The Modest Superpower

It's become all fashionable in Washington, Moscow, and Beijing these days to dismiss Europe as an aging continent in terminal decline. A June report from a Moscow think tank close to the Kremlin described Europe as weak in the face of Russian might, and last year's U.S. National Intelligence Council assessment of global power shifts called the EU "a hobbled giant" plagued by "internal bickering."

Such broadsides are easy to understand. The EU today is divided on all kinds of issues, from how to deal with Russia to the future of NATO. Europe's banks still have more toxic assets on their books than America's. With Britain, France, and Germany often pursuing separate foreign--policy goals, the idea of an EU able to translate its size and wealth into hard power and common purpose seems as remote as ever.

Yet all these critiques miss a stark reality. Even as America and Russia have been humbled by the economic crisis and China and India remain preoccupied with internal problems, Europe is thriving. Exactly two decades after the fall of the Berlin Wall, the continent has been transformed: it is more united, prosperous, and secure than at any time in history. This year, Europe surpassed the United States in wealth, according to the Boston Consulting Group. Next year, Europe's population is expected to hit half a billion and its GDP to nearly match that of the U.S. and China combined. The financial crisis has turned Europe's softer, more regulated brand of capitalism into the preferred model for much of the world—even the United States—and a half-dozen countries are now seeking EU membership in order to gain economic shelter from the ongoing storm. The crisis itself, for all its terrible effects on the EU economy, has unexpectedly strengthened the continent's cohesion, as has the just-ratified Lisbon Treaty, which streamlines the way Europe runs its affairs. Overseas, the EU is now responsible for much of the world's development aid and has 71,000 troops stationed beyond its shores, a global footprint second only to America. This is not to say there aren't many areas where Europe is still divided and punches below its weight. But by most measures, the EU looks better and better by the day.

Predictions of Europe's downfall have a long history of refusing to materialize. In the 1980s one often heard talk of Euro-sclerosis, a crippling malaise of low growth and high unemployment. Since then, European countries have embarked on a reform marathon that, mainly by relaxing labor rules and expanding competition, enabled them to create 9 million more jobs than the United States between 2000 and 2008 and to post a lower unemployment rate (8.9 percent in September, compared with 9.5 in the United States). In the 1990s, the collapse of communism and the disappearance of the Soviet threat led some to predict the fall of NATO and the return of old nationalist ghosts. Those ghosts did briefly rear their heads in the Balkans. But even they couldn't stop Europe from launching a vast expansion to the east, more than doubling its membership from 12 countries in 1989 to 27 today, while simultaneously deepening its integration. Just a few years ago, it looked as if the EU's older and younger members had developed irreconcilable differences over ties to the United States, the threat of Russia, and the Iraq War. Now that split is fast disappearing, thanks to ever-tighter economic and other links, including joint military units, and to what Pawel Swieboda, director of the Warsaw-based think tank DemosEuropa, calls Eastern Europe's "big disappointment" with an American administration that seems to have lost interest in it.

The global economic crisis has again shaken confidence in Europe's future. Because it derives more of its wealth from trade than the United States, Europe was hit harder. But with the start of a recovery, the continental heavyweights, France and Germany, unexpectedly beat America out of the recession, thanks to a rebound in exports and more stable consumer spending. According to the IMF, the United States will experience a stronger recovery than Europe, but only through 2013. After that, U.S. growth will slow to the same rate as the eurozone—2.1 percent—and well below the U.S. average of 3 percent-plus before the crisis. Measured in per-capita terms, the eurozone would grow almost twice as fast as the United States. So much for American parodies of sluggish old Europe.

Many of America's competitive advantages are disappearing. The Wall Street banks and the credit-card culture that did so much to fuel America's boom years are now hobbled, and not likely to recover soon. Government deficits are rising everywhere, but the U.S. deficit is on track to hit 94 percent of GDP next year, compared with 79 percent in the EU. Bob McKee, senior economist at London-based Independent Strategy, says these burdens on the American economy are now long-term strengths for Europe. He also sees Europe's highly globalized companies (five of the world's top ten trading nations are EU members) as better placed than U.S. companies to profit from growth in emerging markets.

On no single issue has Europe rejected rough American capitalism more vehemently than on its treatment of labor. American companies have traditionally enjoyed much more freedom to hire and fire, making them more likely to provide jobs, but also to take them away. U.S. workers had less job security, but also enjoyed much less unemployment. Now that's changing. Columbia University economist Edmund Phelps expects America's "natural" rate of unemployment, long estimated at about 5 percent, to rise to 7 percent or more post-crisis, close to the European "natural" rate of 7.5 percent.

The crisis is also changing perceptions of the EU as incapable of concerted action. When the banking crisis first erupted, the EU's leaders squabbled over bailouts and stimulus measures. Yet at the height of the meltdown this February, as banks and the currencies of smaller EU countries like Hungary and Latvia began to teeter, the European Central Bank stepped in to offer unprecedented emergency credit. And Germany all but guaranteed that richer EU members would prevent any eurozone countries from going bankrupt. That fortified the euro's reputation as the only serious alternative reserve currency, after the dollar, and is a big reason the euro has risen by 17 percent against the dollar since February. The euro now accounts for a record 27 percent of global reserves, according to Barclays Capital, compared with 18 percent ten years ago, and central banks are now putting 50 percent of new reserves in euros versus 37 percent in dollars.