The Transatlantic Century

By C. Fred Bergsten

Tuesday, April 30, 2002; Page A19

The president of the United States and the leadership of the European Union hold their regular semiannual summit here this week. Even the closest observers of world affairs are blissfully unaware of these sessions. The chief outcome of one of their recent meetings was an agreement to consider the adoption of new winemaking standards.

This picture would be comic if it didn't represent such a wasted opportunity. The United States and Europe are the world's only economic superpowers. They are crucial both to each other's prosperity and to the stability of the world economy as a whole. They need to start thinking of themselves as an informal "G-2" steering committee for the global system rather than as petty antagonists over bananas, steel and other minutiae.

Fundamental changes in the world economy call for such a new mind-set. Japan seemed a likely member of the leadership committee, and even a dominant player, a decade ago. But it failed to assume global responsibilities commensurate with its economic weight when it had the chance, and now its decade of severe decline and rapidly aging population raises serious doubts about its leadership in East Asia, let alone the world.

China is the rising power in economic as well as strategic terms. It is still a very poor country and not yet a full-market economy or a political democracy. Its capacity for global leadership is probably a decade or two away.

Meanwhile, Europe has become virtually the economic equal of the United States. Its population is larger than ours and its total output is similar. Our external trade levels are identical. The combined monetary reserves of its members are much larger than our own. The creation of the euro, which will eventually rival the dollar, further promotes the integration of Europe into a single economy.

On issues where Europe speaks with a single voice, and has thus been able to translate its economic weight into negotiating leverage, a G-2 already exists. The best example is trade, where the European Commission has represented Europe since the creation of the original Common Market. Both sides of the Atlantic have thus held veto power over global trade policy for about four decades. The great liberalization and rule-making advances of the postwar period -- the Kennedy Round, Tokyo Round and Uruguay Round in the World Trade Organization -- could proceed only when the G-2 agreed.

Even on trade, however, the United States and Europe seldom behave like responsible leaders. They did get together at the recent WTO Ministerial in Doha to launch new multilateral negotiations, reversing the disastrous failure at Seattle in 1999. But their incessant and growing battles over agriculture, aircraft, bananas, beef, dispute settlement modalities, genetically modified products, mergers policy a la GE-Honeywell, regional preferential deals, retaliation methods, sanctions, steel, subsidies, tax policy and many others threaten trade war rather than promising systemic improvement.

These trade-related issues represent only a piece of the acute transatlantic differences on economic issues, many of which have broader ramifications in security and foreign policy. There is a basic split over energy, with America's fixation on low prices and gas guzzlers confronting Europe's preference for much higher prices and conservation. There are closely related disputes over the environment, with Europe moving to implement the Kyoto convention to combat global warming, which the United States has denounced. Despite President Bush's laudable pledge to sharply increase U.S. foreign aid, European levels are about three times as great, and breed resentment over inadequate "burden-sharing" by America. A sharp disagreement over World Bank lending policies has held up replenishment of its funding for the world's poorest nations.

Most important, the huge U.S. trade deficit means the United States must attract about $500 billion in financing from the rest of the world every year to balance its books. That imbalance reflects a sizable currency misalignment between dollar and euro that will require intensive and cooperative management rather than today's "benign neglect" of both. The alternative is an outbreak of trade protection and a dollar crash that could jeopardize continued U.S. prosperity and global stability.

Creation of the needed G-2 will thus require a considerable change in conduct, based on a basic change in mind-sets on both sides of the Atlantic. Much of the problem lies in Europe, which has largely failed to get its representational act together except for trade and competition policy. Hence, the United States has been under no compulsion to interact with a single Europe and is continually tempted to play off the individual European countries against each other. The European Union's current constitutional convention offers an opportunity that must be seized to consolidate its external representation.

But the bigger adjustment may be required on this side of the Atlantic. The United States is the only military superpower. Its economy, at least for now, is the world's strongest. Why would it want or need to share power with anyone?

The answer is simple. Precisely because of its military superiority, and the need to act by itself on some occasions in that domain, the United States will inevitably be charged with unilateralism for the foreseeable future. Those charges are particularly acute at present due to the strong differences in transatlantic views on the Arab-Israeli conflict, Iraq and even the next steps in the campaign against terrorism.

The United States should thus deliberately, and even ostentatiously, share power and proceed multilaterally in areas where doing so makes substantive sense. Economics is such an area. The United States simply cannot dominate the world economy as it does global security affairs, and Europe is its only potential partner, in terms of both economic capability and cultural compatibility.

The United States and Europe now see each other as inward-looking, highly egotistical entities. Europe views the United States as wanting to run the world with other people's money. Americans characterize Europeans as pontificating free-riders who hide behind America's willingness to exercise leadership even when that is unpopular. Both need instead to start thinking in terms of cooperating and indeed coordinating consistently, both to minimize the problems they cause each other and to provide progressive leadership for the world. They should begin implementing an informal G-2 steering committee for the world economy and start using occasions such as the Thursday summit for that purpose.

The writer is director of the Institute for International Economics.