November 1, 2004
Atlantic Economies

The United States and the European Union maintain the world’s largest and most significant economic relationship, which in turn is a foundation supporting the transatlantic political partnership. By some estimates, the transatlantic economy — including two-way trade and foreign affiliate sales — totals $2.5 trillion and is responsible for 14 million jobs in the United States and Europe. It is not just the scale of the transactions, however; the transatlantic economy is deeply interconnected through impressive levels of foreign direct investment in both directions.
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Together, the United States and the EU have been key players in managing the global economy through the World Trade Organization, World Bank, and International Monetary Fund. They have been responsible for the major accomplishments in international trade liberalization of the last 40 years, and have spurred the adoption of global standards in a wide range of sectors.

Despite the fact that the transatlantic economy seems to grow ever larger and more closely knit, problems of a serious order may lie ahead. The United States and the European Union confront serious macroeconomic issues and a looming demographic crunch, which will place a strain on pension, unemployment, and health insurance schemes. If current trends in growth, productivity, and demographics continue uninterrupted — particularly in Europe — the strong economic foundation for the transatlantic partnership may become seriously eroded. The United States faces great challenges in terms of reducing deficits and absorbing new security costs. But in Europe, where the demographic crunch is likely to be much more severe, prosperity can only be maintained by reducing government expenditures, stimulating faster economic growth, and increasing labor utilization. Despite the impressive achievements of the single market and the euro — and the promise of the new, reform-oriented European Commission under José Manuel Barroso — there is reason to question whether the European Union will once again be able to accomplish what is necessary to renew its economy. At the same time that the United States and the EU find that their economies are moving in different directions, China, India, and others are likely to experience strong economic growth and to lay claim to a bigger role in economic decision making, challenging the traditional joint stewardship of the United States and Europe. In sum, the conditions that allowed transatlantic political relations to flourish over the past fifty years and fostered U.S. and European joint leadership of the world economy may no longer exist by the year 2020.

As a tool to understanding the likely evolution of the transatlantic economy in the years to 2020, the Atlantic Council’s working group developed four basic scenarios, two each for the United States and Europe: U.S. Prosperity, Stalemated United States, Reformed Europe, and European Stagnation. For a range of reasons, the working group determined that the likeliest combination of scenarios is U.S. Prosperity and European Stagnation. While scenarios are a valuable tool to project different futures for the transatlantic economy, more important are their implications for both global economic governance and transatlantic political relations. The performance of both the U.S. and European economies will be a key determinant of how the future leadership of the international trade and financial system is shaped, and will also impact the political and economic relationship between the two regions.

Implications for Global Governance

The principal implication to be drawn from the scenarios in this report is that only under the most favorable economic conditions could one expect the joint global leadership provided by the transatlantic relationship since the end of World War II to survive in its current form through 2020. More likely, some combination of domestic pressures and transatlantic disputes will create an atmosphere that is no longer conducive to joint transatlantic leadership of the global economy. If institutions such as the WTO are not to be threatened with marginalization, the United States and European Union will need jointly to reaffirm their intention to provide active leadership in the governance of the global economy. Reaching out to new actors — including, but not limited to, the G-20 developing countries — to help ensure that they have a significant stake in the smooth and just functioning of the international economy will be crucial. Part of this effort will include the consideration of some reform of the WTO, particularly to ensure that its management of the multilateral trading system is adequate for running negotiations that are greatly expanded, both in terms of issues and participants.

Implications for Transatlantic Relations

The future of the transatlantic economy has implications not only for global economic governance, but also for the close political and economic linkages between the two sides of the Atlantic that have been fundamental to international stability for the last fifty years. Those links are expressed through cooperation in institutions like NATO and the UN, in continuing U.S.-EU undertakings in the framework of the New Transatlantic Agenda, and via bilateral U.S. relations with individual European states. If the European economy continues to lose ground, not only will Europe become more inward looking, but the EU will not have the resources or inclination to play a larger international role and to join the United States as a partner in dealing with some of the strategic challenges around the world.

The United States may well try to turn elsewhere, and with the likely rise of new global players such as China and India, the United States will have alternatives. These potential partners are unlikely to share fully the democratic values that have been at the core of transatlantic cooperation, but that will be less important if these partnership arrangements are temporary and aimed at specific issues. Over time, the U.S. reflex of turning first to Europe when seeking cooperation may fade.

Recommendations

The following recommendations suggest short- to medium-term strategies that the United States and Europe can pursue to increase the likelihood that the most favorable scenario options define the transatlantic economy and overall relationship to the year 2020:

• Both the United States and Europe should recognize that domestic economic policy is a legitimate subject of discussion for the transatlantic dialogue. Europe should accept the validity of U.S. concern about the need for economic reform in Europe, while the United States should be ready to listen to legitimate European critiques of its fiscal and monetary policies. However, neither should try to impose a specific economic or social model on the other — partnerships and productivity can exist with diversity.
• The United States and the European Union should reaffirm their commitment to the multilateral trading system, making it a priority to ensure that the Doha Round is concluded at a quickened pace, actively seeking to rebuild a consensus in favor of trade on both sides of the Atlantic, and positively managing the energized G-20. As part of their re-commitment to the multilateral trading system, the United States and the EU should jointly lead an effort to examine ways to reform the WTO in order to make it a more effective vehicle for trade liberalization.
• Even with modest reforms on the EU’s part, a growing discrepancy in the economic performance of the United States and Europe could lead to a deterioration in their bilateral and global cooperation. In order to reduce the political impact of their divergent economic paths, the United States and the EU should pursue a two-track strategy involving greater coordination of policies, especially in all the major international economic institutions (WTO, World Bank, IMF, G-8), and more encouragement of “transgovernmental cooperation” among informal networks across the Atlantic.
• The United States and the European Union should especially focus on cooperation in encouraging a constructive Chinese role in global economic management and on reform in the broader Middle East and North Africa. China should be encouraged to adhere to WTO disciplines, and perhaps be asked to join a core group to pursue further trade liberalization within the WTO comprised of the 15-25 countries that account for the lion’s share of world trade. The United States and the EU should also forge a more coordinated approach toward economic and political reform in the Middle East and North Africa, taking into account the EU’s long-standing effort to build regional cooperation with its Mediterranean neighbors and with the goal of stimulating more extensive trade among the states in this region and between them and the United States and the EU.
• The advent of a new U.S. administration is an opportunity to reestablish transatlantic relations on a more stable footing. The president should offer a commitment to address the U.S. budget deficit, while encouraging reform-minded European leaders. The president should indicate his intention to engage Europe as a partner on a number of key projects, and Europe must be ready to respond with greater engagement.

 

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