Power Play

It's time for the U.S. to stand up to China. And cutting the Pentagon's budget isn't going to help.

For a president who admires a slick backdoor pass and the occasional alley-oop, it is fitting that Secretary of State Hillary Clinton described his key strategic doctrine in terms of pivoting. In a recent Foreign Policy article, she articulated the administration's grand new strategy: America would "pivot" from conflict in the Middle East and Southwest Asia to deeper engagement in the dynamic Far East, shifting from an over-concentration on Japan and Korea to a more distributed posture across East Asia and throughout the Pacific and Indian oceans. The strategy entails a focus on ensuring alliances in the region are "nimble and adaptive," and guaranteeing allies up-to-date "defense capabilities and communications infrastructure." Speaking at the Pentagon today, President Barack Obama declared that the United States would achieve this pivot towards Asia, especially China, from a "position of strength." 

But as in basketball, an offensive pivot toward the hoop can be met with a zone defense aimed at protecting the court's strategic real estate. And make no mistake: Far from acquiescing to America's strategic pivot to Asia, China will seek to block what the Communist Party mouthpiece the People's Daily called the "U.S. 'return' to China," alleging that the United States is reverting to Cold War policies.

Even as Chinese officials seek to dispel the notion that they desire hegemony, Beijing has taken advantage of America's relatively light presence in the region over the past decade by expanding its economic, political, and military influence throughout the neighborhood. Over the past nine months, it has advanced the idea of a free trade zone among China, Japan, and South Korea; suggested that it should supplant the dollar as the sole global reserve currency; and floated bilateral maritime measures, like a hotline with Vietnam and a new conflict-prevention mechanism with Japan, to stave off the internationalization of local disputes. It has taunted America over its cautious thaw in relations with Myanmar and even questioned the U.S. decision to base Marines in Darwin, Australia, more than 3,600 miles from Beijing.  

If 2011 was the year of the American pivot, 2012 is shaping up to be the year of the great push back.

China's next generation of leadership, in preparation for their ascension this autumn, will likely push for the country to appear strong internationally to appease the nationalists and to distract from a possible economic slowdown. Conversely, Obama will necessarily slow his administration's frantic diplomatic pace during an election year. In 2010 and 2011, Vietnam and Indonesia (respectively) chaired the Association of Southeast Asian Nations (ASEAN), and focused on countering China's push in the resource-rich and strategically important South China Sea. Now that the chair has passed to Cambodia, a nation with no claim to the disputed waters and heavily dependent on China's economy, Beijing will behave more assertively towards ASEAN, attempting to sidestep it and negotiate directly with its member states. On the Korean peninsula, China will likely take advantage of Kim Jong Un's inexperience to increase its influence over North Korea, further integrating its economy into the mainland's and blocking its path to reunification with the South. China will continue to resist India's attempt to further integrate with East Asia, protesting when it holds military exercises with Japan or announces joint projects with Vietnam.

Beijing will aggressively contest Japan's claims to the Senkaku/Diaoyu islands, where over the past year China has encouraged fishermen and civil law-enforcement vessels to enter into Japan's exclusive economic zone (EEZ) and the territorial seas of islands administered by Japan.  Perhaps most worryingly, China will likely further underwrite massive cyber espionage -- while supporting a modernizing defense force that calls into question the value of America's military guarantees throughout the region.

China has portrayed virtually every improvement in the defense capabilities of any regional power as part of a containment conspiracy. As Maj. Gen. Luo Yuan wrote on the website of the People's Daily in December, "it is time for the U.S., as well as the other Asian countries, to give up the containment policies" because "otherwise these countries may slip down on China's list of potential partners once when [sic] China elbows its way to the top table." Such warnings presage more diplomatic brouhahas over future actions, such as deeper naval and air cooperation between the United States, Japan, and other militaries considering how to counter Chinese strategy.

As Asia contemplates alternative future orders, China appears to assume that its power -- rather than an inclusive, open, rules-based system -- should dominate the core of an emerging regional system. An editorial in China's state news agency Xinhua evaluated the situation at the start of 2012: "the United States' high-profile 'pivot' to Asia strategy … has further complicated China's neighborhood," but "no matter how the landscape changes, Beijing will continue to uphold the time-honored Five Principles of Peaceful Coexistence, deepen its friendship and partnership with neighboring countries and strive for regional peace and common prosperity." Implicit is that China stands in the center. Missing is any self-awareness of how Beijing's neighbors will perceive its actions. As Indian statesman Jaswant Singh opined last month, "Chinese assertiveness, most of it currently focused on the country's claims to the South China Sea, has been a wake-up call about the type of regional order that China would establish if it had the power."

In response to China's push back, the United States should focus on expanding a common agenda with China, but by adopting a posture that compels China to follow the rules in regards to fair trade, freedom of navigation, and other regional and global issues. The Obama administration deserves full marks for outlining a strategic vision, enhancing engagement, and elevating issues of maritime cooperation. But that's not enough: The United States needs to increase trade and investment with East Asia and continue to invest in a strong navy.

The United States must move in the direction of the 346-ship fleet recommended by the bipartisan Quadrennial Defense Review independent panel or face the danger of slipping from the present 284 combatant ships to a fleet of just 250 warships. Otherwise, it will lack the balance of power needed to credibly control -- or at least defend -- access to the sea lines of communication in and around the South China Sea, through which about half of all global maritime commerce passes. China is improving its naval and air forces through better integration of anti-ship ballistic missiles, fifth-generation stealth aircraft, submarines, aircraft carriers, cyber weapons, and outer-space systems. Left unaddressed, China's military programs will increasingly call into question America's power projection capability.  

The aim of more U.S. naval and air power in the region, however, should be to avoid war and remain steadfast in support of an inclusive, rules-based system that benefits all nations. We need to replace the traditional hub-and-spoke model of alliances between the United States and its East Asian partners with a more diffuse web of relationships where other regional partners accept more responsibility for common defense goals. A failure to do this -- compounded by likely budget cuts exceeding Secretary of Defense Leon Panetta's recommendations -- will accelerate China's relative rise.    

Economic interdependence should prevent a 21st century-style Cold War between China and the United States, but we must not let diplomatic blandishments about strategic partnership obscure the underlying realities of competition and uncertainty. Some will argue that the United States simply needs to accommodate China, but accommodation is not a strategy. If the United States wishes to perpetuate a liberal world order amid a rising China, it can best do so by cooperating from strength. That requires not just pivoting in and within Asia, but also parrying the inevitable Chinese attempts to obstruct and repulse American power.



Nothing to Celebrate

Think 2011 was a bad year for Europe? 2012 could be a whole lot worse -- if EU leaders don't get serious and deal with these 6 problems.

Welcome to the new year. In Europe, it doesn't look particularly promising. Even in the most optimistic scenarios for the euro and the EU economy, 2012 will be a year of austerity, recession, rising unemployment, and falling living standards. And the worse the economic situation becomes, the more Europeans are likely to turn against the euro, the EU, immigration, free trade -- and each other.

The eurozone crisis looks like it will last a long time. One reason is the ideological rift over economic philosophy that divides eurozone leaders. The predominant view in Germany and a few other countries is that severe curbs on public spending, combined with structural reforms designed to boost productivity, will in the long run engender growth and cure the eurozone's sickness. However, many leading economists in the Anglo-Saxon world, France, and Southern Europe think this German medicine is self-defeating. They argue that the root of the malaise is imbalances within the eurozone -- not only the current account deficits of Southern Europe, but also Germany's current account surplus (almost 6 percent of GDP in 2011). The German method of tackling imbalances is to impose stringent austerity and wage cuts on the southern countries, which will then reduce imports and require less external financing. But the problem with that remedy is that it leads -- at least in the short and medium terms -- to shrinking output and therefore debt burdens that become unsustainable. That increases the probability of governments defaulting, thus threatening the solvency of banks across Europe.

Critics of the German medicine therefore argue that structural reforms in the European periphery should be combined with efforts to boost demand, particularly in the core countries. They point out that the markets have started to worry as much about the peripheral countries' capacity to grow as their ability to repay debts. The European Union's peripheral economies could be helped not only by aid and investment from abroad, but also by a rebalancing of the German economy so that it consumes, invests, and imports more (especially from its European partners).

Such arguments go down badly in many circles in Germany, especially when they come from Anglo-Saxons who, as the Germans rightly say, have mismanaged their own economies and are prone to be cavalier about inflation. Some Germans claim that too much generosity toward southerners will encourage moral hazard in the form of excessive spending. They believe that the eurozone crisis is rooted in governments' breach of EU rules on deficits. (In fact, of the five peripheral countries in trouble, only Greece seriously breached the 3 percent budget deficit limit in the years before the crisis unfolded; Portugal was slightly above 3 percent). So in 2011, the Germans pushed the European Union to adopt much stricter rules on government borrowing, through legislation, and in 2012 they are trying to enshrine similar rules in a new treaty.

Many EU governments think this German economic analysis is flawed and that the new treaty requested by Chancellor Angela Merkel is pointless. But they have gone along with the German plan for greater fiscal discipline in the hope that Berlin will feel reassured that strict rules will stop the southerners from overborrowing and that it will then do whatever is necessary to save the euro. In the short term, that would mean relaxing its opposition to the European Central Bank's buying the bonds of countries in difficulty or lending to bailout funds in order to restore confidence to financial markets. In the long term it would mean mutualizing the costs of sharing a currency through a scheme for collective borrowing such as the issuance of "Eurobonds." At the start of 2012, though, Germany's leaders are far from adopting such policies. Public opinion may constrain their ability to do so, but it is hard to see how the euro can endure without them compromising on some of their economic principles.

A second reason to suppose that the euro crisis will be long-lasting is the poor quality of leadership, not only in Germany but all across the EU. Where are the Churchills, Monnets, Adenauers, Giscards, Schmidts, and Delors of today? Throughout 2011, EU leaders gathered at one EU summit after another. On each occasion they unveiled a fresh "solution" to the eurozone crisis. Every time, the measures taken turned out to be too little, too late.

The financial markets have started to doubt the EU's ability to sort out the problems of its currency. So have governments all over the world. The United States, China, India, and Brazil have urged Europe's leaders to act more decisively.

All is not lost, yet. This is because a eurozone breakup would have a horrifying impact, destabilizing banks, threatening legal contracts, and cutting economic output. There would be a surge of capital controls, border checks, and knee-jerk protectionism. The single market and the EU might not survive in their current form. One can only imagine how, in such a climate, xenophobic populism would thrive. Therefore political leaders -- even ones who are less than brilliant -- have large incentives to try to hold the euro together.

Ultimately, Germany's leaders will have to decide whether they want to save the euro or let it fracture. At the end of 2011, one Élysée official told me: "We think that in the last resort the Germans will try to save the euro. But we worry that by the time they move, it may be too late."

Here, then -- before it's too late -- are the six major worries that European leaders will have to contend with in 2012:

1. The EU's global prestige is waning. This is particularly unfortunate at a time when the Arab world is in turmoil and democratization in eastern neighbors such as Ukraine is stalling. The eurozone crisis has consumed the time and energy of EU governments and also made continental leaders look incompetent. Notwithstanding military action in Libya, they have failed to make help for the emerging democracies in North Africa an urgent priority. A significant part of Europe's soft power, its attractiveness as a model, has eroded. That makes it harder for the EU to influence events in others parts of the world. 

The financial constraints on EU capitals have forced them to cut contributions to EU military missions, leaving operations such as those in Bosnia and the Horn of Africa desperately short of troops and equipment. In Bosnia, there are now only about 1,200 EU peacekeepers, though the military commanders of that force say they need many more troops. EU commanders also say they need a dozen ships to combat pirates off the Horn of Africa, but they currently have less than half that number. Washington is starting to see Europe less as a partner than as a liability whose missteps might drag the U.S. economy back into recession. No longer do EU leaders speak confidently of projecting power or influence, alone or with the United States. Instead, if the economic crisis worsens, the EU might even have to contend with failing states and security crises within its own boundaries.

2. Europe is fragmenting into increasing numbers of subgroups. Within the eurozone there are the AAA-rated countries that set the terms of rescue packages and the deficit countries that cannot borrow easily and must therefore swallow those terms. In 2011, the antagonism between the Germans, along with their northern allies (such as Finland and the Netherlands), and the southerners grew severe. Then there are the "pre-ins" like Poland, Latvia, and Lithuania, that plan to join the euro one day and are ready to accept eurozone discipline, as well as the countries outside the euro that do not plan to join, like Denmark and Sweden.  

And then there is Britain, which has no desire to join either the euro or any European club committed to fiscal discipline. Since the December 2011 summit in Brussels, the EU has been heading for a rift between those countries prepared to join an intergovernmental fiscal compact (nearly all of them) and Britain (and perhaps a few others) outside it. The more divided the EU becomes, the greater the risk that its policymaking will be incoherent or ineffective, especially if the trend toward intergovernmental decision-making weakens EU institutions. The existence of a fiscal compact, with its own procedures, alongside the EU would pose serious risks for the integrity of the single market.

"Variable geometry," meaning that not every country engages in every EU policy, is inevitable and already applies to the Schengen Agreement, the euro, and EU defense. But the EU should try to avoid a two-tier architecture in which a core grouping has its own institutions and procedures that apply not only to the management of the euro but also to a wide range of other policies. Such a setup would damage not only the single market but also the mutual trust that contributes to the EU's strength, cohesion, and effectiveness.

3. The European Commission (EC) is not what it was. The EC, the executive that initiates policy and polices the market, has been weakening vis-à-vis the member states for 20 years, but the financial and euro crises have accelerated its decline. Merkel and French President Nicolas Sarkozy -- rather than the EC -- have led Europe's response to these crises. The big countries provide the money for eurozone bailouts and will not let the EC tell them what to do. They have curbed its role in the new bailout mechanisms. If the new fiscal compact takes off, it will be a more intergovernmental body -- with a lesser role for the EC -- than the EU.

The weakness of the European Commission matters: It is committed to extending and policing the single market, as well as maintaining a strong competition policy. Indeed, those priorities have cost it support in Paris and Berlin. The EC has a better record than any single member state of considering the wider European interest, as it has done on issues like energy security and climate change. It is also the friend and protector of the small member states, which worry about the increasing dominance of France and, especially, Germany.

The EC certainly makes mistakes. Sometimes it is too concerned to protect its own prerogatives. Also, very few of the current commissioners are heavyweight politicians who speak with authority. But the weaker it becomes, the less it will be able to focus the EU's attention on long-term challenges, speak up for the smaller countries, or defend the single market.

4. Britain is moving to the margins of Europe. In Britain's nearly 40 years of EU membership, its influence has never been lower. Britain's negative attitude to European integration, a sometimes Europhobic domestic political debate, and a failure to cultivate allies in the EU have left it unpopular and isolated. Even countries that agree with the British on substantive issues such as free trade, deregulation, or Atlanticism are embarrassed to be seen as siding with them. The diplomatic disaster of the December 2011 summit, which left Britain in a minority of one, was symptomatic of Britain's waning influence.

Many factors are eroding the British people's support for the EU: immigration, which is blamed on the EU; the eurozone crisis, which has shown EU leaders to be incompetent; a stream of regulations affecting the financial center of the City of London, some of which seem to be driven by French and German interests; and of course the tabloid press, which does what it can to stir up Europhobia.

The Conservative Party, like public opinion, is becoming ever more Euroskeptic. Many Conservatives want to renegotiate the terms of EU membership -- a polite way of saying "withdraw." It is now quite plausible to imagine that Britain will leave the EU within 10 years. Prime Minister David Cameron and the current generation of Conservative leaders do not want to take Britain out of the EU, but the next generation of leaders, when they eventually take over, could easily follow the wishes of the party's membership and call a referendum on withdrawal from the EU.

5. France, for the first time in the history of the EU, is clearly No. 2. For most of the EU's history, the Franco-German couple has provided joint leadership. The financial and eurozone crises, however, have accentuated France's relative economic weakness vis-à-vis Germany -- notably its less well-capitalized banks, higher budget deficits, and poorer export performance, all of which leads to higher borrowing costs.

Outwardly, Merkel and Sarkozy still get together and make decisions that the rest of the eurozone then follows. But on most of the key issues concerning the euro -- should there be a new treaty, are Eurobonds needed, should the European Financial Stability Facility be allowed to borrow from the European Central Bank -- Germany's views prevail. Sarkozy's strategy appears to be to hug Germany close in the hope of being able to influence the details of policy and maintain the appearance of parity.

The December 2011 EU summit was a rare example of a partial French victory. Merkel would have preferred all 27 countries to agree to a new treaty, while Sarkozy was sympathetic to the idea of a new intergovernmental body for eurozone countries alone. Britain's rejection of a new EU treaty enabled Sarkozy to establish such a body, but he had to go along with the German idea that it should include most of the countries not in the euro.

The leaders of France's Socialist opposition have attacked Sarkozy for being so willing to follow the Germans. François Hollande, the Socialist candidate for the presidency, has claimed that he would "renegotiate" the fiscal pact to make it less focused on austerity. That pact, however, will be concluded before this May's second round of the French presidential election, and if Hollande wins he will have to accept what Sarkozy has signed up to. The perception that France is no longer leading Europe might strengthen French Euroskepticism. The National Front's Marine Le Pen is a big critic of the EU and the euro and is profiting from their difficulties. A surge of support for the National Front leader in the presidential election could push mainstream politicians away from the idea of further European integration.  

6. Germany is the unquestioned leader for the first time in the history of the EU. But whether it knows how to lead is a different matter entirely. Many Germans are uncomfortable with this role. Germany's politicians are learning very slowly, perhaps too slowly, about the responsibilities that come with leadership. Too many of them define their national interest in a relatively narrow way. Too few of them explain to the public that the euro is good for the German economy: If the currency broke up, a new deutsche mark would soar in value and damage the competiveness of German exporters. They could also point out that the euro was the price Germany paid for an easy reunification and that it has become the symbol of Germany's postwar European identity.

Increasingly, Germany's neighbors are calling on it to assume its responsibilities. As the Polish foreign minister said in Berlin this past November: "We ask Berlin to admit that it is the biggest beneficiary of current arrangements and that it therefore has the biggest obligation to make them sustainable.… I fear German power less than I am beginning to fear its inactivity."

At the beginning of 2012, a healthy eurozone requires two things. First, it requires governments in the peripheral countries committed to structural reforms that will lay the basis for future growth. Since the end of last year, the Greeks, Irish, Italians, Portuguese, and Spaniards have all had such governments (though these governments' longevity is far from assured). Second, a healthy eurozone requires a Germany that is taking the necessary steps to ensure the euro's survival. But 20 years after the Maastricht summit that gave birth to the euro, Germany's partners are still waiting for the European giant to step up to the plate.