious lim-
itation, individual European capitals, and Europe’s collective institutions,
have other instruments at their disposal. When the EU joins with the United
States to declare its commitment to finding ‘peaceful, diplomatic and coop-
erative solutions’ to disputes over territory and resources in the South China
Sea, it sends a signal to Beijing that unduly aggressive behaviour will have
a harmful impact on relations with Europe.24 Similarly, when individual
European governments resist Chinese efforts to silence their criticism of its
human-rights record (as many did when, over Beijing’s protests, they sent
representatives to Oslo for the awarding of the Nobel Peace Prize to jailed
dissident Liu Xiaobo) they demonstrate their continued commitment to uni-
versal principles, despite the potential risk to their economic interests.
Through their policies on exports, investment and technology transfer,
European governments can also act in ways that will indirectly influence
the balance of hard power in Asia. If the EU were to abandon its post-
Tiananmen embargo on arms sales to China the pace of PLA modernisation
would increase, though by how much and in what areas is open to debate.
The stringency with which governments monitor and regulate Chinese
investment in firms involved in sensitive dual-use technologies will also
have an impact on the ability of the United States and its advanced indus-
trial allies to maintain a qualitative edge in key areas of military capability.
On the other side of the balance sheet, European firms could become quite
active in helping other Asian states to strengthen their armed forces, either
by selling them finished products or by collaborating in the development
and manufacture of weapons and other military systems.
The inclination of individual European governments, and of Europe
as a whole, to take steps that would constrain or counter China’s growing
power has been undercut by the onset of the current crisis. As a recent
study by François Godemont and Jonas Parello-Plesner points out, ‘just
as the EU was beginning to develop a more coordinated and tougher
22 | Aaron L. Friedberg

strategy towards China’ across a range of issues, ‘the effects of the economic
crisis are now fracturing Europe’s embryonic unity and making it much
harder to implement this new approach’.25 European governments eager for
China to buy their debt and invest in their weakened economies are likely
to be even more cautious than usual about antagonising it with unwelcome
pronouncements or policies, including those designed to restrict access to
sensitive technologies or to improve the military capabilities of Asian states
other than China. The divisive effects of the crisis have also made it harder
for Europe to present a united front and easier for Beijing to cultivate ties
with key countries and to discourage the formulation and implementation
of common policies that would run counter to its interests.
Persistent weakness of the sort envisioned in a muddling-through sce-
nario will exacerbate these tendencies, lessening Europe’s ability to work
with the United States in defining and pursuing common strategic goals
in Asia. The fragmentation of European political institutions that could
accompany a financial meltdown would leave even the largest states at
a disadvantage in one-on-one negotiations with Beijing. Under these cir-
cumstances China would find it easier to extract concessions on access to
sensitive technologies, including weapons systems, and to bend individ-
ual European countries to its will on a range of economic and diplomatic
issues. By contrast, a stronger, more unified Europe would be better posi-
tioned to stand up to China and, assuming that its members chose to do
so, it could make significant contributions to bolstering strategic stability
in Asia.
While its ability to achieve them will vary depending on what happens in
Europe, Washington’s objectives are likely to remain constant across these
scenarios. At a minimum, it will seek to dissuade European governments
from doing anything that could accelerate unfavourable trends in the Asian
balance of power. Where possible it will encourage policies that have the
opposite effect, whether by slowing the growth of Chinese military capa-
bilities or enhancing those of other Asian nations. Outside the realm of hard
power, the United States will attempt to maximise its leverage, presenting
China with a united front on economic and diplomatic issues by appealing
to the interests and values it shares with Europe.
 The Euro Crisis and US Strategy | 23

Global implications
Regardless of the outcome of the eurozone crisis, the coming decades will
be marked by the continuation of a phenomenon sometimes described as
‘the rise of the rest’; the ongoing diffusion of wealth and power from west to
east and from north to south that first became evident in the 1970s and 1980s
with the emergence of Japan and the other Asian tigers, and has been inten-
sified since the 1990s by the rapid growth of China, India and Brazil, among
others. How the current crisis plays out could accelerate or slow Europe’s
relative decline but, barring catastrophe in other parts of the world, it is not
going to reverse it.
Over the next several decades, however, the slope of Europe’s trajectory
could have a major impact on the structure and functioning of the inter-
national system. Taken together the nations of Europe have vast resources
at their disposal. Working in combination with the United States and the
other advanced industrial democracies they can use these to help defend
and spread the values that, whatever their differences, all share in common:
a belief in the virtues of liberal democracy, the rule of law, the protection of
individual rights and freedoms, market-oriented economics and the peace-
ful resolution of international disputes. A Europe that is economically weak
and politically divided will inevitably punch below its weight, exerting less
influence than it could, given the raw capabilities of its constituent parts.
Unfortunately, absent a turnaround that is not yet in view, it seems
increasingly likely that this will be the case. While they may overstate its
influence before the crisis, many observers note that recent events have
damaged Europe’s soft power, and, in particular, the attractiveness of its
model for domestic development and regional integration. According to Rob
de Wijk of the Hague Centre for Strategic Studies, ‘Europe’s declining appeal
means it can no longer set an example for regional development elsewhere,
thus further undermining its power to shape the international agenda’.26
Austerity and slow growth will also mean that fewer funds are available for
development assistance and other programmes that have served as instru-
ments of European influence in Africa, the Middle East and other regions.
In what may appear to Americans as a somewhat belated discovery of
the continuing importance of hard power, some analysts have also pointed
24 | Aaron L. Friedberg

out that the shrinkage of defence budgets will diminish Europe’s ability to
shape events, and not only through active intervention. Nick Witney, former
chief executive of the European Defence Agency, argues that ‘a key function
of hard power, as ever, is to work on the perceptions of other competitors
– whether by persuading the Chinese leadership that Europeans are not so
decadent that they will not at some point be prepared to stand up for their
own interests; or in emboldening a people, as in Libya, to revolt against their
dictator’. As Witney notes: ‘in the not-as-yet-post-modern world, nothing
conveys resolve so clearly as a willingness to make the sacrifices involved
in maintaining armed forces and, from time to time, employing them’. If it
continues to cut capabilities, Europe risks ‘being marginalized in a world
where newer and more hard-nosed powers make the rules and assert their
interests and values while Europe retreats into retirement’.27
Such a development would obviously be contrary to American inter-
ests. As it works to bolster and reinvigorate the order that it did so much
to create, the United States is going to need all the help it can get. While its
role can only be indirect, and while it will remain preoccupied with its own
problems for some time to come, Washington needs to do what it can to
encourage Europe to dig its way out of its economic difficulties, avoid the
disintegration of its political institutions, and slow, if not reverse, the accel-
erating trend toward demilitarisation.
It may be possible, and at times even preferable, for the United States to
address some problems in collaboration with a handful of allies. When it
comes to global issues, however, there is no substitute for a unified Europe.
Although it has yet to fulfil its potential, the EU could be a powerful force
for good in the wider world, especially if it chose to align and coordinate
its policies and programmes with those of the United States, Japan and the
other advanced industrial democracies.

* * *

From an American perspective it is tempting, and in a sense reassuring, to

see the eurozone crisis as marking little more than an acceleration in long-
standing tendencies towards introversion, demilitarisation, a diminished
 The Euro Crisis and US Strategy | 25

share of global wealth and a dwindling voice in world affairs. For a number
of reasons, however, this view is overly sanguine. Even if Europe is destined
to decline, the pace at which it does so could be consequential. Coinciding as
they do with America’s fiscal crisis and post-war fatigue, Europe’s troubles
could lead to a dangerous diminution of overall Western engagement in
various hot spots at a critical moment. Along with problems that may metas-
tasise in the relatively near term (including Syria, Iran and Afghanistan)
there are also emerging long-term challenges to US and European interests
that will be far more difficult to manage without a coordinated, collective
response. In addition to China’s rise and the potential destabilisation of
large parts of the Middle East and North Africa in the aftermath of the Arab
Spring, there is the likelihood that an Iranian bomb could trigger a new
wave of nuclear proliferation. Finally, it is conceivable that events could
unfold in new and highly disruptive ways, perhaps triggering a worldwide
depression or the re-emergence of armed conflict within Europe itself.
The United States has every reason to hope that Europe will emerge from
the current crisis stronger, more unified and more capable of acting as a full
partner in dealing with the strategic challenges of the twenty-first century.
At this point, however, it must be said that such an outcome does not appear
likely. The avoidance of disaster, and a continuation of previously existing
trends, may be the best that can reasonably be expected. This is not good
news, to be sure, but it reinforces an important conclusion: regardless of
how the current crisis unfolds, but especially if it goes poorly, reinvigor-
ated transatlantic dialogue and enhanced cooperation will be essential to
the security of both the United States and its European partners.

Notes
1 For useful overviews of the underly-
ing economic dynamics of the crisis
see Erik Jones, ‘The Euro and the
Financial Crisis’, Survival, vol. 51,
17–36; Martin Feldstein, ‘The Failure
of the Euro’, Foreign Affairs, vol. 91, no.
1, January–February 2012, p. 105–16.
2 Feldstein, ‘The Failure of the Euro’,

no. 2, April–May 2009, pp. 41–54; p. 105. See also Martin Feldstein,
Alexander Nicoll, ‘Fiscal Union ‘The EMU and International
by Force’, Survival, vol. 53, no. 6, Conflict’, Foreign Affairs, vol. 76, no. 6,
December 2011–January 2012, pp. November–December 1997, pp. 60–73.
26 | Aaron L. Friedberg
3 The phrase ‘Alexander Hamilton
moment’ is borrowed from David
McCormick, ‘Europe Needs its Own
U.S. Fiscal Union Moment’, Financial
Times, 20 June 2012; see also Charles
A. Kupchan, ‘Centrifugal Europe’,
Survival, vol. 54, no. 1, February–
March 2012, pp. 111–18.
4 Kemal Dervis and Javier Solana,
‘Could the Euro Destroy the EU?’,
Europe’s World, no. 21, Summer 2012,
pp. 8–15.
5 Some have suggested that the crisis
has already begun this process of har-
monisation, in effect creating a fiscal
union ‘by force – the force of financial
markets’. See Nicoll, ‘Fiscal Union by
Force’, p. 18.
6 For a sceptical analysis of many of the
proposals for reform see Feldstein,
‘The Failure of the Euro’. For the
details of one plan reportedly being
discussed by top eurocrats during
summer 2012, see Konstantin von
Hammerstein, Christoph Pauly and
Christoph Schult, ‘Planning for the
Future: A Sneak Peek at Tomorrow’s
Europe’, Spiegel Online, 11 June 2012,
http://www.spiegel.de/international/
europe/europe-looks-at-plans-for-
political-union-and-budgetary-over-
sight-a-838142-druck.html.
7 On the need for labour-market
reforms, especially in the service
sector, see Howard Davies, ‘Sorting
Fact from Fiction on Europe’s
Economic Stagnation’, Europe’s World,
no. 21, Summer 2012, pp. 56–9.
8 Nemat Shafik, ‘Reviving Growth
in Europe’, Remarks at Brussels
Economic Forum, 31 May 2012,
http://www.imf.org/external/np/
speeches/2012/053112.htm.
9 Charles Roxburgh and Jan Mischke,
‘European Growth and Renewal:
The Path from Crisis to Recovery’,
McKinsey Global Institute, July 2011,
p. 13, http://www.mckinsey.com/
insights/mgi/research/productiv-
ity_competitiveness_and_growth/
european_growth_and_renewal_
path_to_recovery.
10 Feldstein, ‘The Failure of the Euro’, p.
115. For another variant, which traces
the contagion from Greece to Spain to
the other big European economies, see
Gerald O’Driscoll, ‘How the Euro Will
End’, Wall Street Journal, 12 June 2012.
11 Stephane Deo, Paul Donovan and
Larry Hatheway, ‘Euro Break-up:
the Consequences’, UBS Investment
Research, Global Economic
Perspectives, 6 September 2011.
12 Ibid.
13 Andrew Moravcsik, ‘Europe After
the Crisis: How to Sustain a Common
Currency’, Foreign Affairs, vol. 91, no.
3, May–June 2012, pp. 54–68.
14 Daniel Mockli, ‘The Strategic
Weakening of Debt-ridden Europe’, in
Strategic Trends 2012 (Zurich: Center
for Security Studies, 2012), p. 42.
15 Feldstein, ‘The EMU and International
Conflict’, p. 72.
16 As the UBS study notes, past instances
of the unravelling of monetary unions
have sometimes resulted in the col-
lapse or overthrow of democratic
governments and the rise of authori-
tarian regimes. Deo, Donovan and
Hatheway, ‘Euro Break-up’, p. 15.
17 François Heisbourg, ‘The Defence of
Europe: Towards a New Transatlantic
Division of Responsibilities’, in
François Heisbourg, Wolfgang
Ischinger, George Robertson, Kori

Schake and Tomas Valasek, All Alone?
What US Retrenchment Means for
Europe and NATO (London: Centre for
European Reform, 2012), p. 36.
18 Ibid.
19 Jorge Benitez, ‘U.S. and European
Defense Cuts: A Race to the Bottom’,
NATOSource Blog, 31 August 2011,
http://www.acus.org/natosource/
us-and-european-defense-cuts-race-
bottom.
20 Claudia Major, Christian Molling and
Tomas Valasek, Smart but Too Cautious:
How NATO can Improve its Fight
against Austerity (London: Centre for
European Reform, 2012), p. 2.
21 Patrick Keller, Challenges for European
Defense Budgets after the Economic
Crisis, (Washington: American
Enterprise Institute, July 2011), p. 4.
22 Major, Molling and Valasek, Smart but
Too Cautious.
The Euro Crisis and US Strategy | 27
23 See the discussion in Heisbourg, ‘The
Defence of Europe’, p. 34.
24 ‘U.S.–EU Statement on the Asia-Pacific
Region’, Phnom Penh, Cambodia, 12
July 2012, http://www.state.gov/r/pa/
prs/ps/2012/07/194896.htm.
25 François Godemont, Jonas Parello-
Plesner and Alice Richard, ‘The
Scramble for Europe’, European
Council on Foreign Relations, July
2011, p. 1.
26 Rob de Wijk, ‘The Geopolitical
Consequences of the €-Crisis’, Europe’s
World, no. 21, Summer 2012, p. 21.
On Europe’s loss of soft power see
also Walter Russell Mead, ‘The Euro’s
Global Security Fallout’, Wall Street
Journal, 19 June 2012.
27 Nick Witney, ‘How to Stop the
Demilitarisation of Europe’, European
Council on Foreign Relations,
November 2011, pp. 6–7.
28 | Aaron L. Friedberg