Strategy

Who will save Europe this time?

As the EU teeters, eyes turn to emerging powers.

Chinese PM Wen Jiabao and Russia’s Vladimir Putin have much to gain from EU’s troubles. (Photo: Alexye Druzhinin/AFP/Getty)

Earlier this month, French President Nicolas Sarkozy issued a dire warning about the future of the European Union. An agreement had just been reached to stave off disaster in the EU for a little while longer—the third such accord this year—but political turmoil in Greece was already threatening to derail the deal. That Greece might leave the eurozone seemed a very real possibility. “We cannot accept the explosion of the euro, which would mean the explosion of Europe,” Sarkozy told reporters at a press conference. “[The euro] is the guarantee of peace on the continent where there were terrible wars—fiercer than anywhere else in the world—not in the 15th century, but in the 20th century.”

In evoking the continent’s history of warfare, Sarkozy was perhaps overstating the danger for effect, but his comment serves as a reminder that the risks facing the EU extend far beyond economics. Europeans are genuinely worried that a breakdown in the monetary union could lead to a rise in nationalism and fuel conflict between member states. German Chancellor Angela Merkel gave voice to this concern when she told German parliament last month, “No one should think that a further half century of peace and prosperity is assured.” A weakened Europe is also less able to work with the United States on issues of foreign policy and defence, not least of which is keeping in check the rising powers of China and Russia. The EU crisis may, in fact, prove to be an opportunity for the two rising giants to throw their weight around. And the longer Europe struggles, the faster global power shifts away from the West.

The U.S. is beginning to realize the implications. The foreign-affairs committees in both houses of Congress held hearings on the EU crisis this fall for the first time. Historically, the U.S. has played a significant role in the affairs of other regions; it was the architect of the Marshall Plan to rebuild Europe post–Second World War, after all. Americans have also consistently taken the lead in crafting solutions to past financial calamities, such as the Latin American debt crisis in the 1980s, the Mexican peso crisis in 1995 and the Asian financial crisis in 1997. Yet with regard to Europe’s current debacle, U.S. leaders have been reluctant to get involved. “We have abdicated our responsibility to the global economy, and to ourselves,” says Bruce Stokes, a fellow at the German Marshall Fund in Washington, a policy institute promoting co-operation between North America and Europe.

Stokes, who testified in front of both foreign-affairs committees, admits there are plenty of understandable reasons for the lack of action. The U.S. is mired in its own budget woes, dealing with a moribund economy and a dreadful unemployment situation. The public is hardly clamouring for its leaders to do something about a financial crisis across the Atlantic, thus giving politicians an excuse to ignore it. The Federal Reserve has conducted a number of currency swaps with the European Central Bank, in effect giving the ECB more euros to deploy, but it’s unlikely to do much more. Further action, such as providing funding to the European branches of American banks, would likely open up the Fed to further criticism at home, Stokes says. U.S. leaders have so far stuck to urging Europe to resolve the crisis—and quickly. Treasury Secretary Timothy Geithner made a rare trip to meet with eurozone finance ministers in September, but miffed some by objecting to a plan to tax global financial transactions.

Canada’s approach has been similarly cool. “These are wealthy countries who’ve got to have—and do have—the means to deal with their own problems,” Prime Minister Stephen Harper said during the recent G20 conference. Finance Minister Jim Flaherty repeated this line in an interview with the Financial Times this month. Even if Canada had a preferred solution to the crisis, it’s unclear whether it has the political and economic weight to push its will on European leaders.

If neither the U.S. nor Canada is willing or able to take the lead in assisting Europe, then who will? European leaders have shifted their focus to the BRIC nations (Brazil, Russia, India and China), at least in terms of providing financing for a possible solution. In October, European leaders agreed to increase the size of the European Financial Stability Fund, designed to keep troubled countries from defaulting, from €440 billion to €1 trillion. They have only a vague idea of how to raise these funds, but some are hoping the BRIC nations will make large contributions by purchasing EFSF bonds. So far, the BRICs have made no commitments as they await more clarity on the proposal.

After the agreement to boost the fund was reached, the first visit EFSF head Klaus Regling paid was to Beijing. China has US$3.2 trillion in foreign-exchange reserves, and President Hu Jintao knows China could potentially have a lot to gain by helping the eurozone. For one, it could seek to be granted market economy status by the EU: a recognition the pricing of goods and services is dictated by market forces, not government intervention. China is frequently accused of violating trade policy by flooding European markets with goods at lower prices than it charges at home. If the country were officially deemed a market economy, it would gain an advantage in resolving such disputes with the World Trade Organization. It will earn the designation in 2016 regardless, so pushing it ahead by a few years could be politically palatable in the eurozone.

There’s also a host of controversial issues China could seek to advance, such as getting other countries to dial back their criticism that it’s keeping its currency artificially low, as well as charges over its record on human rights. According to Kenneth Lieberthal, director of the John L. Thorton China Center in Washington, Chinese leaders could additionally push for the EU to end its ban on the sale of weapons to China.

However, the odds of such quid pro quo taking place are slim. “The notion that China would step in with a bailout is wishful thinking on the part of Europeans,” Lieberthal says. For starters, the institution responsible for deploying cash in China is the State Administration of Foreign Exchange, which happens to be very fiscally conservative. Its mandate is to preserve capital and guarantee a reasonable rate of return on its investments; throwing cash into a eurozone black hole would be hard to justify. “They’re not going to be investing funds for diplomatic reasons,” Lieberthal contends. Secondly, a substantial cash infusion to a group of developed nations that enjoy a high standard of living will not sit well with Chinese citizens, 57 million of whom earn less than US$125 per year, and could stoke unrest.

Any political leverage that China might hope to gain by helping the EU would also not happen quickly or easily. Ending an embargo on arms trade, for example, would take more than a simple meeting between diplomats. For now, China is more likely to make contributions through the International Monetary Fund, where its capital is secure, than directly to Europe, and to push for a greater role within that organization. This change is happening already: Min Zhu, former deputy governor of China’s central bank, was named a deputy managing director at the IMF in July, the first from China.

But even if China does nothing, it could benefit from Europe’s troubles. With EU leaders focused on their own problems, they’re less able to assist the U.S. on development issues, thereby giving China the opportunity to extend its influence in Africa, Latin America and the Middle East. China could also use its military power to expand its presence in the South China Sea, a territory rich in natural resources whose ownership is disputed among Southeast Asian countries.

Whereas China appears to be content to leave the EU to its own devices for now, Russia is more keen to use the crisis to its advantage, according to Lauren Goodrich, senior Eurasia analyst at geopolitical research firm Stratfor. A crumbling EU allows Prime Minister Vladimir Putin to promote the strength of Russia’s economy and solidify support within the country. In the past, Russian reformists seeking to loosen Putin’s grip would point to the EU as a model to which Russia should aspire. Now their case is seriously undermined.

Another strategy Russia could employ is to snatch up cheap European assets, predominantly financial institutions and energy infrastructure in central and eastern Europe, to exert more control in a region that was once part of its sphere. Russia has always viewed a united Europe as a threat to its power, says Goodrich. “It’s going to sow as much chaos as it can.”

Anders Åslund, a senior fellow at the Peterson Institute for International Economics, rejects this notion, however. “Russia is a stability-seeking power,” he says. The country actually has a lot to lose as the EU struggles, particularly if the continent slips back into a recession. The EU is Russia’s largest trading partner, and oil and gas account for two-thirds of its exports. Commodity prices would tank if global demand fell. In 2009, Russia suffered the largest GDP decline of any G20 country, with a drop of 7.8%.

Putin realizes how economically vulnerable Russia is, which helps explain statements he made in October about “joining forces” with the EU and working toward a free trade agreement. “The Kremlin is most of all afraid of financial and economic disturbances for itself, and is no longer interested in whipping up unrest,” Åslund says. That also means that even though Russia has a strong interest in ensuring the EU stays healthy, it is unlikely to use much of its US$580 billion in currency reserves to contribute to a rescue plan; it may need that capital at home. The other BRIC nations, Brazil and India, are just as focused on managing their own economies and equally reluctant for now to jump to the EU’s aid.

In the end, the crisis may not prove game-changing for any emerging power. “Part of what we’re seeing here is a global shift, but the shift isn’t to an alternative power centre,” says David Gordon, head of research and director of global macro analysis at the Eurasia Group. “The shift is to no power centre.”

Gordon, along with Ian Bremmer, president of the Eurasia Group, argues this is the first time since the Second World War that no single country or bloc has the political and economic weight to push an international agenda. They’ve dubbed this the G-Zero era. One of the main consequences of a leaderless world, as Gordon and Bremmer warned in a recent editorial in the International Herald Tribune, will be “messier outcomes” when crises hit.

Nowhere is this more evident than in the eurozone’s inability to fix its finances. Italy’s bond prices have been soaring of late, making it increasingly likely the country will need outside funding to avoid default. The problem is, Italy might be too big for Europe to save. And with no one rushing to Europe’s aid, the situation may get very messy indeed.