How Europe’s economic and demogrphic choices made in 2016 will impact the economies of Europe and the U.S.

In 1973, US Secretary of State Henry Kissinger, following a period of American preoccupation with Vietnam and China, declared a “year of Europe.” More recently, after President Barack Obama announced a US strategic “pivot,” or rebalancing, toward Asia, many Europeans worried about American neglect. Now, with an ongoing refugee crisis, Russia’s occupation of eastern Ukraine and illegal annexation of Crimea, and the threat of British withdrawal from the European Union, 2016 may become, by necessity, another “year of Europe” for American diplomacy.

Regardless of slogans, Europe retains impressive power resources and is a vital interest for the United States. Yes, American per capita income is higher, but in terms of human capital, technology, and exports, the EU is very much an economic peer. Until the crisis of 2010, when fiscal problems in Greece and elsewhere created anxiety in financial markets, some economists had speculated that the euro might soon replace the dollar as the world’s primary reserve currency. 

The key question in assessing Europe’s power resources is whether the EU will retain enough cohesion to speak with a single voice on a wide range of international issues.

On questions of trade, for example, Europe is the equal of the U.S. and able to balance American power. Europe’s role in the International Monetary Fund is second only to that of the U.S. (although the financial crisis dented confidence in the euro).

On anti-trust issues, the size and attractiveness of the European market has meant that American firms seeking to merge have had to gain approval from the European Commission as well as the U.S. Justice Department. In the cyber world, the EU is setting the global standards for privacy protection, which US and other multinational companies cannot ignore. (See The Oil of the 20th Century, p 28)

Legal integration is increasing within the EU, but the integration of foreign and defense policy remains limited. And British Prime Minister David Cameron has promised to reduce the powers of EU institutions and to subject the results of his negotiations with the Union’s leaders to a popular referendum by the end of 2017. If Britain votes no and exits the EU, the impact on European morale will be severe – an outcome that the U.S. has made clear should be avoided, though there is little it could do to prevent it.

In the longer term, Europe faces serious demographic problems, owing to low birth rates and unwillingness to accept mass immigration. In 1900, Europe accounted for a quarter of the world’s population. By the middle of this century, it may account for just 6% – and almost a third will be older than 65.

Global impact of the continent
Although the current immigration wave could be the solution to Europe’s long-term demographic problem, it is threatening European unity, despite the exceptional leadership of German Chancellor Angela Merkel. In most European countries, the political backlash has been sharp, owing to the rapid rate of the inflows (more than a million people in the past year) and the Muslim background of many of the newcomers.

If Europe overcame its internal differences and tried to become a global challenger to the U.S., these assets might partly balance American power, but would not equal it.

For U.S. diplomats, however, the danger is not a Europe that becomes too strong, but one that is too weak. When Europe and America remain allied, their resources are mutually reinforcing.

Despite inevitable friction, which is slowing the negotiation of the proposed Trans-Atlantic Trade and Investment Partnership, economic separation is unlikely, and Obama will travel to Europe in April to promote the TTIP. Direct investment in both directions is higher than with Asia and helps knit the economies together. And while Americans and Europeans have sniped at each other for centuries, they share values of democracy and human rights more with each other than with any other regions of the world.

Neither a strong U.S. nor a strong Europe threaten the vital or important interests of the other. But a Europe that weakens in 2016 could damage both sides.