The entire Cold War financial success of the United Kingdom was predicated on its ability to provide Eurodollars to the financial markets – that is, dollars sold in London and thus, critically, outside the regulatory scope of the Federal Reserve. With the coronavirus pandemic forcing central banks into panicked holding actions, moreover, the status of the Dollar as the Global Reserve Currency seems more entrenched than ever. But is that true? Could the Euro challenge this position, and should it?

The Dollar: Lifeblood of International Transactions

To begin with, let us define what a Global Reserve Currency (GRC) actually is. To put it into simple terms, it is the currency which Central Banks and other financial institutions maintain to prepare for financial actions, ranging from investments to variations in domestic exchange rates. Once a currency becomes used as a reserve all over the world, it naturally becomes a GRC.

Hoarding a single GRC has been traditionally appealing: a reserve currency removes the need to exchange currency every time when doing trade. This naturally reduces the exchange rate risk associated with currency exchanges. Since everyone holds the same GRC, they can do trade with the same currency, which helps facilitate investment and other transactions.

All of this global hoarding has a myriad of net effects. On one hand, it generates a massive import of capital to the issuer country; it increases the demand for the currency and hence increases its value; it allows the issuer to hold ”cheap” debt and ”live beyond its means” to paraphrase former French Finance Minister Valéry Giscard d’Estaing’s comment about the United States. Indeed, the endless appetite for dollars has allowed the United States to run a trade and financial deficit of immense scale, since American debt issues always invariably find numerous willing buyers. It has also allowed countries like China and Russia to avoid inflationary pressure on their expanding economies by siphoning money away from the money supply, through the mass purchase of American bonds.

On the surface, this might sound like an amazing deal: everyone else benefits from a stable currency, trade is facilitated and risks are lowered. The issuing country, meanwhile, gains capital and has access to ”cheap” and extensive financing. When one looks closer, however, one notices that not everyone benefits from this windfall. Capital inflow disproportionately benefits financial institutions, causing an increase in wealth disparity and inequality in the issuing country.

Especially in the current economic context, very few people are holding their breaths to see if the wealth will trickle-down. The gain in demand for the currency leads to the subsequent increased value of the currency. This bloated value damages exports and thus hurts the industry. The financial institutions grow wealthier at the expense of the country’s industrial base. While Asian industry keeps taking up more and more market share from the US, the difference between the industrial sector and the financial sector becomes unbearable, particularly as it also eats at the income and job prospects of the working class.

At present over 60% of bank reserves outside the United States are denominated in US-dollars. The picture is similar for global debt, with dollar denominations holding a share of approximately 40%. The thirst for dollars gives no sign of slowing down. In fact, after the 2008 financial crash, institutions around the world began hoarding dollars, a move exacerbated when the Federal Reserve acted as the lender of last resort to save the Eurozone from collapse in 2012. The same hoarding is taking place today, with the world economy reeling from the shock of COVID-19. One could say that the demand for US-dollars has never been higher than now. However, this hasn’t stopped some commentators from sounding the alarm bells.

The Currencies That Would be Kings

Recently Goldman Sachs strategists have warned that the US Federal Reserve’s reaction to the coronavirus crisis may end up destroying the Dollar’s reign as the pre-eminent GRC. The Fed has increased its balance sheet by around $2.8Tn, an absolutely astronomical amount, and has been busy printing money. A GRC requires for itself a certain level of stability, so that it is easily predictable and so that it carries little risk, but financial strategists are warning that the current monetary policy threatens to debase the currency over the coming years. In such a case there is a threat that the savings held by financial institutions globally will be worth much less than what they are now.

This warning has triggered an immediate market reaction. The demand for Gold and Bitcoin (and other alternative currencies) have soared. “Gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows,” commented Goldman strategists. It is important to note that such warnings have been issued before, and historically betting for the Dollar to fail has been a losing game.

For a long time, the Euro was seen as the next GRC, with Euro reserves seeing global growth and prominence at the expense of the Dollar. This progress came to a sudden halt around 2008, in the turbulent onset of the financial crisis. In the decade since, the Eurozone has shown itself to be a relatively unstable economy, which is one of the key qualifications institutions look for in a GRC issuer. This effectively ruled out the Euro’s candidacy for the time being. For the Euro to truly become a GRC it would require great strides from the Eurozone in terms of ensuring that the bloc is stable, including stricter financial controls and some form of internal debt mutualisation system, both of which are unpopular ideas within the bloc, albeit amongst different groups for each.

China, with their Yuan Renminbi (RMB), is the other natural contender to the status quo. For China, becoming the issuer of a GRC would be a chance to garner more financial independence as their trade would no longer be tied to US dollar issuance – although an alternative policy would need devising to contain inflation. In essence, getting onshore currency from the US is excessively easy. The idea of limiting dollar exports has been raised by some, but it has been noted that this could have catastrophic effects on US inflation rates. China has a myriad of other reasons to become a GRC. It would lower borrowing costs, increase Chinese prestige around the world, support Xi Jinping’s reform efforts, spread exposures of the RMB around the world and finally allow China to become a price setter.

All of this would support the CCP’s goal of creating a multi-polar world where the USA would no longer be a sole hegemon. This drive towards a greater prominence of the RMB has been built on increased Chinese market share of global trade and the addition of the Yuan renminbi into the IMF Special Drawing Rights basket – the basket of currencies which count towards the official reserves of nations. The SDR used to be tied to gold but is now tied to a basket of five major currencies.

The Yuan, however, still faces considerable difficulties. The currency is not fully convertible, the onshore version is hard to come by and no trade-safe asset is available. While both the RMB and Euro have become the reserve currencies of their respective regions – much of the non-EU European countries holding the Euro as their main reserve currency, and Chinese neighbours holding the Yuan or the Japanese Yen – there are significant obstacles for them to reach the status of GRC, even in a multi-polar system.

For the Euro, there are high risks in terms of prestige and economic policy. For example, if China were to peg the Yuan to the Euro, this would have severe implication on the value of the currency and on Europe’s ability to command their own monetary policy. At the same time, the ensuing over-valuation of the Euro could be catastrophic for the European industry, as the currency is already overvalued for much of the union – with the notable exception of Germany. This would also increase wealth disparities and most likely lead to social disruptions.

With all of these considerations in mind, elevating the Euro to GRC status would still lead to higher financial independence for Europe. Whether or not the Eurozone would be ready for the necessary reforms to push through a plan for a GRC – or whether it would even be smart to do so – is still questionable, although the promise of prestige may often be popular among federalist circles.

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The latest comment, however, prompted a strong, angry reaction from Angela Merkel, who delivered a barb of her own: “I understand your desire for disruptive politics, but I’m tired of picking up the pieces. Over and over, I have to glue together the cups you have broken so that we can then sit down and have a cup of tea together.”. Macron rebutted that he could not in good faith attend the meeting and pretend that nothing had happened in Syria.

We’ve Seen All This Before

International media have reported on this Franco-German spat as an unexpected low in their relationship, but when one looks closer at the long debate over European security policy, this row seems to follow a remarkably old playbook. France has traditionally been one the more NATO-sceptic of all EU Member States, while Germany sits much closer to eastern European countries at the opposite end of the spectrum, one that sees transatlantic cooperation as existential. With their words, Merkel and Macron have rekindled an old debate. Should the European Union rely on NATO for security, or should it create its own armed forces to uncouple from the United States?

The framing of this question, however, is not accurate and presents a false alternative. After all, an EU army would be just that – an army – while NATO is an alliance involving multiple countries. Why should one be an alternative to the other? The implication that they are mutually exclusive is never explained. As a military actor, the EU could also fit within NATO, and defence cooperation between the two institutions is already the norm – in fact, it’s likely to intensify under the new European Commission.

What is likelier is that this false alternative is serving a deeper political interest. NATO remains controversial in many circles, and the decades of Warsaw Pact (and later Russian) propaganda against the alliance have left a lasting mark in European public opinion. Many see NATO as an instrument of American policy-making, which is a misread since the United States rely primarily on bilateral security agreements to expand their political clout.

Others believe NATO constrains its Member States to dangerous foreign policy adventures, like Iraq, but there is no provision for offensive wars in the North Atlantic Treaty, and even its mandates on defensive wars are designed to give individual countries great leeway. In stark contrast, while not entirely free of controversy, a wholly EU defence project is much more acceptable: it doesn’t exist, after all, allowing observers to project their preferences onto it and avoid disappointment.

As we have detailed before, it is completely impossible for the EU to entirely replace NATO with purely domestic security within a reasonable timeframe. Building joint European armed forces will take decades and significant political commitment, not to mention investment. However, this material impossibility does not answer the long-term question of goals. Even if Europe accepts the present reality of NATO inevitability, should it strive for an uncoupling of the alliance over the coming decades?

The West: Stronger Together

The magnitude of the US – EU relationship is taken for granted and underestimated. When one sets out to do the math, the results are quite impressive. The European Union will be about 20% of the world economy after Brexit and is also experiencing sluggish economic growth. However, when counted together, the EU and the United States represent nearly two-thirds of the world’s GDP. The figures are similar if we look at trade and finance, and the latter is an especially weak sector for Europeans, following the collapse of the EU banking system after the Great Recession of 2008.

If the EU and the United States go their separate ways, or even pursue radically incompatible objectives as with the Iran nuclear deal, only non-Western countries will benefit. More specifically, a permanent split will likely bring China and G77 into a position stronger than any of the two Western groups in isolation. This is especially relevant because China is a unique kind of rising competitor in world history: the Chinese Communist Party plays the longest possible game, with patience and cunning, and they play it for keeps.

The rest of the world is looking for ways to react, and it’s interesting to note how Chinese economic inroads into post-Soviet Asia have immediately strengthened the ranks of the Eurasian Economic Union. Counter-balancing China is almost impossible – one needs a sizable portion of the planet to be on board to achieve parity. Should the West split into two groups, China can just manipulate one against the other – to a degree this is already happening with the Chinese Belt and Road initiative.

Of course, pluralism in the West is not just a disadvantage. Western countries can experiment with different policies, and debate is useful. But ultimately, uniting the West is herding cats, and some of the EU’s and the United States’ friends or would-be allies are far-flung and next to impossible to defend without iron-clad nuclear guarantees. More worryingly, some are already firmly in China’s sights: Japan, the Republic of Korea, Australia, New Zealand are all experiencing significant Chinese pressure and encroachment. The net result is that forging a common Western security policy will be hard regardless. But with the United States saying one thing and the EU another, it will be hopeless.

The Lifeblood Of World Policies

So far, we have focused on finance, GDP size, and share of the world economy. However, Brussels’ main limitations when evaluating a lone wolf strategy are others. The EU economy could double in size overnight and it wouldn’t make a huge strategic difference, in the sense that Brussels would still have no world policy. Indeed, the radical conclusion of even the most cursory of analyses is that the European Union is in no position and will never be in a position to maintain a world policy.

Running a world policy requires the ability to project power all over the globe. In common parlance, power projection is often mistaken for military intervention (sending troops on the ground) but that is inaccurate. Power projection in purely military terms means the ability to project power away from a country’s own shore, i.e. what kind of blue water naval capabilities are available, and what range is available to them thanks to technology and/or how many safe ports are available along the way. Economic, political and cultural pressure help smooth things over, and the latter is the field the EU specialises in. This is commonly called soft power, and it’s certainly useful – but alone it is not enough.

European powers maintained vast colonial empires precisely so they could project power far from home. As the age of colonialism faded, the United States found an alternate model of getting to the same objective: a network of bilateral security guarantees, in which American forces would protect a country in exchange for key basing rights. Even this strategy is now being confronted with its limitations, however, as the United States progressively cut back from their involvement abroad.

Power projection is, for instance, absolutely indispensable in keeping the sea lanes open. This is only one task among many, but it’s a poignant example since, without open sea lanes, there is no free trade. Without allies in the Pacific, there is no US Pacific Fleet. Without US Pacific Fleet there is no freedom of navigation in the South China Sea. Without freedom of navigation in the South China Sea, then maybe Vietnam, the Philippines, and China would have escalated their maritime dispute into a shooting war. If not, then the former two would at the very least under constant threat of Chinese naval blockade – which would immediately destroy the EU – Vietnam free trade agreement. Soft power alone would not help the West in such a scenario, and levying punitive economic measures against an opponent the size of China would be unlikely to have an impact.

In such a scenario, the EU by itself would be powerless, since the only deterrence against such an escalation is the presence of friendly navies in the Pacific. No European taxpayer would consent to the outlandish defence spending required to build a colossal blue water navy so that Brussels can back up freedom of navigation operations in the South China Sea by force. If one aims to present a tangible threat to China for deterrence purposes, those costs soar even higher. Maintaining that level of overseas deployable capabilities is simply not worth the expense.

When part of a worldwide network of friendly countries, however, the European Union could deter China without directly fielding a navy to the far side of the world. Several Pacific countries could step in to provide containment – to a degree, this is already happening since Chinese calculations have to take into account the presence of the US Pacific Fleet. Again the United States crop up as the one country able to keep a finger in every pie, and this only works because they have allies everywhere, ready to back them up in exchange for protection.

Even then, keeping the shipping lanes open is a burdensome undertaking, and Americans themselves have been winding down their involvement. Only truly global cooperation can ensure that the job is done – the idea that the European Union could back up its own agreements in far-flung corners of the world without help is simply outlandish.

The West in a Fractured World

The example of the shipping lanes is replicated in many other areas of foreign policy and security. As military equipment becomes more complex, so do logistics, to the point where only a handful of countries on Earth are capable of deploying and sustaining expeditionary forces abroad. The democratisation of military theory, technology, equipment, and training (mostly done by us Europeans, and especially the Americans) make it easier than ever for non-State actors to become threats.

All of this means that nobody other than the United States will occupy such a hegemonic position on the world stage for the foreseeable future. The European Union can stick to the West, influence it and bring its priorities to the table – or it will have to give up agency on what happens outside its neighbourhood. The Mediterranean, the EU – Russian border, and possibly the Arctic are the EU’s three security frontiers. Anything beyond that will be entirely outside our influence.

To make one example, the European Union is just not going to get an invitation to the Korean six-party talks, even though tensions in Korea rank consistently high among the primary sources of danger for international stability. Indirectly, however, Brussels does have a channel to the six-party talks, specifically through the United States. The alternative would be to eschew representation at all, and have no say on the matter of peace and war in Southeast Asia. Moreover, it is only a handful of EU Member States (France, the United Kingdom, and the Netherlands) who have an active interest in maintaining an independent world policy. Most of the EU is fine with moving responsibility up one level, to NATO and the wider network of Western cooperation, like an informal military club of liberal democracy.

The world’s powers, great and small, did not miss this. China, India, Russia, Brazil, and others have already accepted a role as potentially regional superpowers. Other countries like Turkey and Iran are trying to rise to similar roles in their regions. Most crucially, however, when the United States stop being the world hegemon, the days of world politics are going to be over, at least for the foreseeable future.

Commentators occasionally wonder whether the European Union can replace the United States as the “leader of the free world” but the truth is that it cannot, and it never will. The needed material expense and the imperial overstretch that comes with it is a vision of the past, not the future. That future is one where dictatorships outnumber democracies, where no one country can control shipping lanes or have anything to say around the world unless the whole West speaks with one voice on its core interests. Even then, limitations will be painful, and there is no way to realistically forecast how much these power relations will be impacted by climate change – but there is no viable alternative to the West.

The United States can achieve truly global power projection only with global help, and even then, they are struggling. European countries are never going to be able to do that ever again. While the European Union has a clear interest in forming its own defence forces, it will not have a say in the wider world without a strong network of alliances. The world is already fracturing; giving up on NATO and the West now would only deepen the fissures until the entire postwar order shatters beyond repair.

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The World After Hitler

As the devastating war neared its bloody conclusion, the Allies and the Soviet Union met in Yalta, to debate the future of the world after Hitler. There, they stipulated that Germany in general and Berlin separately would be split into four zones of control under Soviet, American, British, and French administration. Additionally, they agreed that all occupied and former Axis powers were to have free and fair elections to determine their own futures. Whether Churchill and Roosevelt were foolish enough to believe Stalin would honour this agreement, or whether they simply felt they could do nothing about it, remains unclear. It does seem Roosevelt actually trusted Stalin, as he later acknowledged being fooled by him. This didn’t last long: the brutality with which the Soviets treated Eastern Europe, such as the mass purges and massacres even in the territories of those who had never aligned with the Axis, awakened the Western Allies to the true nature of Soviet designs of power. Due to these atrocities, Britain passed the Polish Resettlement Act in 1947, to protect Polish troops who would undoubtedly have been in large part murdered or imprisoned by the Soviet backed authorities upon returning home.

There is little doubt that the Soviets betrayed the Allies’ trust in their treatment of eastern Europe. This heightened tensions, and made it more difficult to reach any positive agreements as to the status of Germany – which even in defeat remained a strategically critical country. The Soviets, in particular,  diligently followed Lenin’s maxim that “whoever has Germany has Europe”. Ultimately, negotiations were hampered by the fact that both sides feared that a unified Germany could end up on the opposing side and therefore hand them a huge amount of power. This is particularly clear when compared to Austria: while occupied in the same four part system for some time, the country was reunified in 1955 without even a requirement to neutrality, although the Austrians embraced it on their own accord afterwards. In Germany, the higher stakes prevented such harmony: by 1947, it was clear to all involved that Germany would not be united. When preparing for the new year, the United States gave up any hope of influencing the Soviet occupation zone, and began to concentrate fully on helping the three western zones to create a functioning economy. Soon after, the Truman doctrine was announced, revealing American intentions to contain Communism everywhere. The opening moves of the Cold War were beginning.

Gloves Off: Berlin Blockaded

Further negotiations at the Moscow conference involved Soviet proposals for a united but neutral Germany, with the industrial Ruhr area under four-power control. However, in large part due to Moscow breaking trust over the rest of the post war restructuring of Europe, the Americans concluded that this was a scheme to get the western powers out and assert Soviet control over all of Germany. Considering the Soviets’ previous record of making apparently reasonable agreements, only to immediately break them in order to ensure their own wider hegemony, the Americans were most likely right to be suspicious. Following the Czechoslovak coup in February 1948, where Soviet backed forces had seized full control of the country and begun purging the opposition, the plans to create a West German state were greatly accelerated.

The Soviets decided to throw the dice and initiated a partial blockade of Berlin on April 1^st 1948. The Soviets aimed to gain a symbolic victory by forcing out the western powers and gaining control of the whole city. The Americans were not intimidated, and doubled down on their plans of economic reconstruction. On the 19^th of June, they unveiled the new Deutschmark currency to replace the old Reichsmark. When the currency was allowed to circulate by the Berlin authorities on the 23^rd of June, the Soviets cut the power supply to the western zones, marking the start of the open attempt to starve out the city. The Soviets then compounded the blockade by cutting communications links and blocking supplies of food and coal.

The western powers retaliated with an embargo on the Soviet zone, cutting off steel and coal from the Ruhr. The official justification was designed to parrot Soviet bureaucratic excuses for the blockade, and accused Moscow of stealing empty railway wagons. British foreign minister Bevin was reasonably confident that supplies would last long enough for a solution to be found: Berlin’s food stocks were expected to last around a month, and fuel even longer. He outright rejected surrendering the city to the Soviets to the extent that he was willing to have the United Kingdom follow the United States into war if bullets began to fly.

A Miracle In Logistics: The Berlin Airlift

Fortunately, war proved unnecessary, in large part due to what had been intended as a mental exercise in planning by RAF air commodore Rex Waite. On being told that supplying Berlin entirely by air was impossible, he decided to prove the opposite. On June 23^rd his plan was rebuffed as not sufficiently detailed, but with more detail added the British and American authorities were inclined to take the idea seriously, at least as a temporary measure. This was largely because nobody else had presented a proposal other than shooting their way to Berlin, which had been vetoed by Washington as ludicrously dangerous as a strategy that relied entirely on the Soviets bluffing.

Very few saw the Berlin Airlift plan as likely to be successful, and with good reason: it required at least 4500 tons of goods to be transported per day, an unprecedented amount by air. And yet, it happened. The operation was a desperate rush to get enough planes carrying enough cargo into the air. Flying and maintenance crews worked tirelessly to ensure this came to be. The western powers had one significant advantage in carrying through such a punishing schedule, the extremely high motivation of the air crews who flocked to the opportunity to carry out such a humanitarian mission. As supplies started to come in, the effects of the Soviet blockade began to inflict negative consequences on the USSR too. The Western Allies embargo of steel and coal, if prolonged, would cripple the Baltic fishing fleet, as well as East German industry in general. As such the Soviets tried various means to frustrate the Berlin Airlift, from physical barriers to buzzing transport planes with fighters.

Despite these obstructions, by September 1948 the target of 4500 tons per day was being hit and, astonishingly, surpassed. On the 18^th of September nearly 8500 tons of coal were brought in, and in the end the Berlin airlift transported a phenomenal 2.3 million tons of goods. By January 1949, a full six months after Rex Waite’s original plan, the average of delivered goods rose to over 5500 tons per day. It was an unprecedented display of industrial might and political will, and it sent a very clear message. On the Soviet side, the reaction was one of muted stupor. Demands for a different settlement of postwar Germany were quietly dropped, and the focus shifted on trying to save face. Molotov took much of the blame, being replaced in punishment for his miscalculation. In the end, Stalin capitulated at the cost of face-saving negotiations. He consoled himself by ordering Soviet bureaucracy to keep being a nuisance to German rail traffic.

Berlin Airlift Successful: Round One To The West

The success of the Berlin Airlift allowed the Western Allies to continue their plans to create an independent state in West Germany, which came into being in May 1949, and holding onto the foothold of west Berlin at the same time. In the opinion of Bevin, failure would have been severe as he expected that abandoning Berlin would have made it impossible for the Western Allies to hold the rest of West Germany, leaving the Soviets the undisputed masters of Europe with a united communist Germany under their suzerainty.

Additionally, the crisis bound the West more tightly together, with Bevin requesting nuclear capable US bombers to be stationed in Britain, and launching a concerted P.R. counteroffensive against Soviet communism. It is also worth noting the attitude of Berliners themselves: despite their economic hardship, few defected to the Soviets. Conversely, Berliners living under Soviet administration did their best to flee, and the Soviets had to build walls and barriers to stem the tide of people leaving. The Berlin Airlift thus provided a great victory for the West – and set the demarcation lines of a frozen conflict that would make the world hold its breath for the next four decades.

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In pursuing this course, Trump was satisfying a popular demand for unilateral decisions, as well as widespread dissatisfaction with the terms of the deal at home. As with many other policy fields in which Washington is currently trying to go its own way, however, it soon discovered that things are not so simple. The new sanction regime introduced by the United States punishes more than just American companies: it threatens European firms as well. The EU, which is trying to keep the nuclear deal alive, has not taken kindly to this economic confrontation. This has given the Iran sanctions row a whole new dimension: Europe and the United States built the structures of international finance together. Under the weight of this standoff, they now risk to unravel.

Preventing Nuclear Proliferation

The Joint Comprehensive Plan of Action is an agreement of historic proportions: it bears the signature of the five permanent members of the U.N. Security Council (the United States, Russia, China, the United Kingdom, and France) as well as Germany, the European Union, and Iran. In spite of its grand nature and the lofty names behind it, however, the deal was always uneasy.

The transatlantic combination of European soft and American hard power delivered results, but it also exposed the growing divisions between Washington and Brussels. Trump’s pull-out reopened a fissure that many thought had finally been closed. This fault line runs inside America’s security environment – where the Iran deal was in equal parts berated and praised – and across the Atlantic.

However, the American government has more reasons than just domestic appeasement to pursue this course of action. The reinstatement of the Iran sanctions framework is part of a larger strategy, one that Washington labels “maximum pressure“. This strategy seeks to force Iran to halt its development of ballistic missiles, cease support for militant groups in the Middle East, and end its violations on human rights. Trump has been swift to warn Europeans about grave economic consequences, should they wish to circumvent the cordon of Iran sanctions.

Unfortunately, rather than de-escalate the confrontation, this has widened the rift between the two sides of the Atlantic. The European Union remains committed to save the deal. As the two allies grow further apart, the United States’ capability to exert financial pressure on Iran has weakened.

Weaponised Interdependence

The United States have been incredibly effective at using their financial muscle as a way to exert pressure on other countries. Pressure is applied not only directly, for example through restrictions on access to the American market – but also indirectly. The sanctions placed on Iran are a prime example of the latter. Non-US firms doing business with Iran are penalised not just with exclusion from the American market, but from international finance as well.

Moreover, this system of “secondary” sanctions can exclude not just firms, but also entire countries, from access to financial markets. As has been recently argued, this strategy has allowed the United States to effectively multiply its economic might.

There are two key factors that give the United States this unparalleled ability to exert pressure on other countries through secondary sanctions. The first is the dollar clearing system: most financial transactions of some significance are conducted in dollars. The second is SWIFT – an international banking transfer system. Without access to SWIFT, obtaining information about international financial transactions becomes next to impossible, even for banks.

Europe has played a significant supporting role in both of these developments. The UK in particular has assisted in the international prominence of the dollar by providing eurodollars to the financial market for the entirety of the Cold War. The SWIFT system is based in Belgium, although it’s heavily influenced by the United States. During the Cold War, both sides of the Atlantic generally saw eye to eye on the subject.

The birth of the EU has changed the equation somewhat. The Union is the only polity other than the United States with the sheer size, regulatory tools, and economic clout to influence international finance to some degree. Nevertheless, American and European policies on the subject remained well coordinated: it was their joint action that allowed for an effective isolation of Iran in the first place, and their joint push that made the deal possible.

Iran Sanctions: The European Alternative

The American pull-out from the Iran deal upended years of policy coordination. Trump’s administration has gambled on its ability to keep influencing the international system even without European support. Indeed, that the same tools can be used to force European countries in line if they persist in their efforts to save the Iran nuclear deal.

This assumption is not completely groundless. Under American pressure – and against European wishes – SWIFT has effectively been forced to isolate Iran from access to the world market once more. Additionally, the dollar clearing system isn’t going anywhere soon. This allows the United States to threaten European banks with punitive measures if they facilitate Iran’s access to the world market. Considering the weakened state of European banks in the wake of the Great Recession, this is no idle threat.

These actions have severely tested the EU’s naturally atlanticist inclinations, and it is no coincidence that calls for an independent EU approach on Iran have intensified. These have come not just from Brussels, but from Member States like Germany and France as well.

On the back of this support, the EU is tentatively setting up a Special Purpose Vehicle which would allow payments to Iran, bypassing SWIFT and the dollar clearing system. This SPV will initially only allow transactions that involve access to food, medicine, and other humanitarian purchases. The Americans, however, are worried that the system could expand in the future, becoming a rival to SWIFT. The Europeans themselves have acknowledged this possibility, with the German government detailing prospects of future expansion.

The move has been met with strident opposition from the Trump administration. The decision to co-host a conference on the Iranian threat with Poland is no coincidence, as Washington looks to the more atlanticist European Member States to undermine the EU’s strategy from within. This, however, may not be enough to stem the threat of a SWIFT replacement.

As the American Treasury had already warned under Obama, the risk of overreach is real. Aggressive maneuvers could deprive the United States of its leverage on the international financial market. Antagonising the United States’ main ally in the continued support of this financial architecture is a high-risk strategy. If the SPV develops into a full-fledged alternative to SWIFT, it will offer international actors at least one potential avenue of bypassing secondary American sanctions.

Playing For High Stakes

These are but the opening moves in a standoff where the stakes are high. The creation of an alternative financial structure that bypasses American influence would fatally undermine the US’ ability to exert financial pressure worldwide. Conversely, however distrustful the EU is of Trump’s motives, it is still highly dependent on the United States for military security, and as has recently become apparent, its intelligence services are inadequate and critically reliant on American intelligence.

The European banking system is also considerably weaker than the American one, and largely entangled with it. This helps explain Brussels’ caution with the SPV. By keeping it limited to humanitarian transactions, the EU is giving itself a fallback option should the worst come to pass, without fully breaking away from transatlantic finance in the immediate.

When combined with other transatlantic divergences – such as the views on Nord Stream 2 or Trump’s friendliness towards Russia – the standoff over Iran sanctions adds even more uncertainty to an unstable environment. Either way, the outcome is likely to be consequential for the future of the transatlantic alliance, as well as international finance.

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In 2012, through these words, the Nobel Committee awarded the European Union with its prestigious Peace Prize (The Nobel Foundation, 2012). The initial steps of European integration are generally regarded as major catalysts for change that helped transform a war-torn continent into a “security community”, as Karl Deutsch put it (Deutsch 1957; Nathan 2010, 6). Europe’s political fabric was stripped away of nationalist sentiments and unilateralism in favour of cooperation mechanisms and multilateralism.

To this day, EU citizens enjoy an unprecedented degree of freedom and prosperity guaranteed by a long-lasting period of peace – around 70 years – in which the spectre of war survives in the minds of a few elderly citizens but is understandably ignored by younger generations. Indeed, a war between current member states is deemed “not merely unthinkable, but materially impossible” (Robert Schuman, 1950).

The EU and Power Politics

These premises certainly confirm that EU member states have renounced the use of military force to solve intra-European disputes, successfully scaling back the role of power politics in conflict resolution. By partially transferring their sovereignty to newly formed institutions, the founding countries created a supranational system that favours diplomacy and dialogue over hard power. Before digging into the analysis of the research question, it is essential to give a precise definition of power politics.

While some sources stress the preeminence of military assets, others include economic might in the set of instruments that a given country has at its disposal to exert influence over rival entities. Therefore, power politics can be defined as a way for states to conduct international relations where military, as well as economic tools, serve the purpose of advancing self-interest at the expenses of other actors (Merriam-Webster, 2018). This concept is central to the realist theory, which conceives international relations as a continuous struggle between states to satisfy their need of security and promote their interests in order to survive in the anarchic international system (Wohlforth 2008, 133).

Rebuilding Europe After WWII

The new European order emerged from the ashes of World War II. The consequent peace experienced over the following decades do not necessarily entail the definitive demise of power politics. Throughout the last century, some major member states have continued to use military projection and their international stature to strengthen their position both over fellow members and not. Moreover, the European Union has seen multiple conflicts rage not far from its Eastern borders. Some of these persist today in the form of frozen conflicts in which the bloc is more or less involved, although not militarily.

Greater economic interdependence and supranational law might have drastically changed the way European states interact, but the topic needs to be further explored from a historical perspective. It must be stressed that, as European integration has come to embrace the political realm as well, the role of power politics deserves a thorough analysis that also includes the study of EU foreign policy, and thus the external dimension.

The term “peace” needs to be carefully defined as well. By accepting a “minimalistic interpretation” (Pasture 2014, 8) we can easily argue that most of Europe has evolved from being a ravaged battlefield to a haven of democracy and justice, offering an excellent real-world example to democratic peace theorists. Peace, therefore, might simply result from the absence of war and violence. However, confrontations can take place without firing a single shot and by recurring to other less destructive means (nuclear deterrence, cyber-attacks, military exercises, missile defence systems setups etc.). By taking into account this dimension of power politics, for instance, the period encompassing the Cold War can hardly be considered peaceful; the weapons were cold, yet the tempers were not.

The rationale for peace-building

While it is widely accepted that European integration contributed to peace-building, academics have long argued on the rationales behind it using different theoretical frameworks, consequently reaching different conclusions. It is my opinion that a comprehensive understanding can only be achieved by considering the multiple perspectives available in the literature. Most importantly, the importance of a thematic and staged approach must be acknowledged.

The approach must be thematic because some policies, events and breakthroughs might be better explained by one theory rather than another. For instance, Haas’ theory of neo-functionalism confers special importance to supranational institutions and spillover effects. Meanwhile theorists of intergovernmentalism argue that national governments held the lead in order to advance their interests inside the European Community.

Some policies, like the Common Agricultural Policy (CAP), relied on strong intergovernmental negotiations. Meanwhile, the setting up of the Monetary Union can be explained as a direct consequence of previous results in integration (spillover effect).

The staged process helps identify the best theory – or combination of theories – to read certain events in a delimited period of time. The early years of the European Community were of course characterized by the protagonism of national governments, which led to the setting up of supranational institutions in the first place. However, the period that saw the much-praised Jacques Delors guide the European Commission might best be unfolded by the institutionalist perspective and its underscoring of activism in supranational institutions.

The early stages of European integration can give us a glimpse of how power politics were still prominent at the time. France, Germany, Italy and the other member states were not fighting on battlefields any more. However, each state, whenever the occasion made it possible, tried to get the most benefits from the process.

Academics’ Approaches

Some intergovernmentalist scholars explain European integration as a way for states to rescue themselves (Milward 1992, 7). Although, this must not overshadow the importance of Monnet’s pragmatic idealism (Van Meurs et al. 2018, 63) and the founding fathers’ personal characters, distinguished by the shared universalist views and Christian values they relied upon. This is best exemplified by Schuman, De Gasperi and Adenauer’s leading roles in their respective Christian-Democratic parties (Verovšek 2017, 529).

Because of their nature as major powers, it was mostly France and – after its accession – Great Britain that continued to use power politics as a way to conduct their foreign policies (Van Meurs et al. 2018, 230). Taking into account examples from the 20^th  as well as the 21^st century such as the Pleven Plan (1950) and the intervention in Libya (2011), we can argue that power politics did not disappear from the European scene. Indeed, it became subtler and less dependent on material and military assets. States used the new supranational platform to advance national interests and steer negotiations and new policies in a way that would favour them over other members.

The intergovernmentalist approach that featured the early integration process can be intended as a way for states to use power politics in a new ratio that would suit the new friendlier context. France, especially, used its weight, diplomatic power and reputation to oppose any initiative that would reduce significantly its sovereignty and would put into question its supremacy in continental Europe.

The Pleven Plan

Pressures from the United States aimed at convincing France about the importance of rehabilitating Western Germany’s military capacities and embedding them into a supranational defence platform showed to be insufficient to assuage the French political establishment, which still feared a resurgence of German expansionism.

The European Defence Community (EDC), a plan proposed precisely for this aim by the then Prime Minister René Pleven, entailed some form of political union that most of the French military deemed unnecessary and dangerous, as it undermined the possibility for France to freely project its military power (Gavin 2009, 80).

General Ely was one of the few prominent figures from the army to support the plan, though only from a political perspective, as France had heavily invested in it. General Juin fiercely opposed the plan, as it would have stripped the nation of its authority to confer it to a supranational institution (ibid.).

The French officials who supported the plan were not blindly underestimating the German question; the diplomat Helvé Alphand conceived the EDC as a way for France to keep a stricter control over Germany. France, after all, could count on a larger army, and could appoint its officials in key positions (ibid.) to not let others assume a leading role. In the end, both the factions were opposing or arguing in favour of the EDC because, in their opinion, the position of France would be strengthened. Any higher ideal of European unity was not the determining factor of the sides taken; the distribution of power could not be changed or reduced to the detriment of France.

These opposing views pushed the newly appointed Prime Minister Pierre Mendès in 1954 to rethink the plan and modify some of its core provisions, devoiding it of any supranational footprint. Any reference to a federal or confederal system was eliminated, while Germany would have been the only member state to integrate its army. By losing its meaning, the plan was never adopted despite the ratification by the other national parliaments. Power politics had come to shape post-world war Europe as well.

The Fouchet Plan

Other shows of force in the European arena concerned the Fouchet Plan and the negotiations over the CAP in the sixties, a source of grim debates among member states since its inception. The French President General de Gaulle played an important role in both events. When he came to power, it was immediately clear that he would try to assert French supremacy on the continent.“Europe”, he said, “is the means for France to recover what it ceased to be after Waterloo: first in the world” (Vanke 2001, 96).

De Gaulle’s objective was to drive Europe away from the influence of the USA and the Soviet Union and create the sufficient premises for France to lead European integration under its conditions and leadership (ibid.). Supranational institutions like the Commission and the European Parliament, designed by his predecessors, were seen as obstacles to overcome in order to reach the goal. The plan, named after the French ambassador Christian Fouchet, conceived a loose “political union of states” grounded on a solid intergovernmental structure that would include a security dimension as well.

The French proposal ultimately failed due to strong opposition from the Netherlands and Belgium, who favoured an Atlanticist approach and feared French supremacy (Dinan 2014, 101). The Dutch opposition strategy, led by the foreign minister Joseph Luns, consisted of linking the accession of the United Kingdom (the so called prealable englias/English prerequisite) to the new political union.

Indeed, conflicting views revolved around Britain. The French opposed British membership over concerns of excessive influence from NATO, de facto controlled by the US, on European affairs. Meanwhile, the Dutch had hoped since the signing of the Treaty of Rome that the UK would become a member to counter the early Franco-German axis. Nonetheless, Dutch opposition was so firm that the Netherlands would have even accepted the setting-up of the political union provided that they would not become part of it (Vanke 2001, 108).

The Common Agricultural Policy (CAP)

Like the Fouchet Plan, some academics go as far as to say that the confrontation over the CAP in 1965 was deliberately pushed forward by the French, especially from the Gaullist faction, to shape the European Economic Community (EEC) in a way that would suit more their interests (Newhouse 1967, 21). However, according to the international historian N. Piers Ludlow, the conflict was primarily spurred by Germany, Italy and the Netherlands to jointly challenge the supremacy that France had assumed in the first decade of European integration (Ludlow 1999, 233).

It can be argued that the European Community was first and foremost a French project that would have never been realized if the French had not taken the initiative (ibid.). All the six founders undoubtedly gained advantages from the making of the customs union and were well aware that no further progress in integration would have taken place without France leading the operation. This acknowledgement reduced their negotiating power (ibid. 236). The Germans especially wanted to avoid the dissolution of the Community at all costs, as it served as a major tool to regain legitimacy on the international scene.

The possibility of such dissolution emerged in 1965 when the six failed to agree on details concerning the CAP. de Gaulle encountered strong resistance over the policy, which was clearly favouring the French agricultural industry at the expense of the other states’ finances. The three “rebels” felt they had given enough concessions to satisfy French demands. Italy, for instance, was the biggest net contributor to the common budget despite being the poorest of the six (ibid. 237).

Confident of its position, General de Gaulle withdrew the French permanent representative at the EEC from its post in Brussels and decided that no French delegation would be sent to the next Council and COREPER meetings. The crisis ultimately led to the so-called Luxembourg Compromise. It inflicted a fatal blow to the supranational character of the community as member states acquired veto power over matters considered too important for national interests, heavily reducing the importance of Qualified Majority Vote (QMV) in the decision-making process. According to the French politician and economist Robert Marjolin, the compromise “consecrated the victory of the Gaullist conceptions in the matter of European institutions” (Marjolin 1989, 347).

De Gaulle and the French Withdrawal from NATO

de Gaulle’s attempts to restore France’s grandeur also concerned the broader transatlantic relations. In 1966, in a move that shocked his allies, the general announced France’s withdrawal from the military command of NATO. The decision perfectly suited de Gaulle’s conception of international relations, a strongly realist one, that marginalized the role of ideology and focused entirely on the balance of power (Martin 2011, 233).

He had credibly declared himself anti-Communist before, but as his scepticism over US presence on the continent became more marked, he sought a softer relationship with the Soviet Union that would make space for a strategy of détente as opposed to US containment.

De Gaulle conceived the transatlantic alliance in a different way compared to his European partners, less reluctant to rely on the American leadership to counterbalance Soviet influence. Before leaving NATO, France had already halted its participation to common military activities, creating the premises for the treaty to be considered a “14 + 1” alliance more than a compact bloc (ibid. 235).

French national sovereignty was paramount, and any move towards transatlantic integration of military capabilities had to be rejected. This is the reason behind France’s refusal to take part in the Multilateral Force project (MLF), aimed at integrating the nuclear capabilities of all three major NATO powers. Nuclear independence became a primary objective as de Gaulle would not accept the Anglo-Saxon supremacy and prerogative on this matter. Furthermore, he went as far as to side with the Soviet Union to oppose German membership in the MLF project (ibid.).

The Élysée Treaty between Germany and France signed in 1963 corroborated the Franco-German axis but ran parallel with the two countries’ opposing views on transatlantic relations; despite Adenauer’s warm welcoming of such treaty, he also interpreted it as a way for de Gaulle to further distance France from NATO and embed a new security system in the axis. When the next year de Gaulle persisted with his stance by offering the new German president Ludwig Erhard a “veiled ultimatum” on what side to pick, Adenauer’s fears were confirmed (ibid. 237). However, Germany would eventually choose to affirm its loyalty to Washington.

De Gaulle’s ultimate goal was to free the European continent, stretching “from the Atlantic to the Urals” (ibid.234), of the tension stemming from the Cold War. To him, the United States was responsible for feeding the flames of the conflict and only a European security system under French leadership and supervision would be able to restore some balance. History, though, would betray him.

France in the Cold War

Throughout the following 30 years of Cold War, France would uphold its distinct position and try to emerge as the third alternative to the bipolarity imprinted on the world stage by the two warring superpowers. Despite de Gaulle’s positioning on the right of the political spectrum, it would be the socialist President François Mitterrand more than anyone to keep afloat the General’s tenets of national independence and scepticism over the transatlantic alliance. France witnessed the collapse of the Soviet Union and the End of the Cold War under his presidency, in the eighties and early nineties, when NATO’s purpose was put into question and a reform of Europe’s defence structure seemed necessary (Menon 1995, 22).

After de Gaulle’s departure, the semi-presidential system which characterized the Fifth Republic laid the ground for institutional conflicts between the President and the Prime Minister over who had to be in control of foreign policy. Mitterrand feared that NATO would further push for an integrationist policy, eventually including the political dimension. The prime minister Édouard Balladur instead, represented the Atlanticist faction in the centre-right Union for a Popular Movement (UMP), which envisioned a rapprochement with the alliance. Yet, France’s official position continued to come out as ambiguous and distrust mounted from both sides.

An official from the US declared that if “it wasn’t for the French, we might be able to accept the assurances that a new European security entity would be part of a trans-Atlantic partnership, but on this issue, we don’t trust the French” (ibid. 24). Indeed, France urged the other European allies to come together and embrace a common defence structure; nevertheless, her actions didn’t go much further than creating a Franco-German brigade in agreement with Chancellor Helmut Kohl (Brown 2013, 291).

With all the major member states enclosed in the Atlantic framework, France was the only country ardently pushing for a European security arm that could challenge NATO leadership. Paradoxically, perhaps out of awareness that nothing would be accomplished at the European level, France also recognized the importance of the alliance and supported several US-led initiatives (Menon 1995, 27).

France’s Re-entry into NATO and Libyan Intervention

It was only in 2009 that, under the presidency of Nicolas Sarcozy, France re-joined NATO. This move followed years in which France’s attempts to shape an independent European security policy had slowed down.

Some success had been achieved in 1993 with the ratification of the Maastricht Treaty, which institutionalized the Common Foreign and Security Policy (CFSP) as the second of the three pillars forming the new European Union; however, the Petersberg Declaration issued the previous year had made clear that EU’s foreign policy activities would have only included crisis management, leaving the actual military tasks to NATO (Van Meurs et al. 2018, 231).

By joining the Alliance, Sarcozy recognized that France’s interests would thenceforth be better pursued within the transatlantic framework. In 2012 a report by the once strongly anti-NATO French politician Hubert Védrine stated that indeed France could not count on a European security apparatus and would be worse off out of NATO (ibid. 292). The country’s role in the transatlantic alliance was first tested during the 2011 military intervention in Libya. The operation exemplified the persistence of power politics in the European landscape and, most likely, of de Gaulle’s ghost in French foreign policy (Brown 2013, 296).

Approved by the UN Security Council, the military intervention was primarily led by France and Great Britain to stop general Gaddafi from committing violence against his people. In 2010 pacific protests had erupted throughout the Arab world, especially by the hand of young citizens, and the strongmen in power did not restrain from using violence. However, other reasons might have led France to intervene.

Intervention in Libya and the Impact on European Relations

As outlined by the intelligence platform Stratfor, the event translated into an indirect and silent confrontation between Italy and France. Since the establishment of its old colony, Italy has always considered Libya to be extremely important for its national interests, with regular energy supply and stability as primary objectives.

France’s assertiveness during the crisis ended up convincing the Italians that its role risked being stripped away by its transalpine allies, especially through new potential energy contracts signed by the French company Total at the detriment of the Italian ENI. In fact, responding to clarifications over the future of the Italian business in Libya, the Deputy Chairman of the Libyan National Transition Council Hafiz al Ghogha said that this would depend on “the support that the various European countries have offered the grassroots uprising” (Stratfor 2011, 11).

Before the conflict started, France was also the most important European arms supplier for Tripoli, but its role was being challenged by Rome with deals worth more than one billion dollars in 2010 (ibid. 8). Today, eight years after the military intervention, the confrontation is still ongoing:  President Emmanuel Macron is tacitly backing General Khalifa Haftar, which controls the eastern region of Cyrenaica, while Italy supports the UN-backed Government of National Accord (GNA) led by Fayez al-Sarraj in Tripoli.

France’s renewed activism over the last years, in Lybia as well as in Mali, can be read, from a broader perspective, as a way to reassert its role as major European military power in contrast with German supremacy over the economic sphere (ibid. 7). Eventually, the crisis proved the complete disunity of EU’s member states in the field of foreign policy.

Conclusion

With the exception of the Algerian War of Independence, legally speaking an intra-European civil war (Pasture 2015, 2; Hansen & Jonsson 2014), the process of European integration has brought long-lasting peace over most of the continent’s territory. The Franco-German robust friendship represents the most successful achievement of the process. However, we must avoid resorting to teleological explanations. While historical thinking might lead us to conceive a linear progression of history pointing to a predetermined end, we cannot exclude the repetition of events, or the occurrence of new ones, possibly caused by multiple contingent factors (ibid. 8).

The EU immediate neighbouring regions host a few ongoing conflicts (Nagorno-Karabakh, Eastern Ukraine, Libya) which threaten the geopolitical stability of the continent and affect intra-European dynamics. As shifts in the transatlantic relationships became clear after Trump’s trade tariffs against the bloc, the EU finds itself at a crossroads between departing from its status of “economic giant, political dwarf and military worm,” as in the words of former Belgian foreign minister Mark Eyskens and remaining anchored to a stagnating context fuelled by its leaders’ empty declarations. Yet, as demonstrated previously by exploring France’s historical behaviour, power politics have triggered and found a way into European integration since its inception, with countries today still reluctant to give up more sovereignty.

Supranational institutions have acquired a life of their own, but intergovernmentalism still persists consistently. President Macron and Chancellor Angela Merkel have recently restated the question of a European army, but chances are that nothing tangible will come out of it, at least in the short and medium terms. Nonetheless, this proves once again that the military dimension is still central to the biggest economic bloc risen out of the ashes of war; further shifts in the international order could challenge the current dynamics and systems of alliances, leading the EU to assume a more proactive role in the new multipolar world, perhaps by overtaking NATO’s task, as hoped by France, or acting as a complement to it, as favoured by Germany.

Bibliography

An earlier version of this article was originally written for the University of Leiden. 

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The long and painful Brexit negotiations have topped the headlines for the better part of two years, and it’s easy to view it as an isolated event. However, Brexit is part of a dramatic realignment of the British position on the world stage. The decision to leave the EU, of course, was determined by voters in a referendum. But the fact that a referendum was held in the first place is no coincidence, nor should we blind ourselves to the complex negotiations between London and Brussels prior to the Brexit referendum.

Cameron‘s domestic calculations in appeasing the far-right by pushing through a referendum are often discussed, but what typically goes under the radar is that the referendum proposal was part of a larger, if incoherent, high-risk foreign policy being conducted by his administration. Under Cameron, the United Kingdom sought a new place for itself in the world, one where British fortunes became inextricably linked with China.

In so doing, it sleepwalked into a dangerous position: it alienated its two major allies – the United States and the European Union – at the same time. The risks involved are massive, and this strategy’s failure – which seems likelier with every passing month – would have far reaching consequences on British foreign policy, and indeed, on the health of the UK as a whole.

The Post-Imperial Conundrum

Britain emerged victorious from the Second World War, at least on paper. In practice, however, it was left in financial and political straits, which made it impossible for it to maintain its empire and dependent on the United States for protection.

In this grim context, Britain found a new place in the growing Western bloc by closely aligning itself to the new hegemon, the United States. It did so not just in defense and foreign policy, but also financially. Britain quickly became the world’s one stop shop for Eurodollars. These were dollars, but made available for lending in Europe, and thus, critically, outside of the regulatory scope of the Federal Reserve.

This would prove particularly significant after the United States abandoned the gold standard. With American assent, the United Kingdom became the link in the financial chain between the two shores of the Atlantic – and later on, the rest of the world. On that bedrock, the City of London obtained its legendary status and spearheaded the phenomenal consolidation of European banks at the turn of the millennium.

Cameron’s High Risk Gamble

The meltdown of 2008 changed everything. It not only threatened to turn into a heart attack of the world economy, but it altered the geography of global finance, with American and Asian banks having more or less recovered, while European banks remained a shadow of their former selves. What, then, would be the UK’s role in this altered international environment? It is fateful that it would fall to David Cameron and his administration to answer this question.

As Prime Minister, Cameron quickly earnt for himself a reputation of a man who put party politics ahead of statesmanship. Starting with the Tory withdrawal from the EPP, Cameron pursued a confrontational strategy with the EU, in which he sought to win more concessions for Britain and placate the rumblings of Tory back-benchers.

It is undoubdted, therefore, that much of Cameron’s strategy of slamming the EU and undermining its authority was motivated by domestic calculations. However, it also fit the government’s vision for the future of the United Kingdom.

Cameron’s unimaginative strategy for the post-recession world was to replicate the strategy that had saved Britain’s prestige during the Cold War. After all, if the world was so hungry for Eurodollars, surely a market could be found for Chinese investment as well. With that in mind, London sought to reposition itself away from the Atlantic, and as the newfound financial link between China and the West.

Needless to say, the prospect of helping China’s grand entry into world finance and the world market held promises of great profits and geopolitical clout. When Tory politicians talk of a Global Britain, this is what they envision. And with HSBC in the lead, Britain has now been marketing itself as the door to China for a number of years.

What was perhaps underestimated in London was the political price of this strategy. The Chinese gamble profoundly displeased the United States, particularly as it became more and more apparent that the relationship was completely one-sided, with Britain giving way to increasing Chinese demands – a subservience that was strongly criticised by American diplomats in 2015.

Likewise, such a move put Britain on a clear course of competition with the European Union: not only was it harder for Britain to pursue a high-risk strategy as a member, but it was also harder to befriend the new hegemon. Neither the EU nor its members had any patience for the unilateral freedom of action the UK now demanded.

To reiterate: at the same time as Cameron was set on a collision course with Europe, he proceeded to also alienate Washington by enacting a policy of cooperation with a dictatorship that represents the greatest political challenge currently faced by the United States. The risks inherent to this strategy look high enough; they become even higher when we consider that there is a crucial difference between the Eurodollar system and the British-Chinese connection. The former was both an economic and a political alliance, but with Beijing there are no such guarantees. The financial ties are not shielded by friendly and long-standing political friendships.
The weakness of this strategy became fully apparent when Cameron lost control of his own referendum.

Intriguing with Allies: Brexit and Power Competition

If a recurring theme can be found when discussing Cameron’s tenure in government, it’s the complete failure to understand the priorities of his own allies. For years, Cameron shunned the EU and sought approval from Angela Merkel instead, firm in the belief that Brussels was powerless and that Germany ultimately called the shots. He also believed that German car-makers were the real grey eminence behind EU politics, and as such, they would eventually persuade Merkel to let Britain do what it wanted, so as not to lose export opportunities in the UK.

This, naturally, proved incorrect. Angela Merkel went on record multiple times, stating that the EU was far more important to German security, and the European Commission stubbornly refused to be sidelined. But all warnings fell on deaf ears in Downing Street. As recently as 2014, the administration claimed that Merkel viewed Cameron as the “naughty nephew”.

It is perhaps bewildering that one of the most developed countries on the planet based an extremely risky foreign policy on the assessment that its Prime Minister was simply too adorable to take no for an answer, but it is the reality we must contend with, when discussing the road taken by the United Kingdom after the recession.

After Cameron’s disgraced exit from politics in June 2016, the Tories have hardly abandoned this logic. David Davis and others were buoyant that Barnier and the European Commission could be bypassed entirely, if only an agreement was struck with Berlin.

Power is a word that is rarely mentioned in European politics these days, and yet there can be no doubt that the United Kingdom framed Brexit negotiations as a question of classic European power competition. By offering German carmakers access to the British market, London would in effect earn the right to become the leader of the continent. And if the bilateralism this requires led to the dismantling of the EU, so be it.

Just as with the American displeasure at British subservience to China, once again the miscalculation of its own allies made it impossible for Britain to pursue its goals. In the end, Brexit was negotiated with Barnier and the European Commission. Regardless of the outcome, which remains uncertain at time of writing, the fact of the matter is that the original Brexit strategy failed miserably.

The Die Is Cast

Independently of how Brexit ends and what lies in wait for British-American relations, the crucial part of Cameron’s plan has already been enacted. As revealed by the Bank of England, British banks are significantly more exposed to China than other European banks, not to mention the Americans. This represents a twin risk: political and financial.

Politically, as we have already seen, the idea (predominant in the 1990s) that power competition was no longer a factor in economic development is now no longer taken seriously. It is openly acknowledged that the rise of China presents a challenge to the West and to the United States. The comments by American diplomats that constant concessions are no way to handle a rising power are a case in point: it is highly doubtful that Britain can juggle a political alignment with its traditional allies, while giving way to Beijing on an increasing amount of matters.

Financially, exposure to China implies severe credit risks. Should Chinese finance so much as sneeze, the City of London would be the first Western financial hub to suffer the consequences – much like in 2008, when the meltdown of the recession nearly stopped the flow of transatlantic finance cold in its tracks.

Of course, in the complex reality of the world economy, everyone would suffer from a Chinese meltdown. Even the relative troubles of 2015 had profound effects on international finance. Nevertheless, in an attempt to salvage its primacy in world finance, Britain has already placed itself first in the line of fire, and this will remain true irrespective of future relations with the United States or the final outcome of Brexit. The future of British finance, and by extension the British economy, now lies with the fortunes of the Communist Party in China.

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To say that all this represents a momentous development for European foreign policy would be understating it. By riding out the mid-terms, Trump has proven that he is far from a temporary upset of American politics. Indeed, the most careful observers will realise that the change of direction in the GOP’s base precedes Trump’s political career by many years. Trump has simply been the first GOP primary candidate seriously and consistently motivated in promising the electorate what they really wanted. This heralds a reversal in Transatlantic relations that is without precedent.

One of the many fields in which Europe must now contend with entirely new challenges is that of free trade. Trump’s economic nationalism mirrors that of his voters, and has translated in a general American retreat from free trade around the world. In the meantime, the European Union has negotiated – and in some cases clinched – enormous trade deals, to much publicity. Can the EU step into the breach left by Trump’s withdrawal from the world market?

The Linchpin of Free Trade

The EU is well positioned to exploit the vacuum left by the United States in free trade: outside of its score of preferential trade agreements with countries in its neighbourhood, the Union has been active for a number of years in negotiating ambitious free trade agreements with Australia, New Zealand, Vietnam, Singapore, Canada, Japan, Mexico, and the South American trading bloc Mercosur. These wide-ranging deals seek to dramatically reduce and in some cases all but eliminate tariffs. They also typically include clauses on worker protection and rights, safety and food standards, and protection from imitation. This is an upward equalisation which would progressively enshrine EU standards as widely recognised all over the world.

The state of these talks vary. The EU and Mexico originally signed a trade agreement in 2000, and are now in the process of agreeing to an updated text which would replace the original agreement. Others, like CETA, are on the cusp of finally being implemented, pending approval by the parliaments of each member state. On the opposite end of the scale, the EU-Mercosur trade deal has a long and politically complicated road ahead.

Of all these, however, the most significant is undoubtedly the free trade deal with Japan. Labeled as the “cars for cheese” agreement, this truly gigantic deal is in the final stages and, once cleared by the European Council, will be put forward to the European Parliament. When implementation begins, the agreement will bring together a combined 19% of the world’s GDP and a combined 38% of the world’s export of goods into a single free economic zone. No wonder that the European Commission has hailed it as “the most important bilateral trade agreement” it has ever concluded. Even in isolation, it will massively strengthen the EU’s position in world trade. When combined with the other trade deals currently being negotiated, it could well be a game changer for the European export market. 

No Economy is an Island

The narrative of this grand trade offensive is, of course, limited in two ways. The first regards timing, while the second regards the way we interpret macroeconomic developments in the 21st Century. The trade deals being negotiated by the EU have taken years to reach a point of maturity, and have gone through difficult days of impasse and delay. The case of CETA being stonewalled by a Belgian regional parliament best illustrates the hurdles that the EU has to face when agreements transition from successful negotiation to successful implementation.

It is a happy convergence that some of these trade deals – such as CETA, or the recently signed EU-Singapore agreement – reached a critical point just as Trump tried to turn global trade into a zero sum game. Of course, this is not entirely down to coincidence: Trump himself greatly contributed to the sudden acceleration, particularly with regards to the Pacific. Japan and Vietnam eagerly sought far-reaching trade deals with the EU as substitutes for Obama’s grand project of a Trans Pacific Partnership. Nor should we discount the importance of these free trade agreements as an opportunity for the European export economy, or for the accessory benefits in soft power and international standing.

This, however, is the point where Europe finds itself faced once again with its own limitations. In a classic, 20th century view of macroeconomics, the world economy is composed of many “islands”, corresponding to national economies, which are interconnected through flows of goods, payments and investments, collectively aggregated into a balance of payments. But in the highly globalised economy of the 21st Century, things are not so simple. The flows of trade and finance are linked, but do not overlap. It is a very important point that the Great Recession of 2008 was not a crisis of public finances or trade deficits, but primarily one of banking claims. The pre-2008 fear that the US would slip into a twin deficit crisis with China proved unfounded. It was the private sector, with European, British and American banks in the lead, that caused the disaster.

As shown by the two charts above, provided by the IMF and the BIS, trade and finance do not overlap. More to the point, the center of the financial world is still a system primarily based on American and European banks, with east Asia on the rise. But something has changed since 2008, and it’s the staying power of European banks.
The state of the world’s finances and of the European banking sector in particular deserve to be explored in depth in a different article.

For the moment, suffice to say that European banks have never recovered from the crisis they were, in large part, responsible for unleashing, as they rushed to exploit the American mortgage bubble. Here we see one further, dramatic instance of the theme that has run through the last 150 years of history: the decline of Europe and the rise of new global players. The United States and Southeast Asia are the two main centers of global finance. European banks teeter on the edge of implosion to this very day, with even Deutsche Bank – the biggest corporate muscle of the locomotive of the European economy – facing the very serious prospect of collapse. European banks would have never survived the recession without vigorous liquidity provided by the American Federal Reserve.

When European leaders talk about an independent trade policy as a way to achieve a new independence from the United States, it’s hard to disagree with the sentiment. However, no course of action has been proposed to suggest how this could actually be achieved in practice. Behind every trade deal negotiated by the European Union looms the uncomfortable knowledge that Brussels would not be in a position to conduct its trade offensive, without the modicum of financial stability guaranteed by American credit.

Uncertainty Lies Ahead

The importance of free trade should not be discounted, and the European Union is in a prime position to become the centerpiece of a new international trade system. This has significant political and prestige connotations as well, at a time where the opponents of liberalism are gathering strength. It is inconceivable, however, that this could lead to a true European economic emancipation from the United States. When it comes to credit-worthiness, the all important factor in a sophisticated and globalised capitalist economy, the Old Continent has well and truly been eclipsed, not because of the state of its public finances, but primarily for the beleaguered state of its banks in the wake of the Recession.

European strength in free trade will not increase the health of its banks, or remedy the tragic vulnerability of its credit system. As China and the United States have demonstrated, moreover, a strong export economy is not a sufficient or complete substitute for a booming domestic market. To name a practical example, while it’s easy to look at the German trade surplus as a demonstration of economic strength, one should keep in mind that the surplus is so large thanks to, in part, suppressed consumption at home. This is true of Europe writ large – no amount of exports has been able to comprehensively revert the anemic state of European economies to their pre-crisis levels.

The European trade offensive is a great undertaking, but expecting it to reposition the EU in relation to the United States is a recipe for disappointment. The solution to the EU’s economic ailments, if it indeed can be found, will require a much larger strategic vision – one that seems to be lacking, not just in Brussels, but in all European capitals.

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1860 marked a fundamental step in this direction with the historical Cobden-Chevalier deal between France and Great Britain. However, it’s only in the 1940s that global trade began to take shape with the General Agreement on Tariffs and Trade (GATT). This agreement laid the foundations of an international order devoted to trade, and the creation of international institutions tasked with promoting, regulating and protecting free trade among States, like the World Trade Organization.

A new deal has been in the pipeline for a few years now: it’s the so called TTIP (Trans-Atlantic Trade and Investment Partnership), and it’s considered the biggest trade deal in history. We are talking about a bilateral deal between the two largest economies of the world: the European Union, and close second, the United States. Together they comprise roughly 45% of Earth’s GDP. If the deal were to be signed, it would give birth to the largest common market of the planet. Talks related to the treaty have gone forward for over a decade, but it was only in 2013 that U.S. President Barack Obama and former European Commission President, Josè Manuel Barroso, have officially started negotiations. In spite of the precise content of the deal being only accessible by negotiators themselves, the media have managed to get a hold of information and release it to the public: it’s mostly drafts that regard few of the numerous relationships and processes that the deal will affect. The European Union, however, has decided to publish a document illustrating the guidelines over which the TTIP will be framed. This is what we know:

The Treaty mandates the complete elimination, on both sides, of the respective (and already considerably low) tariffs of traded goods. The same is prescriped for non-tariff barriers, that is obstacles or limitations of non-fiscal nature imposed on goods of foreign origin with the objective of limiting or preventing their access in determined economic zones. The Treaty includes a relative harmonization of regulations, and a liberalization of services (excluding audiovisual ones), markets, tender processes and public services, with the objective of allowing American and European firms to operate on respective markets on an equal footing with local competitors. When it comes to investment, the Treaty’s aim is to implement tutelage for foreign investors..

How is this enforced? Through a process called the ISDS – Investor State Dispute Settlement, a tool already in use in some areas devoted to free trade. The ISDS will become an independent tribunal for companies to appeal to, if they believe a State has implemented policies that are contrary to the company’s activity. The tribunal will be presided by three judges, one chosen by the company, one by the State being called under judgement, and another being chosen by both. If the two cannot agree on a third judge, one will be selected by the World Bank.

A famous case discussed among academics of international trade saw tobacco multinational Philip Morris, sueing Uruguay for increasing the size of health danger warnings on cigarette packages, and implementing other measures aimed at dicinsentivizing sales. Since the ratification of NAFTA, the free trade deal between Mexico, the U.S. and Canada, the latter has been sued the most, losing over 168 million dollars, not including legal expenses.

Several think tanks, economists and research centres have underlined the positive aspects of TTIP. A few papers, like the one published by the London-based Centre for Economic Policy, or by the Aspen institute, have predicted an increase of 28% in trade volumes, and that European families would receive a further 545€ per year. It is worth noting that the former paper has been criticized because the Centre for Economic Policy is primarily financed by international banks with a stake in the Treaty. Increased competition between American and European firms would further innovation and technological development. The European Commission foresees a GDP increase of 0,5% for Europe, and Trade Commissioner Karel de Gutch claims both parties would benefit from the creation of hundreds of thousands of job. Carlo Calenda, Italian minister (and former vice minister) for economic development, hopes that the deal will be concluded as soon as possible, in order to intercept investment capital that would otherwise head to the Pacific, where a similar deal is being hammered – the Trans Pacific Partnership.

However, many voices have been raised against the deal, both within civil society and from other sources. Several organizations have underlined how negotiations need to become more transparent. Neither Congress nor the European Parliament have had access to the documents. Secondarily, it has been pointed out that eliminating non-tariff barriers will undermine European safety standards, destroying the quality of foodstuffs and environmental protection for which European regulation is far more comprehensive than that of the US.

It is valid to assume that we would see a devolution of European standards, converging towards the lax norms of our Atlantic ally. One such example is the precaution principle adopted by the EU, which dictates that a product needs thorough testing before being given market access, to verify it brings no risk to consumers. This process is not always guaranteed in the United States.

Speaking of competition, opening the European market completely to American multinationals would endanger the survival of small and medium businesses forced to compete under unfavorable conditions, as has happened with Mexican agriculture after the ratification of NAFTA. Twenty years on, NAFTA has also contributed to job losses in the United States, and the reduction of salaries in a few sectors and industries. Scott Sinclair, a senior analyst of the Canada Center for Policy Alternatives, has denounced the anti-democratic nature of this tool: “We have these completely irresponsible judges taking care of public affairs. Why should companies be able to bypass national justice systems?”

East of the Atlantic, British opposers to the TTIP fear that the Treaty might endanger the NHS, given that companies could sue the British government if it decided to nationalize services currently in the hands of private investors. In order to oppose the ratification of TTIP (and CETA, a similar bilateral deal between Europe and Canada), over 380 European associations have launched a joint campaign of opposition through the European Citizens Initiative. In spite of the Commission ruling the petition inadmissible from a judicial standpoint, over three million citizens from all 28 member States have signed so far. An illustrious opposer of TTIP is Joseph Stiglitz, who won a Nobel prize for economics in 2001, and has told the Italian parliament in September 2014: “With the deal you want to sign, or rather the USA want you to sign, you will relinquish the right to protect your own citizens.”

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