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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.
The 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
(www.tfpd.org).
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