Just prior to the inauguration, The Brookings Institution released a briefing book, “Big Bets and Black Swans,” examining the key foreign policy challenges President Obama faces as he begins his second term. The section on the Eurozone, written by Justin Vaiesse and Thomas Wright — identifies a potential euro failure as a “black swan” — a low probability, high-risk event that could divert the president’s attention and political capital from other priorities. The recommendations outlined by its authors identify two opposing dynamics that have defined the U.S.-EU relationship in recent years. First, a prosperous eurozone is crucial to the health of the global economy, and impacts U.S. interests directly. Second, U.S. ability to influence eurozone developments directly is very limited. The memorandum addresses possible U.S. policy towards the eurozone crisis but its authors recognize that its causes can be traced to the last round of EU institution building, which brought about monetary union without fiscal union. The future health of the eurozone is therefore tied to the effectiveness of the current, post-crisis, round of EU institution-building. What can President Obama do to help? Speak softly to both Brussels and Britain, in effort to keep both talking to each other, and hope for the best.
The EU and U.S. rank first and second in GDP, respectively, and the Brookings authors note how strong the Foreign Direct Investment (FDI) link is between the two (“50 percent of U.S. FDI abroad goes to the European Union, while 62 percent of FDI in the United States originates in the European Union.”) And yet, “The United States can neither compel the Eurozone to adopt particular structures nor do much to protect the Eurozone from a political backlash” related to responses to the crisis. Happily, the authors note, EU leaders have already made a round of decisions aimed at preserving a Euro inclusive both of Europe’s “core” (Germany, France, and Northern Europe) and its troubled periphery (Greece, Ireland, Portugal and Spain), including the adoption of a Single Supervisory Mechanism (SSM) for Europe’s banks late last year (discussed previously on this blog). No institutions are crisis-proof, but the initially positive reaction to the adoption of the SSM signals the desire among EU policymakers to correct the deficits in Europe’s regulatory institutions that contributed to the onset of the crisis. This forward motion on regulatory reform, as well as German Chancellor Angela Merkel’s motive to keep eurozone matters from derailing her own re-election this year, provide some reason for tempered optimism that the eurozone should not devolve into the “black swan” the Obama Administration fears in the near term.
In addition to the renewal of EU institutions, the authors plead for the U.S. to work to keep Britain engaged in the Eurozone with the threat looming that a possible referendum offered by the Cameron government might sever the U.K.’s connection with Europe entirely. The U.K. is a net contributor to the EU budget, and this has proven to be politically problematic for its governments in the past. Last month, John Cassidy of The New Yorker concluded that whispers from the Cameron government about a possible referendum on Britain’s withdrawal from the EU were tied to the state of British conservatism – an acknowledgment of growing influence of the U.K. Independence Party, which campaigns for withdrawal from the EU, during the recession. It is a bet on Cameron’s part to cultivate the Independence Party eurosceptics on the U.K. right while their popularity surges and he faces re-election, while allowing for the chance that an economic rebound might siphon their popularity surge more quickly than it emerged. On January 23, UK Prime Minister David Cameron confirmed the rumors, pledging a national referendum on EU membership would be held within five years. Cameron’s speech drew criticism from several EU foreign ministers and general concern that it badly undercuts the EU efforts to emerge from the current crisis a stronger union. It has certainly produced fresh punditry on the question of the EU’s future; The New York Times “Room for Debate” this week asked “Should the EU Stick Together?”
The U.S. and U.K. have their own historic “special relationship.” For the U.S., however, the U.K.’s connection with the eurozone is a curious policy concern. The U.K., never a participant in the common currency, has gone to lengths to keep a distance from the EU’s financial union throughout its history. Further, the U.S.-U.K. “special relationship” has centered on global security issues — from the Atlantic Charter to the recent Iraq War — and not economic policy. The U.S.-U.K. partnership predates the EU and stands outside of either side’s relationship to the rest of Europe. The authors argue that the Obama Administration must use whatever sway this special relationship holds to help the Cameron government resist calls for withdrawal from the extreme eurosceptics of his party. The U.S. must work to preserve the U.K.’s role in Europe as a means of preserving its own. By promising an EU referendum, the Cameron government has transformed this from a less theoretical U.S. diplomatic goal to a more concrete one.
“Quiet diplomacy and support has been your hallmark and it has been reasonably effective,” Vaisse and Wright advise Obama, “You should not radically depart from this path.” It is telling, however, that as invested as the U.S. is in the Eurozone, there appears to be little the U.S. can do to influence Eurozone outcomes beyond quite diplomacy. On Europe, Obama must “speak softly,” because there is no “big stick.”