TFPD Transatlantic Foreign Policy Discourse (TFPD)  

  A Stiftung Wissenschaft und Politik Project 

Working Groups

Past Working Groups 2002-08

  Post-Conflict Management
The Role of Islamists
State's Economic Role
Transatlantic Security
  China's Rise
Russia, USA and the EU
Military Transformation
Balkans Politics
EU Enlargement
States at Risk
Military Co-operability
Middle East
Meetings & Reports
Partners Organizations


Redefining the economic role of the state in a changing international environment - Challenges for American and European Policy-Makers (2005/06)


arrow Meetings & Reports

Group Leader:
arrow Dr. Jens van Scherpenberg

Key SWP Participants:
arrow Dr. Ognian Hishow
arrow Daniela Schwarzer

arrow Publications

arrow Partner Organization:
Institute for International Economics

1. The issue

The interaction of national economic policies and international markets has been a factor shaping - sometimes restricting, sometimes supporting - foreign policy in many countries since at least the 1990s, the "globalization decade", if not since Ronald Reagan's paradigm shift in economic and fiscal policy.

For Germany as the linchpin of European economies, in particular, the combination of a dynamic domestic economy with a growing standard of living, highly competitive exports and a strong currency in international demand, used to be a core ingredient of its foreign policy influence within the European Union, among the G-7 countries as well as on the wider international scene.

Today, both the U.S. and the EU are engaged in a major process of institutional competition brought about by the competitive pressure of globalization that punishes bad economic policies and rewards good ones. As any competition, this one, too, can lead to learning from each other, to adopt best practices in economic, regulatory and social policies. But it may also expose some fundamentally different social preferences. Thus, a revitalized American capitalism on the one hand, and an array of reformed and reinvigorated European "social market economy" variants may become different role models, competing with each other but also with the Chinese/Asian model, for influence among other countries in a globalized world.

Whether their respective reform policies succeed will, however, not only decide the ability of the United States and the EU to exert "soft power" as economic and social role models but will also ultimately determine their ability to take on and share the "hard power" burden of international security (war on terrorism, containing international trouble spots, stabilizing failed states etc.).

2. The setting

The economic boom period of the late 1990s – and Germany’s unification in particular – allowed for some complacency in this regard, epitomized by talk about the “peace dividend”. Since the turn of the century, however, even more so since 9-11, the economy-foreign policy relationship has required urgent renewed attention:

·      Budgetary pressures on most major industrial nations have again become a matter of substantial concern. Tax revenues are down, either because of deep tax cuts that are only partially compensated by the positive revenue effects of economic growth, as in the US. Or, as in major continental European countries, because of sluggish growth that leaves taxable income and sales depressed. At the same time, domestic demands on budgets both in the US as in major European countries keep rising with ageing populations and increasing health care costs, among others.

·      With the rise of China – and India – globalization has taken on a new meaning. It isn’t any more simply about American or European multinationals moving some of their jobs to cheaper locations in order to maintain the competitiveness of their core operations in their home countries. Globalization has turned into a major process of structural change in the international division of labor. Whole industries have moved or are about to move to other locations, with China about to become the manufacturing center of the world economy.
Countries whose structural economic framework conditions make them slow adapters to the changing global economic environment suffer in terms of economic growth. And public finance in these countries suffers even more from economic stagnation as tax revenues drop while welfare costs rise and the state comes under growing pressure to take up activities on which markets are seen as failing.

·       The “peace dividend” has clearly run its course as new challenges have been emerging in recent years: The war on terror and its derivative theaters in Afghanistan and Iraq, failing states, growing resource conflicts, proliferation of WMD, the emerging of new international powers – all of these factors require a stronger international presence of the major Western industrial countries and the devotion of increasing resources to maintain a stable, peaceful international order, which serves as a framework for a growing world economy and thus for increasing worldwide economic welfare.

Having both guns and butter – satisfying domestic budgetary demands as well as foreign and security policy resource requirements – is an option open only to countries that count on having an almost boundless ability to borrow abroad – of which, obviously, there is but one, the United States. Some American analysts maintain that due to the superior ability of its own economy and labor force to dynamically adapt to changing market requirements, the U.S. will be able to “outgrow” its economic imbalances. Others, however, see the tipping point almost having arrived at which the US may enter into a painful, possibly recessionary adjustment process.

Even for the U.S., therefore, redressing non-core public expenditure and refocusing public expenditure on providing core public goods may have become an urgent necessity, the more so for major continental European countries. For the latter, due to a lack of attractiveness for foreign savings and only limited demand for official Euro reserve holdings, the “guns-and-butter” option is not available, while budgetary pressures from social security, welfare and unemployment benefits are even greater than in the U.S.

The more urgent will it be to introduce a stronger element of cost-benefit awareness regarding foreign and security policy into policy-making. The common challenge has to be faced both by economic reform policy as by foreign policy decision-makers:

·           How at the same time to stimulate economic growth and to restructure public budgets in such a way that sufficient funds are available for the core task of states on which the Atlantic allies essentially still agree: to provide a secure, stable and open political environment for international economic, social, cultural exchange.

·           By which means – military, diplomatic, economic and financial – can this common foreign policy purpose be served in the most effective and most efficient, hence most economic way?

3. Our objectives

Addressing this policy dilemma is the more important since for politicians on both sides of the Atlantic there are strong temptations of a seemingly easy way out:

·       For the United States, following the “guns-and-butter” approach entails an implicit policy of burden shifting – letting high-saving and low-consuming Chinese and other Asians but Europeans as well work and pay for American private and public consumption: a precarious co-dependency that carries an increasingly high risk of failure.

·       In European countries, for many domestic constituencies free-riding on the global public goods provided by America still looks like a comfortable way of keeping overall public expenditures under control without having to cut down subsidized public services and social expenditure programs.

If both attitudes converge, the resulting situation is prone to disaster.

The objectives for the transatlantic working group on “Redefining the economic role of the state in a changing international environment” that we propose to establish would be to

·       Raise the awareness for the foreign policy dimension of economic and structural reform policies in both Europe and the U.S.;

·       Assess the scope for transatlantic “best practice” competition in conceiving reform policies in redressing public expenditure, in social security and health care reform, and in taxation.

·      Point out the burden-sharing aspects of such requirements:

-       In Europe, successful growth-oriented structural reform policies are a prerequisite for Europe to take on a larger part of the burden in the war on terror, in international stabilization, peace-keeping and state-building, and thus for EU countries to have more say in defining America’s global strategy.

-       In the United States, a carefully managed but resolute policy of fostering macroeconomic adjustment – not least by raising the national savings rate -, will reduce the risks of belated and hence overshooting adjustment processes imposed by short-term market reactions that may lead to disruptive domestic policy reactions, such as protectionist measures.

·       Engage economists and economic policy makers on the one hand, foreign policy experts and actors on the other in a substantive dialogue to further their mutual understanding of the interdependence between economic reform policies and foreign and security policy.

We assume that the “political climate” for our working group is increasingly encouraging on both sides of the Atlantic:

·       In the U.S., skepticism increases about the US economy’s ability to weather its imbalances without substantial domestic policy efforts. On the one hand, the reform discussions on social security, on taxation as well as on how to rein in the growing GDP share of public expenditure have intensified. On the other hand, not the least in the wake of the “Katrina” disaster, the debate on the economic role of the state in providing essential domestic public goods has been revived.

·       In Germany, the likely change of government towards a conservative-social democrat coalition improves the prospect for at least maintaining the reform momentum created by the Schröder government.

·       In France, the “post-no-vote-hangover” may ultimately lead – the more so when confronted with a continuing reform momentum in Germany – to renewed efforts at overcoming its own structural rigidities, if only after the next presidential election in early 2007.

·       Britain has aimed at giving the European reform process – not last embodied in the “Lisbon Agenda” - renewed vigor during its presidency in the current second half of 2005. The British government clearly wants to underpin its own European credentials in this debate as a benchmark of successful economic reform.

4. Procedure and tentative scheduling:

The core working group, to be formed by about 6-7 participants from Europe (probably from France, Germany, United Kingdom) and the same number of American members, should meet twice for a one-and-a-half-day workshop.

We will meet for a first workshop in Washington, on 26-27 January 2006; to be convened at the Institute for International Economics.

A second workshop is scheduled for 11-12 May 2006 in Berlin at the SWP.

At each meeting, additional local participants from government, Congress/Bundestag and the think tank community will be invited.
Berlin meeting will receive additional support from the European Commission.

From the meetings, a number of short policy papers will originate, to be written by members of the core group and to be published by SWP and on the project website (



© 2005 Stiftung Wissenschaft und Politik, Legal Disclaimer.