The key to the euro crisis: Economic growth

The struggle to save the euro is beginning to look like a chase scene from an Indiana Jones movie. First, our hero dodges the landslide, then runs from the spear-wielding aborigines, then is surprised by a snake ("I hate snakes!"), then is pursued by well-armed Germans and has to escape on horseback, only to plunge over a waterfall, only to be captured by ... you get the idea.

So this week we had 48 hours of excitement after Greek Prime Minister George Papandreou announced he was going to hold a referendum on Greece's acceptance of the European bailout. Consternation reigned, and markets tumbled. And then he said, in the best tradition of Emily Litella: "Never mind." Markets rebounded, and the bus lurched on toward the next crisis.

As I've emphasized before, I'm no macroeconomist (although my respect for some of them has been dropping steadily since 2007). From my decidedly non-expert perspective, here's what I've concluded.

The real issue with respect to Greece and Italy (and thus, the euro) is whether genuine economic growth can be restored to these economies. All the bailouts and austerity and haircuts (i.e., voluntary reductions in debt) in the world won't help these states (and especially not Italy) if they can't generate enough economic growth to pay back what they owe. (Strict austerity is a problem here, by the way, because it reduces growth in the short term). If they don't grow they can't pay, which will place a lot of European banks at risk of major losses and maybe bankruptcies. And because this whole arrangement depends on confidence -- a debt is an asset if you think it will be repaid, but it's a loss if you believe it won't -- you'll get a credit event if the markets ever conclude that growth won't happen and the debts won't get repaid, and the euro is probably finished (at least in its present form). End of story.

So the fact that things have calmed down a bit (just as they do at the end of a good chase scene), doesn't tell us much about the future. All these diplomatic machinations to arrange rescue packages, etc., can buy time, but they won't solve the problem if economic growth does not return. And the big difference between this thriller and a Spielberg movie is that the script is being written as we go along and we have no guarantee of a happy ending.

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Stephen M. Walt

Offshore balancing: An idea whose time has come

You know that an idea is catching on when Tom Friedman gets behind it. He's been a reliable weathervane for some time (a cheerleader for U.S.-led globalization in the 1990s, backing the Iraq War in 2002 and then reversing course when it went south, supporting escalation in Afghanistan with his fingers firmly crossed, and lecturing Americans on their recent failings once that became fashionable, too). But in this case I'm not complaining, because some of his recent writings suggest that he's coming around to the idea of offshore balancing.

Consider his column in today's Times. He makes two basic points: 1) the strategic stakes in Central Asia aren't worth the costs, and 2) withdrawal from Iraq will exacerbate Iranian-Iraqi relations and improve our strategic position. Gee, where did I hear those ideas before? And then he goes further, pointing out that getting out of our current "land wars in Asia" will restore our freedom of maneuver and give us more strategic options. Here's the money quotation from Friedman, based on testimony from a prominent Indian scholar:

'If the U.S. steps back, it will see that it has a lot more options,' argues C. Raja Mohan, a senior fellow at the Center for Policy Research, in New Delhi. ‘You let the contending regional forces play out against each other and then you can then tilt the balance.' He is referring to the India, Pakistan, Russia, Iran, China and Northern Alliance tribes in Afghanistan. ‘At this point, you have the opposite problem. You are sitting in the middle and are everyone's hate-object, and everyone sees some great conspiracy in whatever you do. Once you pull out, and create the capacity to alter the balance, you will have a lot more options and influence to affect outcomes - rather than being pushed around and attacked by everyone.'

The United States today needs much more cost-efficient ways to influence geopolitics in Asia than keeping troops there indefinitely. We need to better leverage the natural competitions in this region to our ends. There is more than one way to play The Great Game, and we need to learn it."

One might add that playing "hard to get" a bit would also make other countries do more to retain U.S. backing, and that would be good for us too.

Although Friedman doesn't use the term in his column, the logic he's outlining here is pure offshore balancing. That strategy -- which would eschew nation-building and large onshore ground and air deployments -- would both increase our freedom of action and dampen anti-Americanism in a number of key areas. It would acknowledge that Americans are not very good at running other countries -- particularly when their histories and culture are vastly different from our own -- and that trying to do so is neither necessary nor wise. Offshore balancing would take advantage of America's favorable geopolitical position, most notably its distance from most of the world's trouble spots and centers of power. (Why should a country that has no great power rivals near its own borders be so eager to send its military forces deep into the Asian landmass, in search of monsters to destroy, especially when there are no threats to the overall balance of power in these areas? Better to follow Muhammed Ali's famous advice and "float like a butterfly, sting like a bee.)

Offshore balancing is not isolationism, however, because the United States would still be diplomatically engaged in many places and committed to intervening in key areas if and when the balance of power broke down. By eschewing costly onshore commitments and fruitless exercises in "regional transformation" and nation-building, however, it would husband the resources on which America's long-term prosperity depends and help us rebuild a society that used to be inspire others and increasingly disappoints.

Nor is offshore balancing a magic bullet or a panacea. To make it work, you need to know a lot about the diplomatic and security constellations in key areas; you need expert diplomats who know how to play hardball in subtle ways; and you need a foreign policy establishment that pursues U.S. interests ruthlessly and doesn't get sidetracked by ideological crusades or the pleadings of special interests. And in case you hadn't noticed, those features are in short supply these days.

So we have a ways to go before offshore balancing becomes a reality. But with the Times' cheerleader-in-chief on board, maybe we'll get there a bit sooner.

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