by Adam Tooze
It was a fateful coincidence that in the wake of the constitutional debacle of 2005, it was Germany that took the rotating presidency of the council of the EU. At this moment, early on in her career as chancellor, Merkel assumed responsibility for redrafting and driving through a replacement for the failed constitution. The result, after months of meticulous high-pressure preparation by Berlin, was the Lisbon Treaty of December 2007. Like the constitution it replaced, the Lisbon Treaty merged the multiple pillars of the European integration project into a single European Union with a population of 500 million. It created a new foreign and security policy for the EU. It streamlined the commission and established the principle of majority voting that was essential to make the vastly expanded structure manageable. But above all, it institutionalized the council as the representation of Europe’s national governments and created a presidency of the council as its standing representative. It ended any pretension on the part of the European Commission and its president to executive leadership.57 Many of the key provisions of the original constitutional treaty were thus maintained. But the defeat of 2005 left a lasting mark. The paramountcy of Europe’s national governments was reaffirmed. For the foreseeable future there would be no further steps toward federal integration. Policy in Europe would be made not centrally by Brussels but by intergovernmental bargain.
As the first financial boom of the twenty-first century began to unravel in 2007, Europe was in a conflicted situation. It was deeply economically integrated, with the ECB presiding from a distance over a hyperactive financial system that linked the eurozone to the City of London and Wall Street. And yet the wider politics of European integration were in retreat. The Lisbon Treaty enshrined intergovernmentalism and Europe’s voters had shown their willingness to exercise a veto over steps beyond that. How, given this disequilibrium, the EU would respond to an unforeseen crisis was anyone’s guess. And that observation went beyond finance.
IV
If one compares American and European policy discussion in the early 2000s, one sees that they shared many preoccupations. Policy experts on both continents were focused on fiscal discipline and international competitiveness, supply side incentives, efficient government spending, deficits, evidence-based welfare policy, education reform and flexible labor markets. These were the shibboleths of the watered-down, supply-side market economics inherited from the days of Reagan and Thatcher and the Washington Consensus of the 1990s. The policy communities on both sides of the Atlantic also shared blind spots. Sharing a deep faith in markets, neither realized the threat posed by the new, market-based model of banking. On both sides of the Atlantic they were oblivious to the risks accumulating in overleveraged banks, relying on vast quantities of wholesale funding. Why, then, did both sides find it so hard to recognize the risks that they shared? And why have crisis narratives on either side of the Atlantic diverged so sharply since 2008?
If we are looking for one crucial difference it is surely this: From the morning of September 11, 2001, America was a superpower at war. Not only that, under the Bush administration, it was a regime pursuing a global war on terror. The initial European reaction to the attacks of 9/11 was one of solidarity. The ouster of the Taliban from Kabul enjoyed general support. But over the winter of 2002–2003, as Washington and London pushed toward the invasion of Iraq, that sense of common commitment evaporated. The German and French governments came out in opposition to war, as did millions of European citizens who filled the streets in some of the largest demonstrations in Europe’s history. This was the moment in which the American neoconservative Robert Kagan coined his famous phrase that Americans were from Mars and Europeans from Venus.58 Europe’s leading intellectuals responded in kind. The unlikely pairing of Jürgen Habermas and Jacques Derrida issued a counterblast. Significantly, for them, the transatlantic divide went far beyond foreign policy. It extended to social policy and political culture. In the early twenty-first century it amounted to nothing less than a civilization divide, a bifurcation within modernity, between the chastened postimperial world of Europe and the expansive, imperially aggressive Anglosphere.59
A wide gulf conventionally separates accounts of global geopolitics in the wake of 9/11 from our narratives of the genesis of the financial crisis. But if we listen closely it is clear that the quagmire of Iraq haunted the Washington policy-making elite in the early 2000s, awakening nightmarish memories of Vietnam and the crisis of American power and authority of the 1930s. The rise of China added to the sense of menace. Larry Summers’s description of the Sino-American trade balance as a balance of financial terror was telling. That was not how the Germans or the Dutch thought about their trade surpluses. The pervasive militarization of the language of national leadership in the United States would become even more glaring once the crisis began. Both in rhetoric and self-conception it would mark a fundamental transatlantic divide.
In terms of political culture the differences are undeniable. But to take the loudly proclaimed transatlantic alienation of the early 2000s at face value as a description of economic or geopolitical reality would be self-deceiving in a double sense.60 The idea that “social Europe” had deviated in any essential way from the logic of turbocharged “financial capitalism” as exemplified by America was an illusion. In fact, Europe’s financial capitalism was even more spectacularly overgrown and it owed a large part of its growth to its deep entanglement in the American boom. Furthermore, whatever the differences over Iraq, Europe’s pose of geopolitical innocence is a historically recent phenomenon. Though it balked at Iraq, France remains a hardened postcolonial war fighter. Nor does Europe only do “small wars.” As recently as the 1980s the European members of NATO had been active participants in winning the cold war and making the victory stick. Given the dramatic escalation of tension with the Soviet Union, the stakes could hardly have been higher. Particularly notable was the Federal Republic’s commitment to hard power. At its peak, the Bundeswehr had a standing strength of 500,000, with a mobilization strength of 1.3 million. The deployment of nuclear-armed cruise and Pershing missiles to Europe in 1983 was a transatlantic effort that bonded a generation of Atlanticists in the face of concerted opposition from the Left in both Europe and the United States.61 The high priests of Europe’s twenty-first-century cult of innocence reside, of course, in Brussels. But though the EU might prefer to deny the fact, in the post–cold war world, it was far from geopolitically inert. It entertained complex relations with its neighbors in the Mediterranean and in Eastern Europe that could not easily be disentangled from the hard power of the NATO alliance or coercive border policing. And this would matter, because whereas the EU kept its distance from the Middle East imbroglio and refused to see the rise of China as a geopolitical threat, it would be on Europe’s doorstep that a violent great power confrontation would erupt, and it did so just as the world banking system began to unravel. In August 2008, as the financial markets hurtled toward disaster, Russia went to war with Georgia, a Western-backed proxy.
Chapter 5
MULTIPOLAR WORLD
Russia’s return to the world stage in the early 2000s owed even more to global economic growth than did the rise of China. Russia poured oil and gas into world markets. Its banks and industrial corporations borrowed enthusiastically in Europe and the United States. Like China it held a huge reserve of dollars, but unlike China its financial and economic interrelationship with the United States was indirect. Russia did not earn its dollars by exporting to the United States. It sold its gas and oil to Europe and Asia. Furthermore, whereas the Chinese Communist Party approached the West with self-confidence, the wounds of the Soviet Union’s defeat in the cold war were still fresh. There were no fond memories of a “Nixon-Kissinger” moment in the Kremlin. It was not by accident, therefore, that it would be Russia’s president Vladimir Putin, the cold war KGB operative, who would pose the question that China and America preferred not to speak out loud. What, Putin demanded to know, were the implications o
f a rebalanced and reintegrated world economy for the geopolitical order? Putin not only posed the question. In so doing he exposed a deep lack of agreement within the West—inside Europe and between Europe and the United States—over what kind of international architecture should frame economic and financial development, not just in the world at large but in particular on Europe’s very doorstep, in Eastern Europe, the showcase for capitalist transition in the post–cold war world.
I
In Europe, unlike in Asia, the triumph of “the West” over communism was absolute. It was a triumph of both hard and soft power, military, political and economic might. Though Germans might give more credit to Gorbachev and détente diplomacy, and Americans more to Reagan and Star Wars, the Atlantic alliance was united in victory. No one benefited more from the end of the cold war than a newly reunified Germany, and it was German-American cooperation that secured the win. In 1990 French president François Mitterrand favored a conciliatory vision of embracing the former Soviet bloc in a common European security policy that would supersede NATO as well as the Warsaw pact.1 But neither Helmut Kohl nor George Bush wanted anything to do with that. The West had won. It would set the terms for Europe’s reunification.
The fall of the Wall and the dissolution of the Soviet Union in December 1991 left Russia shrunken and isolated. Not since the dark days of Lenin’s ruinous peace of Brest-Litovsk in 1918 had Russia been so humbled. Under Yeltsin, Moscow’s relations with the West were friendly. But Russia’s economy was a shipwreck. In the words of George Soros, Russia was “a centrally planned economy with the centre knocked out.”2 In the so-called transitional recession, inflation soared and Russia’s real GDP fell by 40 percent between 1989 and 1995. On “Black Tuesday,” October 11, 1994, in one single session of frantic currency trading, the ruble lost more than a quarter of its value against the dollar. It was not until 1995 that Russia’s economy stabilized. A modest revival fueled by large imports of foreign capital enabled Russia to catch its breath, only to be thrown off balance yet again by the Asian financial crisis of 1997.3 Struggling to hold the exchange rate, the Russian central bank introduced exchange controls and begged an emergency IMF loan.4 But in August 1998 Yeltsin’s government lost its grip. On August 17 Moscow devalued and declared a ninety-day moratorium on the payment of foreign debts owed by Russian banks. The ruble went into free fall, plunging from 7 to the dollar to 21. The cost of imports surged. Russians who had borrowed abroad faced bankruptcy. Then on August 19 the Russian government defaulted on its ruble-denominated domestic debts. By October 1998, with 40 percent of the population counted as living below the subsistence minimum, Moscow was reduced to appealing to the international community for assistance to pay for food imports. As inflation soared to an annualized rate of 84 percent, Russians lost confidence in their national currency. As the new millennium began, dollars made up 87 percent of the value of all currency in circulation in Russia. Outside the United States, Russia was the largest dollar economy in the world. International investors in Russia were required to pay their local taxes in American currency. Russia became the ultimate experiment in dollarization, a nuclear-armed, former superpower with a currency supplied from Washington.5
Post-Socialist GDP (PPP) Index, 1989-2010: The Industrialized Nations
Source: http://www.ggdc.net/maddison/maddison-project/home.htm.
With the exception of newly independent Ukraine, Russia was the worst hit of the post-Soviet countries, but the early 1990s were tough across the former Eastern bloc.6 As they stripped away the institutional structure of planning, the economies of Eastern Europe and the former Soviet Union experienced economic trauma. On average between 1989 and 1994, output fell by more than 30 percent. Inflation, unemployment and social inequality rocketed as real wages plunged and Communist-era welfare systems disintegrated. In the Baltic states, the hit to the wage level in the 1990s was staggering. Wages fell by 60 percent in Estonia and 70 percent in Lithuania. For many millions, emigration was the best option, illegal if need be.
This was the backdrop against which NATO and the EU decided on enlargement to the East, stabilizing the immediate crisis, offering a future direction and permanently redrawing the geopolitical map.7 The double expansion of EU and NATO was not a coordinated affair. It was driven as much by the East Europeans themselves as by Washington, Berlin and Paris. Poland, Hungary, the Czechs and the Slovaks—the Visegrád group—began pushing for NATO membership as early as February 1991. The EU followed up with an association agreement. But the EU’s decision for enlargement did not follow until 1993, with its conditions being spelled out in detail only in 1997. While some outside observers called for a Marshall Plan to launch economic development, what the EU offered to aspirant members in Eastern Europe was technical and expert assistance as they embarked on the transformation of everything from public finances to transport infrastructure, property rights and the legal system. Focusing only on the military dimension, NATO could move more quickly. Already in 1999 the Poles, Hungarians and Czechs were admitted as full members. The really big bang came in 2004. On April 1, 2004, Bulgaria, Estonia, Latvia, Lithuania, Slovakia, Slovenia and Romania joined NATO. A month later all but Bulgaria and Romania also joined the EU. The two stragglers were judged ready for EU membership in 2007.
It took fifteen years from the end of the cold war. There were second thoughts in Washington, and many West European governments were reluctant to embark on the eastward expansion. The costs were likely to be huge. The risk of provoking Russia was obvious. In 2003 the divisions over the invasion of Iraq were deep and embarrassing.8 The East Europeans who were candidates for both NATO and EU membership had to choose. On one side stood Berlin and Paris in opposition to the war. On the other side were Washington, London and their supporters in Madrid and Rome. Eastern Europe opted overwhelmingly for war and US defense secretary Donald Rumsfeld did not hesitate to rub salt in the wounds, playing the “new Europe” against the “old,” leaving France and Germany resentful and isolated.9 Habermas and Derrida’s 2003 vision of a distinct “European identity” was directed as much against the East Europeans as it was against the Anglo-Americans. It was core Western Europe that counted. It was left to the European Commission to put a brave face on things. Commission president Romano Prodi was fond of announcing that the fall of the Wall in 1989 and the reunification of Germany and Europe marked not the end of history but a new beginning.10 Whereas Europe’s history had once meant conflict and penury, now Europe had nothing to fear and the world had nothing to fear from Europe. The EU had overcome both the classic power politics of the nineteenth century and the armed truce of the cold war. As a bringer of stability, prosperity and the rule of law, the EU was realizing Kant’s dream of perpetual peace.
Prodi talked as though the EU would soon emerge as a fully featured state, combining both soft and hard power. But, in fact, the geopolitical configuration of the post–cold war world was more uncertain and ramshackle than that. The EU never developed its own hard-power capabilities. Not only was European military cooperation factious and frowned upon by Washington, but the European states all took the peace dividend. In light of Russia’s weakness, what reason was there not to run down their substantial cold war military establishments? It was this decision that laid the basis for the transatlantic divide on security policy in the 2000s. It also left the East Europeans all the more dependent on the Americans, whose military preponderance grew ever more massive as the new century progressed. At the same time, after the first round of financial assistance in the early 1990s, the United States played no more than a peripheral role in shaping the wider integration of Eastern Europe. On the ground it was the EU that set the pace in erasing the legacy of the Soviet experiment.
II
The incorporation of Eastern Europe into the EU and NATO was an encompassing geopolitical, political and bureaucratic process. But the first mover was not officialdom, but West European business.11 With wages less th
an one quarter of those prevailing in Germany in the 1990s, the attraction of the highly skilled East European labor force was irresistible. The process of integration was even more dramatic than that taking place among Canada, the United States and Mexico under the NAFTA agreement. Within a decade of the fall of communism, around half of all East European manufacturing capacity was in the hands of European multinationals.12 East European motor vehicle production, which soon accounted for 15 percent of European output, was 90 percent foreign owned, with VW’s acquisition of Škoda as the emblematic case. Meanwhile, the biggest single foreign investor in Poland in the 1990s was FIAT, followed by Korea’s Daewoo.13
If private capital led the way, it was followed by a rising tide of public funding. All over Eastern Europe, highways and public buildings were emblazoned with the blue badge of the EU and its ring of stars. Though the initial levels of spending were quite modest, after 2000 through the Cohesion Fund, the European Regional Development Fund and the EU’s agricultural subsidy schemes, tens of billions of euros flowed from West to East. In the last funding period, 2007–2013, 175 billion euros were earmarked in structural funds for Eastern Europe, 67 billion euros for Poland alone.14 The Czechs received 26.7 billion euros, and 25.3 billion went to the Hungarians. Across the region, the EU’s money was sufficient to fund between 7 and 17 percent of gross fixed capital formation over a seven-year period. The sums that were poured into the new member states in Eastern Europe by Brussels were comparable in scale to the famous Marshall Plan launched in 1947 to rescue ruined postwar Western Europe. Whereas after World War II it took until the late 1950s before private capital began to flow abundantly across the Atlantic, in the transition economies of Eastern Europe the impact of the EU’s public funding was immediately multiplied by private investment.