The EU summit: Will the center hold?

On the eve of the EU Summit, Mark Sheetz offers the following commentary, which differs in some respects from mine. 

In several recent blogs on the euro crisis, Stephen Walt has expressed exasperation with European leaders and pessimism on the fate of the eurozone. His reaction is understandable and consistent with virtually all journalists and economists who study the issue. They are frustrated at the slow pace of European decision-making and the fact that a solution seems obvious. In recent days, demand for action has become nearly hysterical, with analysts, columnists, and editorial writers for the New York Times suggesting that time for a solution is "running short," that "the endgame is fast approaching," that the eurozone is facing a "meltdown," and that a collapse is "perhaps inevitable."

So, what is the solution? Conventional economic wisdom insists that either Germany acquiesce to some sort of bailout or the eurozone is finished. Germany must consent either (a) to the issuance of joint and severally liable Eurobonds or (b) to a policy of monetary easing by the European Central Bank (ECB). The problem is being treated as a technocratic economic matter.  Hence, technocrats have come to power in Greece and Italy. But the matter is essentially political and the crisis turns on central problems of international relations theory, like anarchy, sovereignty, and power.   

Economists believe that the basic problem of the eurozone is economic: that national economic imbalances can no longer be restored through the traditional method of currency devaluation.  But the problems of the eurozone are fundamentally political: (a) it expanded too fast, wider won out over deeper, (b) there is no commitment to common budgetary policies, and (c) there is no mechanism to enforce agreements.

The debate is congealing around two poles, a pessimistic pole predicting the breaking apart of the eurozone versus an optimistic pole of closer integration. The solution includes both. On the one hand, wide economic disparity among members of the eurozone will force weaker members to leave. Greece, as well as those countries that use the euro but cannot afford it (PIGS), will be cast off from the eurozone by a mounting centrifugal force.

On the other hand, the remaining members will converge on tighter economic policy along the German model. As a corollary to more restricted membership, those countries remaining in the eurozone will harmonize their policies regarding deficits and government pensions and achieve some sort of convergence in the major items affecting budget deficits. This will have the effect of bringing Europe closer together, or at least those countries that can achieve convergence. It may also create a more politically coherent Europe, with those remaining in the eurozone leading the European Union economically and politically. Such a situation might even give a common foreign policy the chance to develop and cohere around a small group of stronger European countries.

Some believe that a Greek expulsion from the eurozone will be catastrophic. They assume that a Greek default within the eurozone is manageable, while a Greek exit would make contagion worse. My own feeling is that contagion -- and the accompanying collapse of the European project -- would be the result of Greece staying in the euro, not the result of Greece getting out.  The recent evidence of market contagion to Italy and Spain appears to support this claim. A referendum in Greece would have cleared the air. It would have restored a stark reality that European leaders would not be able to evade. If Greeks had voted "no" on the referendum, Greece would have had little choice but to return to the drachma. That would have been a lesson to others. They would have recognized that they have only two choices: (a) converge fiscal and monetary policies or (b) press the "eject" button. The problem now is that European leaders may still think they can muddle through by patching up a country here and there. That will destroy the clarity exposed by a Greek default.

The divide, as usual, is between France and Germany over monetary policy. The French, along with their southern European allies in Greece, Italy, Spain, and Portugal, favor easy money, while the Germans, along with northern Europeans in the Netherlands, Austria, and Finland, insist on a tight money policy. Any hint of German capitulation to French demands of easier money will be the end of the euro. The first sign of wavering, the first inkling that a compromise is afoot, will signal to the markets that the floodgates for a river of euros are open, that fiscal and monetary discipline are history, that inflation will be rampant, and that the euro will be worthless.

Germans will not pay for the profligacy of their neighbors. Otherwise, where would it stop? Any concession towards easy money will only reinforce the "moral hazard" of further risk-accepting behavior. It is a story as old as Aesop: the ant and the grasshopper. Germany entered into the euro under assurances that all members would conduct their economic affairs responsibly. If this is no longer the case, then Germany will reserve the right to withdraw. A former British chancellor of the exchequer agrees, insisting that Germany would sooner withdraw from the euro than see its integrity compromised. Another (not insignificant) factor is the survival of Angela Merkel as chancellor. Any suggestion of Merkel wavering at the prospect of easy money is tantamount to political suicide. So all the speculation that the ECB or the EFSF will "stabilize" (rescue) the euro is so much folderol.

The power calculus, then, favors Germany. France will be dragged along kicking and screaming, but two points suggest eventual French capitulation. One is that Germany will otherwise threaten to secede from the euro, which would put France in a nasty competitive economic position. And the second is that, without the unity embodied in a common currency, French hopes of ever again exerting influence on the world scene will have evaporated. Europeans understand that they cannot meet global challenges as individual nations because they are no longer great powers. As President Sarkozy conceded, "If Europe does not change quickly enough, global history will be written without Europe."

The original path to the common currency was through a convergence of economic policies. Nations would have budget deficits of no more than 3 percent of GDP, and total debt of no more than 60 percent of GDP. If euro members had stuck to these criteria, they would be in dandy shape now. So a return to that mechanism, with additional penalties for non-compliance, might work. The problem is to create binding agreements.

On the question of enforcement, one possibility mentioned is an automatic increase in taxes to offset a budget deficit beyond acceptable limits. Other devices to ensure compliance with EU oversight of national budgets are available for the same purpose. These sanctions would be imposed by a central authority that can override national budget decisions. The European Court of Justice and the European Commission have been suggested as ultimate arbiters, but such supranational enforcement has its limits in a union of sovereign states.

Sovereign governments may oppose such measures for domestic political reasons. As long as sovereignty remains, national governments may negate previous agreements. Even within national governments, as in the U.S. Congress, existing legislatures may negate the agreements of previous legislatures. Therefore, a more severe penalty is required. 

The ultimate penalty for non-compliance is, of course, expulsion. The eurozone could expel any country that fails -- after a suitable time period -- to adhere to budgetary guidelines set forth in a new agreement. The ultima ratio of economic union is expulsion, just as the ultima ratio of politics is war. It lurks behind every decision as the final alternative.

So the demise of the euro, as a proxy for the EU itself, is not on. Neither is a consolidation on the German federal model. A big push for more Europe is not in the cards now. The loss of that much national sovereignty is unrealistic, given the immature development of a European identity. That is why convergence of fiscal and economic policies is the most likely outcome, not complete structural reform.

But convergence will not save the euro if member states refuse to comply with agreed guidelines. Both France and Germany violated the guidelines in 2003, breaking through the barriers of 3 percent budget deficits and 60 percent debt for more than a year. If the founding members of the eurozone fail to comply or to remedy violations within prescribed time periods, then the euro will well and truly collapse. In a union of sovereign powers, political will is the ultimate arbiter.

Mark S. Sheetz is an Associate in the International Security Program at the John F. Kennedy School of Government of Harvard University. He is currently writing a book on France, Germany, and the Transformation of Europe.  

David Ramos/Getty Images

Stephen M. Walt

The 'silent war' with Iran

Back in August 2010, I wrote a post warning about the possibility that war with Iran was being "mainstreamed." My concern was the likelihood that incessant talk of war would gradually accustom people to the idea and harden perceptions to the point that eventually even former skeptics would be convinced that war was inevitable and that we might as well get it over with.  As I put it back then:

If you talk about going to war often enough and for long enough, people get used to the idea and some will even begin to think if it is bound to happen sooner or later, than "'twere better to be done quickly." In an inside-the-Beltway culture where being "tough" is especially prized, it is easy for those who oppose "decisive" action to get worn down and marginalized. If war with Iran comes to be seen as a "default" condition, then it will be increasingly difficult for cooler heads (including President Obama himself) to say no.

I now wonder if my concerns were understated, and the danger a bit more subtle. It appears that we have gone beyond just talking about military action to actually engaging in it, albeit at a low level. In addition to waging cyberwar via Stuxnet, the United States and/or Israel appear to be engaged in covert efforts to blow up Iranian facilities and murder Iranian scientists. Earlier this week, the CIA lost a reconnaissance drone over Iranian territory (whether Iran shot it down or not is disputed). And just as I'd feared, this situation has led smart and normally sober people like Andrew Sullivan and Roger Cohen to endorse this shadowy campaign, on the grounds that it is preferable to all-out war.

I certainly agree that what the United States is doing is better than launching an all-out attack, but I question this approach on three grounds. First, as I've already argued elsewhere, our preoccupation with Iran vastly overstates its capabilities and the actual threat it poses to U.S. interests. Iran is a minor military power at present, and it has no meaningful power projection capabilities. It has been pursuing some sort of nuclear capability for decades without getting there, which makes one wonder whether Iran intends to ever cross the nuclear weapons threshold. Even if it did, it could not use a bomb against us or against Israel without triggering its own destruction, and there is no sign that Iran's leadership is suicidal. Quite the contrary, in fact: the clerics seem more concerned with staying alive and staying in power than anything else. Iran's "revolutionary" ideology is old and tired and inspires no one. The "Arab Spring" has underscored Iran's irrelevance as a political force, Iran's Syrian ally is under siege and may yet fall, and the ongoing U.S. withdrawal from Iraq will remove a key source of Iranian-Iraqi solidarity and encourage Arab-Persian differences to reemerge once again. Iran is a problem but a relatively minor one, and it is a sign of our collective strategic myopia that U.S. leaders either cannot figure this out or cannot say so openly.

Second, waging a covert, low-level war is not without risks, including the risk of undesirable escalation. No matter how carefully we try to control the level of force, there's always the danger that matters spiral out of control. Iran can't do much to us militarily, but it can cause trouble in limited ways and it could certainly take steps that would jack up oil prices and possibly derail the fragile global economic recovery. Moreover, if some U.S. operation misfired and a couple of hundred Iranians died, wouldn't the revolutionary government feel compelled to respond? If U.S. or Israeli operatives are captured on Iranian soil, will pressure mount on us to do more? (Just imagine what all the GOP candidates would start saying!) Such developments may not be likely, of course, but it would be foolhardy to ignore such possibilities entirely. Nor should we ignore the possibility that others will learn from this sort of "unconventional" campaign and one day use similar tactics against U.S. allies or the United States itself. 

Third, a semi-secret war of this kind raises the inevitable risk of "blowback." The late Chalmers Johnson defined blowback as the unintended consequences of U.S. action abroad, and especially those actions of which the public is largely unaware. When we conduct semi-secret, not-quite wars in other countries, the targets sometime try to hit us back. When they do, many people back home will see their actions as unjustified aggression, and as evidence that our enemies are irrevocably hostile and unremittingly evil

A case in point is the alleged Iranian plot to get Mexican drug lords to assassinate the Saudi ambassador in Washington. Americans immediately concluded that this scheme was a sign of dastardly Iranian perfidy, when it might just as easily have been a harebrained Iranian riposte to what we were already doing. This is not to say that Iran was justified in trying to blow up a building in our nation's capital, but by what logic is peace-loving America justified in doing something similar over in Iran? In short: If the American people don't quite know what their government is up to, they cannot understand or interpret what other states are doing either. We may have good reasons not to like what others are doing, but the bigger danger is that we simply won't understand it, and won't understand our own role in helping bring such actions about.

Lastly, ratcheting up military pressure -- even if done covertly and at a relatively low level -- can only reaffirm deeply rooted Iranian suspicions of the United States and prolong U.S.-Iranian animosity. (The same is true in reverse, of course).  I'm under no illusions about the depths of this animosity and the degree of skill, imagination, and patience it would take to unravel it, but doing more of the same is not going to make it any easier. Yes, many Iranians loathe the regime and would like it to go, but that doesn't mean they welcome U.S. or Israeli attacks on Iranian soil. And that is especially true of attacks on the nuclear program, which Iranians of many political persuasions view as an important symbol of national pride.

In short, the "silent campaign" against Iran is not without its own risks and costs. It is preferable to all-out attack, but a silent war and an all-out war are not the only options. The third option is a sustained and patient effort to reengage with Iran, in order to convince Iranian leaders that they are better off not going nuclear and that both sides will be better off if we can gradually work out some of our differences. Such an approach does not require the United States to sacrifice any core interests, nor would it preclude continuing to press Iran on its human rights record and on other matters that trouble us. And maybe it won't work. But as Trita Parsi shows in his new book A Single Roll of the Dice, that alternative approach has never really been tried.

AFP/Getty Images