US-EU: the end of the affair

By George Irvin

As poll after poll revealed before the US election, a vast majority of Europeans favoured Kerry. They did do for many reasons: the debacle in Iraq, the discarded 'road map' in the Middle East, human rights and Guantanamo, the ICC, Kyoto … the list goes on and on. To be sure, the election of John Kerry would not have provided any quick solutions. Nevertheless, it would have symbolised a return to the relatively comfortable relationship Europe has enjoyed with the US for over half a century.

Bush's victory marks a watershed in relations between the US and the EU. Stated most succinctly, the trans-Atlantic love affair is over. The EU's political voice in world affairs may still be weak, but its commitment to a socially inclusive state at home and to multilateralism in foreign affairs remains crucial. Economically, the EU is now larger in population and marginally richer in combined GDP than the USA. Although the EU's average growth rate is still too low and its unemployment rate too high, its trade balance is comfortably in surplus and it is not dependent on foreign savings to finance current consumption. The euro is a strong currency - arguably excessively so - and it is rapidly gaining on the dollar as a world reserve currency.

Socially, the EU's citizens enjoy high-quality education, universal welfare benefits, longer holidays and higher pensions - in short, a quality of life second to none. Fifty years ago, Europeans looked to America for an enviable standard of living and a dynamic, progressive democracy. Today, all that has changed.

Lest we pat ourselves on the back too quickly, it should be noted that part of the EU's political class is still enamoured of US-style economics. Thus, we are told (most recently by Mr Kok) that our labour markets are over-regulated, that we pay excessive taxes and that our pension provision is unsustainable. If we continue like this, it is argued, we will be out-competed not merely by the USA but in another half-century by China and East Asia. There is an element of truth in this argument - but only an element. The EU can achieve higher growth, but this requires gentle reform rather than any wholesale dismantling of the welfare state. Indeed, the key to faster growth in the eurozone is not deregulation, but rather the adoption of more sensible monetary and fiscal policies. This is one area in which we can still learn from both the US and Japan.

Bush's victory in the US has two immediate implications for the EU. Economically, it means that the US external deficit will continue to grow and that the dollar will weaken against the euro. Sooner or later, the European Central Bank will be forced to relax monetary policy to prevent the euro from becoming dangerously strong, choking off Eurozone exports and damaging any prospect of higher growth.

It is politically that the renewed Bush presidency poses the greatest challenge. It does not require rocket-science to see that the new administration - plus both houses of Congress - will be even more conservative than the last. The Iraq imbroglio will deepen. Today's battle for Fallujah will be followed by tomorrow's battle for Sadr city and, as the Iraqi deaths mount before the US military juggernaut, young Shias and Sunnis will fight to expel what they consider to be an occupation force. In Palestine, Arafat's death - and continued US support for Sharon - will exacerbate the tensions in a struggle which has become emblematic in the Muslim world, whatever its rights and wrongs.

Those few EU countries belonging to the US-led 'coalition' in Iraq will come under growing domestic pressure to withdraw. In the Middle East, it is vital that the EU greatly strengthen its role as honest broker. Such a role requires far more than merely providing economic aid to the Palestinian Authority; the EU must speak decisively and with a single voice. Unless the deadlock is broken and genuine progress achieved, the West will create in the Muslim world a whole new generation of the very terrorists it claims to be combating.

Pessimists amongst you may well ask how this is to be done when the new Commission in Brussels is the least progressive in living memory? Optimists will counter that Berlusconi will not survive the next Italian election, and that in Britain the 2005 general election will critically weaken Blair. With two of the three Bs departed, Barroso will find less support for advancing the neo-liberal project in Brussels and a 'coalition' agenda abroad. All should agree, however, on one clear principle. The EU can no longer rely on the protective tutelage of the US. That option finally ended in the early hours of that fateful Wednesday morning as the result of the US election became clear.

This article was contributed by George Irvin, UHD Professor of Economics, ISS, The Hague; he may be contacted at George@Irvin.com. The opinions expressed at those of the author and not necessarily those of Federal Union. Last updated 10/11/04