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Hervé de Carmoy



The European Union, the United States, and China : how will these relationships evolve ?

 
« America is a large country, strong and disciplined in its liberty,
yet it ignores many things, foremost Europe »
Albert Camus, 1947

Is Europe on the verge of becoming irrelevant ? After having earned preeminence in global affairs between the Renaissance and World War I, Europe passed the torch of leadership to the United States. In winning World War II, America strenghtened its position to become the supreme power – militarily, economically, financially and culturally. And yet, since the Fall of the Berlin Wall, the United States’s relative power has continued to decline ; Europe has failed to take advantage of this power shift. Is this a sign of an irreversible transformation in favor of China and Asia at large ? Will America be able to tolerate a secondary role, with Europe releguated to the role of spectator, even that of a « financial provider instead of actor », to quote the words of a former Israeli Prime Minister ?

It’s possible, though, that this interpretation misses the point. We are no longer in the twentieth century : we live in an interconnected world that has transformed all spheres of human activity, and especially the use of armed force. A new world has emerged. Historical relationships of solidarity and rivalry are becoming less relevant than relationships of circumstantial convenience. Interests intertwine in a pragmatical and unpredictable manner : who would have believed, two years ago, that communist China would contribute to saving the American banking system, which is responsible for the current economic crisis ? In this new world, the struggle between great powers, ideologies, even wars of religion, are losing pertinence. The forefront of the scene is occupied by economical interests – although Hegel’s observation looms large in the background : « the History of humanity is a story of mere prestige, and this is a fight to the death ».

What about, then, Europe’s relationship with the United States and China ? It changes according to the circumstances. There is a solidarity in their economic and monetary interests, less so in financial matters ; but where action is concerned, it’s less black and white. Europe finds itself in a state of enduring military dependence on the United States.

Economically, Europe is tied to both the United States and China. According to the Schuman report on « Europe – 2009 », Old Europe, with its 497 million inhabitants, generates 42 % of global commerce. Europe constitutes the main economic unit in the world. It’s clear that the United States is the premier global economic power, with a GDP of 14 trillion dollars, which is three time that of Japan. But, altogether, European countries are responsible for 22 % of global production, while the United States produces only 21.4 % and China only 10.8 %.

Globalization however has created a new world, a less occidental one. In 2025, Europe and the United States could represent less than 8 % of the world’s population, while Asia could represent 50 %. Asia’s share of global GDP could pass from 24 % to 38 %, thus putting Asia on level footing with OECD. Europe will be forced to rethink its relationship with a new world : Asia. Europe and Asia grow ever more integrated while at the same time the rivalry between them sharpens. Integration is enriched by all kind of flux, networks and open borders. The rivalries, on the other hand, are fuelled by IPOs, artificially low prices, protected markets from which Europe and the United States are excluded, tough competition for localised sites of research and production. For the moment, it’s in the best interest of the three regions to facilitate proper functioning of the system. It has proven beneficial for the large majority of the population.

What about the financial sphere ? The balance of power worked properly in the wake of the subprime crisis. Collaboration between world financial institutions, States and large national banks was exemplary. China handled its American assets and their relative value with foresight. The United States managed to neutralize the risks of its bank failures. Europe ensured the liquidity of its system. Results met the expectations, and each country rebounded according to its own aptitudes : a good growth rate for China, hesitant recovery in the United States, and relative stagnation in Europe.

The crisis of 2008 transformed the financial industry. A new Chinese model has emerged. It differs from the American one and is in partial resonance with that of Europe and many developing countries : in China, the State – never out of sight – plays a growing role. It tightly controls foreign firm’s activities, renationalises, creates national top-level firms. It handles prices, interest rates, and exchange rates. Even more importantly, China provides the main Chinese firms with more than one trillion dollars, long term and with a negligeable interest rate. This has a multiplying effect : it has revitalised, for now, the Chinese economy, and contributes to the ending of the crisis of the occidental financial system. China allows its elite, those investing in the market, to make money. In the last twelve months the Shangai Exchange has grown by 90%. Let’s not forget that the Chinese culture doesn’t promote egalitarianism but relies instead upon hard work and financial strategies ; this shows the extent to which the Chinese have an affinity for the Americans. Both could endorse Guizot’s sentence : « make money ». Indeed, they all want it, and fast. Forget about naivete. Europe participates in this mentality. But it has not yet adopted the Chinese-American assumption according to which extreme inequalities act as growth accelerators. Europe remains content with a consistently low growth rate, which is compatible with its actual wealth and its lack of geopolitical ambition – a continent devoid of any transcendance or missionary zealots. Moreover, Europe has not yet fabricated a collective vision of the future : that is, the Europe of today is not a nation.

On the other hand, the Chinese elite continues to be driven by the will of preeminence, which is a powerful force with the potential to elevate a nation to the primary position in world affairs, especially a nation with a hunger for prosperity and global recognition.

The process of internal development is inseparable from solidarity in Europe’s philosophical approach to political action. It is clear that since 1951 Europe has developped itself « by concrete realisations, that unite nations pragmatically » to quote Robert Schuman. At the beginning Europe had 160 millions inhabitants and 6 countries. Sixty years later, Europe is comprised of 27 States and 497 million citizens. Since the creation of the European Union it has been in its own silent revolution : by making nations progressively cede their control over limited matters, the EU has successfully substituted a sense of union among Europeans for that of national rivalry. It constitutes a market of half a billion consumers, the equivalent of 40 % of the Chinese population, and more than 40 % of that of the United States. The EU finances the internal infrastructures of the poorest regions. The EU also promotes a political commonality in the fields of science, technology and the environment – a policy that has achieved some positive results. An amount of seven billion euros a dedicated to exchange programs between European students. Significant progress has been made in the domain of security with « Europol », « Eurojust », and the fight against terrorism. However, European political will tends to be clouded by administrative and institutionnal complexities. This threatens to push European citizens away from the EU project.

All this illustrates the fact that the human values of the Enlightment are gradually catching on throughout Europe. The state of law spreads and progresses. Longterm economic results have been outstanding. Let’s not forget the state of the Union in 1947. In this era, American quality of life was four times that of France, Germany, the UK and Italy. The Marshall Plan, the adoption of the best practices of American businesses and universities, as well as the creation of a unified market has transformed the economic and societal reality of Europe. Quality of life has become comparable across the Atlantic, although within Europe inequalities are less extreme. Clearly, the EU faces a recession. Europe is now forced to acknowledge, albeit reluctantly, a shift in economic, financial - and hence political- balance in favor of China and Asia. Europe must ask itself : what model of organisation must the world now adopt ? Can it be inspired by its own achievements ? Europe’s strength is that it has been able to reestablish peace on an embattled continent. European countries have met this challenge because they have agreed to move towards union in a gradual manner. They have been respectful of the differing cultures and institutions among themselves, in a minimally democratic setting. Is this model of soft power sustainable ? Will it be able to inspire other regions of the world ?

Is the European trajectory in line with that of China and the United States ? In fact, China is interested in Europe only as a trade partner : there is no European-China solidarity. There is a type of client – provider relationship, which requires diplomacy and financial means. In contrast, the United States appreciates Europe as a rich and accomodating historical ally. This relationship suits the United States : creating longterm allies is not necessarily their forte. They prefer to act on a case by case basis, and according to circumstance, in order to control initiative and rapidity of execution. Anyway there are some fields where it is not desirable for Europe to follow the United States, especially with regards to the preeminence of the financial world in American enterprise.

The reason for this absence of rivalry between the United States and Europe is simple : there is a difference between the nature of force and power. There is a force of Europe in its results and its projects. But there is no European power. The exercice of power requires collective will. In order to exercice this power the State must be able to suffer a high level of sacrifices which can be measured in terms of financial choices, length and intensity of work, and brutal contestations of privileges. One must be willing to take large risks and tolerate social inequalities. China and the United States have chosen this path. Both countries have consistently chosen to devote a significant portion of their national wealth in order to fortify their military forces. Europe has done the opposite. The percentage of Europe’s GDP devoted to health and retirement expenses is continuously rising, while by comparison the share of military expenses is diminishing. For the time being, Europe has turned its back to financing armed power, even if both the UK and France have kept armies well-equipped with advanced technologies. Military strength and its use abroad are, for the Americans, at the heart of their strategy. It’s interesting to note that throughout their history Americans have never limited financial resources with respect to their military efforts. Yet, is what has been relevant during two centuries still relevant today ? Will Asia and the Middle East keep financing an American deficit largely aggravated by military expenses or will they want to see a growing fraction of American savings reoriented to paying for their own debt ? In the XXIst century, can America’s armed power, beyond its network of universities and research, remain the key factor in the world exercise of power ? Can America hold on to its current level of military and political preeminence with an industrial sector that is no longer at the forefront of the field ? As an example, Chinese solar panels have seized 25 % of the American market in just five years. Wouldn’t it be relevant then for the United States, in the years to come, to find other ways to collaborate with Europe that take into account the new balance of power with China ?

From 1945 to 1975 power in the United States was possessed by what has been called the « military-industrial complex ». Since then, the financial dimension has taken over. We can tell that there is now a « military-financial complex », because the military dimension allows the United States to have control over the financial flows of the world. It is plausible that the American elite will try to preserve this isolated control over financial power and that they will try to cap the impact of any new international financial regulation. It is likely that the American financial capitalism will continue to socialize the losses and to privatize the profits. Banks have more than tripled their margins and increased their speculating activities. The banks are only giving out small loans to the productive sector, the reason being that commercial bankers are disappearing and that the financial flow comes from trading floors, and provides huge profits to a small elite that is not willing to see their large earnings reduced. It is to be hoped that continental Europe, led by Germany and France, and in opposition with the UK, gives preeminence to the industrial sector.

About the military field : the Chinese have an official budget of 56 billion dollars, which is increasing by 14% this year, although the nuclear and space budgets account for most of this increase, the conventionnal army remains relatively archaic. In the next fifteen years, China will have the economic means and the political will to reach the status of a large military power, even if it doesn’t consider any conquest strategy for now.

But then, what is the significance of the two-digits increase in the Chinese and American military budgets observed in the last ten years ? Doesn’t it hint at a potential for rivalry ? History reveals that a massive increase in military expenses has never coincided with a spirit of solidarity. Instead it signifies a rivalry on many levels.

To talk about rivalry evokes the balance of power. In regard to the great powers, the balance evolves. The American preeminence has been declining for a generation, except on the military sphere, the domain where the United States enjoys an overwhelming superiority. The Fall of the Berlin Wall marked the beginning of a paradox, an uninterrupted succession of interminable conflicts where a longterm « pax americana » seemed to be within grasp. The United States had defeated the Soviet Union only by fighting peripheral battles. They could have participated in a global peace process while still preserving their own interest as well as that of Europe in the Middle East. Of course there was September 11th. This attack provided both a justification and a pretext for the presence of the American forces in Afghanistan and in Irak.

The causes and consequences of this state of unending war are multifold. The most fundamental cause might be a change in the behavior of the American consumer, who started to prefer a consumption financed by China and the Middle East at the expense of investment. In this situation, all parties bear a share of the responsibility. Individuals did not stop spending : their indebtedness exploded. American collective sentiment has favored short-term thinking and accepted a state of growing dependance on work done in Asia and oil from the Middle East. They’ve adopted the principle that some European elites in 1780 affirmed : « let’s eat our assets, and let’s eat them joyfully ». The results are evident : individual savings have collapsed, and deficits have reached new heights. Even worse – because it will take longer to fix - the American industrial fabric is fraying. Many of the most talented leave public service and industry, or refuse to enter it, to make a fortune in speculative finance. In this context, what can the United States do to protect its way of life ? It has strongly mobilized its banks in a way that was thought to be exceptionnal at the time. Thus they can collect abroad and redistribute internally the surplus liquidity of Asia and the Middle East. In order to avoid any risk of undue pressure, they’ve decided to rebalance these ties of financial and economic dependency. There is a way to do it : the United States has established a massive military superiority in the Middle East with minimal support from Europe. The result is an overwhelming amount of indebtedness, both internally and externally, which, together with technical errors of governance on many levels, has caused a financial, and thus an economic crisis. The scenario is consistent with Churchill’s writing : « the Men of the State who yield to the desire of making war are no longer in control of their destiny, but slaves of unpredictable and uncontrolable events ».

While America destroys its surplus wealth by war, by under-investment internally and by indebtedness related to consumption, China and Europe both intend to affirm their preeminence or their capability in other ways. China draws from the greatness of its past the internal resilience to once again become the Empire of the Middle. In this China differs from Europe, a continent that erased from its collective memory its history of conquests in the last centuries, without however managing to get rid of secular conflict within its borders.

China plays the game of both solidarity and rivalry. It accepts the creation, together with the United States, of around sixty mixed commissions. It participates in all the International Organisations. But sectors of conflicts are multiplying : China has penetrated by multiple channels Africa and Latin America, traditionnally zones of influence for the United States and Europe. China sends doctors, agricultural experts, and investments. They exploit mines and create ports there. China doesn’t try to impose moral standards but instead diffuses the image of a old colonized country that has managed to work its way to recovery. By doing this, China secures its imports of energy and raw materials. It broadens its commercial reach. It prepares itself for a confrontation with the Euroamerica on many issues, such as finance, Iran, and Taiwan.

In finance, liquidity is crucial. The Occident is dry. China, on the contrary, has at its disposal a sea of capital. Furthermore, China forms tight relationships with the sovereign funds, to buy together mines, gold, oil, real estate, or shares in retail or technological western companies. The capitals of the sovereign funds allow China to demultiply, and to take advantage of a leverage effect. Alliances are created discretely on a case by case basis. Of course this process isn’t without risks : in a year, China will have tripled the amount that its biggest firms owe to Chinese banks. It is well known that part of these sums have been invested in raw materials, on internal markets of real estate and bonds. The risks of loss are great. In any case, Europe and the United States can and must accept the challenge from the Chinese financial industry. They have on their side tradition, teams and some flows. To do so, their banks must concentrate, specialize, and reinforce their presence in Asia, and rethink their methods of internal management. It hints at a longterm process which is vital to rebalance the scale of force.

The strenghtening of the relationship between Iran and China constitutes another phase of this immense game aiming at reducing the influence of the United States and of Europe in the Middle East and also in Asia. China moves ahead with prudence. China has begun to explore the possibilities of creating a regional currency, and it has accumulated gold to this end. China is planning to create an alternative to the Internet. It has also begun to reorganise its military potential at an accelerated pace. It handles with care its relationship with the United States, as the avoidance of direct conflict is in the center of the survival strategy of its elite. China mobilises its new networks in order to aid its political agenda in Taiwan.

In light of all this, what is Europe’s place ? Reality proves that Europe is in a phase with several of the shared tendencies of our time. The first of these tendencies is the wild desire of three billions of individual worldwide to join the ranks of the middle class. Europe, as well as the United States, has met this objective to a large extent. The second is the generalised return of public power. This evolution reflects a collective acknowledgement of a global common interest when it comes to environmental risks, pandemics, excesses of the financial markets and terrorism. Europe is on the cutting edge in these fields. The United States are rhetorically reluctant to take all this into account, but in reality they act pragmatically. They didn’t hesitate to nationalize AIG, General Motors, and the main American banks. We have to mention finally, as a third shared tendency, the quasi-impossibility of imposing on any country regimes or ways of life only by force. This result is consistent with the philosophy of the EU, founded upon concepts of the power of will and of gradual progresses. This goes against the missionary zealousness inherent in American spirit. To enforce it in the future will require intense negociations.

Thus a new framework has appeared as related to the exercise of power in the world. The notion of shared governance has gradually overcome the heavy bureaucracies of military, financial and political infrastructures. Diplomacy has once again become pivotal. But only Europe has taken steps towards multilateral diplomacy ; China and the United States essentially still work within bilateral relationships.

In light of all this, what will be Europe’s position relative to China and the United States ? Can we foresee some of the main features of the future landscape ?

It seems to be desirable that Europe pursue its laborious progression. After it has enlarged itself Europe will have to try to deepen its internal systems of cooperation in order to strenghten its efficiency actionwise. This will become crucial if Europe wants to gain relative importance. Its lack of military means or of action on the international stage could relegate it to the status of an immense Helvetia, which is not in the interest of the United States given the current rise of Asia. In order to gain leverage in the balance of power between China and America, Europe should probably seek to partner with Russia, as they truly complement each other in the fields of industry and energy. Germany has been Europe’s leader in this relationship. By any means, Europe must acquire an iron hand. It will need to act in this manner in order to recover its place, next to the United States, in geostrategic leadership. The United States doesn’t wish to expend a vast amount of energy handling the complexities of the European system. Their priorities are elsewhere.

The United States have intense reforms to implement. They have been there before. They have managed to understand the consequences of the de facto moratorium between great powers since the Korean War in 1951, which demonstrated that the nuclear conflict between great powers was no longer possible. The Cuban Missile Crisis has proved this. They will have to learn from their recent military expeditions to the Middle East as well. Using forces of occupation has proved to be of limited efficiency. What was relevant from 1954 to 1989 will probably no longer be relevant in the same way in the future. Besides using their unmatched force, the United States’ moral authority over the military landscape will be influenced by the manner in which it handles the changes in the Middle East and by the results it achieves. Will it be able to pull itself out of Afghanistan and Iraq, and find a proper solution to the Iran issue, as they managed to do more than one generation ago with the Chinese issue of the time. In any case, the key factor of the power of the United States will remain its military strength, but this power must rely primarily on the regeneration of their industrial capabilities. Actually, the burden is on the United States to instigate a sort of double revolution : the first concerns finance : its supremacy is eroding, the United States are no longer the primary source of capital for the world, nor the only global currency. The euro, the growth of the american indebtedness that has reached the level of 90 % of their GDP, and the Chinese concern for the creation of an Asian currency are all symptomatic of the transformation of the global monetary landscape. The same applies to the banking and financial spheres : the leading American companies have stumbled. Certainly they are not the only ones. But all these evolutions are evidence of a larger change, that of knowing the fragility of any financial supremacy, notably in this case the American one. It follows that the United States must accept the fact that they have to reduce the size of their financial industry, whose exuberance contributed to America’s industrial decline by turning away the most talented from the industrial sector towards the financial sector, a trend that will have longterm effects. One must acknowledge today that given the earnings of the American banks and the distribution of bonuses they have forecasted, no change is to be expected in the near term. Besides, the American citizen must learn to invest with an eye towards the future : infrastructures, schools, universities, health care, capital risk. It is essential that Americans do so, and that they show in these areas the immense focus of which they are capable.

With regard to China, its relative preeminence will continue to accelerate : its large demography, its insertion in an expanding Asia and its economy are impressive assets. The figures for the next decade are fixed and certain. The Chinese haven’t made an error politically, economically or financially in more than ten years. On the contrary, all indicates that their domestic and international choices are pertinent, from the industrial point of view as well as from the monetary one. Risks of error remain linked to the overwhelming role of the State, to the lack of democratic politics, to likely errors in investment stategies, to the excessive appeal for financial games, and to corruption. Chinese elites want at all cost to prevent the « Sans-Culottes » from revolting. They know how to proceed : a healthy dose of economic growth, a great deal of policed repression and a zestful control of information. Results are to be expected.

Who then will have the upper hand on world affairs ? The bets are open, since the stir created by the markets and the leaders is unpredictable. But the ground is moving beneath our feet. Longterm prosperity will continue to belong to those groups that manage to categorically personnify the values of pragmatism, humanism, and the creation of enduring wealth.

 

Hervé de Carmoy


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