Interstesting Article from www.stratfor.com

[dalmations202]

The United States, Europe and Bretton Woods II
October 20, 2008 | 2200 GMT


By George Friedman and Peter Zeihan

French President Nicolas Sarkozy and U.S. President George W. Bush met Oct. 18 to discuss the possibility of a global financial summit. The meeting ended with an American offer to host a global summit in December modeled on the 1944 Bretton Woods system that founded the modern economic system.
Related Special Topic Page

* Political Economy and the Financial Crisis

The Bretton Woods framework is one of the more misunderstood developments in human history. The conventional wisdom is that Bretton Woods crafted the modern international economic architecture, lashing the trading and currency systems to the gold standard to achieve global stability. To a certain degree, that is true. But the form that Bretton Woods took in the public mind is only a veneer. The real implications and meaning of Bretton Woods are a different story altogether.
Conventional Wisdom: The Depression and Bretton Woods

The origin of Bretton Woods lies in the Great Depression. As economic output dropped in the 1930s, governments worldwide adopted a swathe of protectionist, populist policies — import tariffs were particularly in vogue — that enervated international trade. In order to maintain employment, governments and firms alike encouraged ongoing production of goods even though mutual tariff walls prevented the sale of those goods abroad. As a result, prices for these goods dropped and deflation set in. Soon firms found that the prices they could reasonably charge for their goods had dropped below the costs of producing them.

The reduction in profitability led to layoffs, which reduced demand for products in general, further reducing prices. Firms went out of business en masse, workers in the millions lost their jobs, demand withered, and prices followed suit. An effort designed originally to protect jobs (the tariffs) resulted in a deep, self-reinforcing deflationary spiral, and the variety of measures adopted to combat it — the New Deal included — could not seem to right the system.

Economically, World War II was a godsend. The military effort generated demand for goods and labor. The goods part is pretty straightforward, but the labor issue is what really allowed the global economy to turn the corner. Obviously, the war effort required more workers to craft goods, whether bars of soap or aircraft carriers, but “workers” were also called upon to serve as soldiers. The war removed tens of millions of men from the labor force, shipping them off to — economically speaking — nonproductive endeavors. Sustained demand for goods combined with labor shortages raised prices, and as expectations for inflation rather than deflation set in, consumers became more willing to spend their money for fear it would be worth less in the future. The deflationary spiral was broken; supply and demand came back into balance.

Policymakers of the time realized that the prosecution of the war had suspended the depression, but few were confident that the war had actually ended the conditions that made the depression possible. So in July 1944, 730 representatives from 44 different countries converged on a small ski village in New Hampshire to cobble together a system that would prevent additional depressions and — were one to occur — come up with a means of ending it shy of depending upon a world war.

When all was said and done, the delegates agreed to a system of exchangeable currencies and broadly open rules of trade. The system would be based on the gold standard to prevent currency fluctuations, and a pair of institutions — what would become known as the International Monetary Fund (IMF) and the World Bank — would serve as guardians of the system’s financial and fiduciary particulars.

The conventional wisdom is that Bretton Woods worked for a time, but that since the entire system was linked to gold, the limited availability of gold put an upper limit on what the new system could handle. As postwar economic activity expanded — but the supply of gold did not — that problem became so mammoth that the United States abandoned the gold standard in 1971. Most point to that period as the end of the Bretton Woods system. In fact, we are still using Bretton Woods, and while nothing that has been discussed to this point is wrong exactly, it is only part of the story.
A Deeper Understanding: World War II and Bretton Woods

Think back to July 1944. The Normandy invasion was in its first month. The United Kingdom served as the staging ground, but with London exhausted, its military commitment to the operation was modest. While the tide of the war had clearly turned, there was much slogging ahead. It had become apparent that launching the invasion of Europe — much less sustaining it — was impossible without large-scale U.S. involvement. Similarly, the balance of forces on the Eastern Front radically favored the Soviets. While the particulars were, of course, open to debate, no one was so idealistic to think that after suffering at Nazi hands, the Soviets were simply going to withdraw from territory captured on their way to Berlin.

The shape of the Cold War was already beginning to unfold. Between the United States and the Soviet Union, the rest of the modern world — namely, Europe — was going to either experience Soviet occupation or become a U.S. protectorate.

At the core of that realization were twin challenges. For the Europeans, any hope they had of rebuilding was totally dependent upon U.S. willingness to remain engaged. Issues of Soviet attack aside, the war had decimated Europe, and the damage was only becoming worse with each inch of Nazi territory the Americans or Soviets conquered. The Continental states — and even the United Kingdom — were not simply economically spent and indebted but were, to be perfectly blunt, destitute. This was not World War I, where most of the fighting had occurred along a single series of trenches. This was blitzkrieg and saturation bombings, which left the Continent in ruins, and there was almost nothing left from which to rebuild. Simply avoiding mass starvation would be a challenge, and any rebuilding effort would be utterly dependent upon U.S. financing. The Europeans were willing to accept nearly whatever was on offer.

For the United States, the issue was one of seizing a historic opportunity. Historically, the United States thought of the United Kingdom and France — with their maritime traditions — as more of a threat to U.S. interests than the largely land-based Soviet Union and Germany. Even World War I did not fully dispel this concern. (Japan, for its part, was always viewed as a hostile power.) The United States entered World War II late and the war did not occur on U.S. soil. So — uniquely among all the world’s major powers of the day — U.S. infrastructure and industrial capacity would emerge from the war larger (far, far larger) than when it entered. With its traditional rivals either already greatly weakened or well on their way to being so, the United States had the opportunity to set itself up as the core of the new order.

In this, the United States faced the challenges of defending against the Soviet Union. The United States could not occupy Western Europe as it expected the Soviets to occupy Eastern Europe; it lacked the troops and was on the wrong side of the ocean. The United States had to have not just the participation of the Western Europeans in holding back the Soviet tide, it needed the Europeans to defer to American political and military demands — and to do so willingly. Considering the desperation and destitution of the Europeans, and the unprecedented and unparalleled U.S. economic strength, economic carrots were the obvious way to go.

Put another way, Bretton Woods was part of a broader American effort to extend the wartime alliance — sans the Soviets — beyond Germany’s surrender. After all wars, there is the hope that alliances that have defeated a common enemy will continue to function to administer and maintain the peace. This happened at the Congress of Vienna and Versailles as well. Bretton Woods was more than an attempt to shape the global economic system, it was an effort to grow a military alliance into a broader U.S.-led and -dominated bloc to counter the Soviets.

At Bretton Woods, the United States made itself the core of the new system, agreeing to become the trading partner of first and last resort. The United States would allow Europe near tariff-free access to its markets, and turn a blind eye to Europe’s own tariffs so long as they did not become too egregious — something that at least in part flew in the face of the Great Depression’s lessons. The sale of European goods in the United States would help Europe develop economically, and, in exchange, the United States would receive deference on political and military matters: NATO — the ultimate hedge against Soviet invasion — was born.

The “free world” alliance would not consist of a series of equal states. Instead, it would consist of the United States and everyone else. The “everyone else” included shattered European economies, their impoverished colonies, independent successor states and so on. The truth was that Bretton Woods was less a compact of equals than a framework for economic relations within an unequal alliance against the Soviet Union. The foundation of Bretton Woods was American economic power — and the American interest in strengthening the economies of the rest of the world to immunize them from communism and build the containment of the Soviet Union.

Almost immediately after the war, the United States began acting in ways that indicated that Bretton Woods was not — for itself at least — an economic program. When loans to fund Western Europe’s redevelopment failed to stimulate growth, those loans became grants, aka the Marshall Plan. Shortly thereafter, the United States — certainly to its economic loss — almost absentmindedly extended the benefits of Bretton Woods to any state involved on the American side of the Cold War, with Japan, South Korea and Taiwan signing up as its most enthusiastic participants.

And fast-forwarding to when the world went off of the gold standard and Bretton Woods supposedly died, gold was actually replaced by the U.S. dollar. Far from dying, the political/military understanding that underpinned Bretton Woods had only become more entrenched. Whereas before, the greatest limiter was on the availability of gold, now it became — and remains — the whim of the U.S. government’s monetary authorities.
Toward Bretton Woods II

For many of the states that will be attending what is already being dubbed Bretton Woods II, having this American centrality as such a key pillar of the system is the core of the problem.

The fundamental principle of Bretton Woods was national sovereignty within a framework of relationships, ultimately guaranteed not just by American political power but by American economic power. Bretton Woods was not so much a system as a reality. American economic power dwarfed the rest of the noncommunist world, and guaranteed the stability of the international financial system.

What the September financial crisis has shown is not that the basic financial system has changed, but what happens when the guarantor of the financial system itself undergoes a crisis. When the economic bubble in Japan — the world’s second-largest economy — burst in 1990-1991, it did not infect the rest of the world. Neither did the East Asian crisis in 1997, nor the ruble crisis of 1998. A crisis in France or the United Kingdom would similarly remain a local one. But a crisis in the U.S. economy becomes global. The fundamental reality of Bretton Woods remains unchanged: The U.S. economy remains the largest, and dysfunctions there affect the world. That is the reality of the international system, and that is ultimately what the French call for a new Bretton Woods is about.

There has been talk of a meeting at which the United States gives up its place as the world’s reserve currency and primacy of the economic system. That is not what this meeting will be about, and certainly not what the French are after. The use of the dollar as world reserve currency is not based on an aggrandizing fiat, but the reality that the dollar alone has a global presence and trust. The euro, after all, is only a decade old, and is not backed either by sovereign taxing powers or by a central bank with vast authority. The European Central Bank (ECB) certainly steadies the European financial system, but it is the sovereign countries that define economic policies. As we have seen in the recent crisis, the ECB actually lacks the authority to regulate Europe’s banks. Relying on a currency that is not in the hands of a sovereign taxing power, but dependent on the political will of (so far) 15 countries with very different interests, does not make for a reliable reserve currency.

The Europeans are not looking to challenge the reality of American power, they are looking to increase the degree to which the rest of the world can influence the dynamics of the American economy, with an eye toward limiting the ability of the Americans to accidentally destabilize the international financial system again. The French in particular look at the current crisis as the result of a failure in the U.S. regulatory system.

And the Europeans certainly have a point. If fault is to be pinned, it is on the United States for letting the problem grow and grow until it triggered a liquidity crisis. The Bretton Woods institutions — specifically the IMF, which is supposed to serve the role of financial lighthouse and crisis manager — proved irrelevant to the problems the world is currently passing through. Indeed, all multinational institutions failed or, more precisely, have little to do with the financial system that was operating in 2008. The 64-year-old Bretton Woods agreement simply didn’t have anything to do with the current reality.

Ultimately, the Europeans would like to see a shift in focus in the world of international economic interactions from strengthening the international trading system to controlling the international financial system. In practical terms, they want an oversight body that can guarantee that there won’t be a repeat of the current crisis. This would involve everything from regulations on accounting methods, to restrictions on what can and cannot be traded and by whom (offshore financial havens and hedge funds would definitely find their worlds circumscribed), to frameworks for global interventions. The net effect would be to create an international bureaucracy to oversee global financial markets.

Fundamentally, the Europeans are not simply hoping to modernize Bretton Woods, but instead to Europeanize the American financial markets. This is ultimately not a financial question, but a political one. The French are trying to flip Bretton Woods from a system where the United States is the buttress of the international system to a situation where the United States remains the buttress but is more constrained by the broader international system. The European view is that this will help everybody. The American position is not yet framed and won’t be until the new president is in office.

But it will be a very tough sell. For one, at its core the American problem is “simply” a liquidity freeze and one that is already thawing. Europe’s and East Asia’s recessions are bound to be deeper and longer lasting. So the United States is sure — no matter who takes over in January — to be less than keen about revamps of international processes in general. Far more important, any international system that oversees aspects of American finance would, by definition, not be under full American control, but under some sort of quasi-Brussels-like organization. And no American president is going to engage gleefully on that sort of topic.

Unless something else is on offer.

Bretton Woods was ultimately about the United States trading access to its economic might for political and military deference. The reality of American economic might remains. The question, then, is simple: What will the Europeans bring to the table with which to bargain?

[dalmations202]

2008 and the Return of the Nation-State

October 27, 2008 | 1905 GMT


By George Friedman


In 1989, the global system pivoted when the Soviet Union retreated from Eastern Europe and began the process of disintegration that culminated in its collapse. In 2001, the system pivoted again when al Qaeda attacked targets in the United States on Sept. 11, triggering a conflict that defined the international system until the summer of 2008. The pivot of 2008 turned on two dates, Aug. 7 and Oct. 11.

On Aug. 7, Georgian troops attacked the country’s breakaway region of South Ossetia. On Aug. 8, Russian troops responded by invading Georgia. The Western response was primarily rhetorical. On the weekend of Oct. 11, the G-7 met in Washington to plan a joint response to the global financial crisis. Rather than defining a joint plan, the decision — by default — was that each nation would act to save its own financial system with a series of broadly agreed upon guidelines.

The Aug. 7 and Oct. 11 events are connected only in their consequences. Each showed the weakness of international institutions and confirmed the primacy of the nation-state, or more precisely, the nation and the state. (A nation is a collection of people who share an ethnicity. A state is the entity that rules a piece of land. A nation-state — the foundation of the modern international order — is what is formed when the nation and state overlap.) Together, the two events posed challenges that overwhelmed the global significance of the Iraqi and Afghan wars.
The Conflict in Georgia

In and of itself, Russia’s attack on Georgia was not globally significant. Georgia is a small country in the Caucasus, and its fate ultimately does not affect the world. But Georgia was aligned with the United States and with Europe, and it had been seen by some as a candidate for membership in NATO. Thus, what was important about the Russian attack was that it occurred at all, and that the West did not respond to it beyond rhetoric.

Part of the problem was that the countries that could have intervened on Georgia’s behalf lacked the ability to do so. The Americans were bogged down in the Islamic world, and the Europeans had let their military forces atrophy. But even if military force had been available, it is clear that NATO, as the military expression of the Western alliance, was incapable of any unified action. There was no unified understanding of NATO’s obligation and, more importantly, no collective understanding of what a unified strategy might be.

The tension was not only between the United States and Europe, but also among the European countries. This was particularly pronounced in the different view of the situation Germany took compared to that of the United States and many other countries. Very soon after the Russo-Georgian war had ended, the Germans made clear that they opposed the expansion of NATO to Georgia and Ukraine. A major reason for this is Germany’s heavy dependence on Russian natural gas, which means Berlin cannot afford to alienate Moscow. But there was a deeper reason: Germany had been in the front line of the first Cold War and had no desire to participate in a second.

The range of European responses to Russia was fascinating. The British were livid. The French were livid but wanted to mediate. The Germans were cautious, and Chancellor Angela Merkel traveled to St. Petersburg to hold a joint press conference with Russian President Dmitri Medvedev, aligning Germany with Russia — for all practical purposes — on the Georgian and Ukrainian issues.

The single most important effect of Russia’s attack on Georgia was that it showed clearly how deeply divided — and for that matter, how weak — NATO is in general and the Europeans are in particular. Had they been united, they would not have been able to do much. But they avoided that challenge by being utterly fragmented. NATO can only work when there is a consensus, and the war revealed how far from consensus NATO was. It can’t be said that NATO collapsed after Georgia. It is still there, and NATO officials hold meetings and press conferences. But the alliance is devoid of both common purpose and resources, except in very specific and limited areas. Some Europeans are working through NATO in Afghanistan, for example, but not most, and not in a decisive fashion.

The Russo-Georgian war raised profound questions about the future of the multinational military alliance. Each member consulted its own national interest and conducted its own foreign policy. At this point, splits between the Europeans and Americans are taken for granted, but the splits among the Europeans are profound. If it was no longer possible to say that NATO functioned, it was also unclear after Aug. 8 in what sense the Europeans existed, except as individual nation-states.
The Global Financial Crisis

What was demonstrated in politico-military terms in Georgia was then demonstrated in economic terms in the financial crisis. All of the multinational systems created after World War II failed during the crisis — or more precisely, the crisis went well beyond their briefs and resources. None of the systems could cope, and many broke down. On Oct. 11, it became clear that the G-7 could cooperate, but not through unified action. On Oct. 12, when the Europeans held their eurozone summit, it became clear that they would only act as individual nations.

As with the aftermath of the Georgian war, the most significant developments after Oct. 11 happened in Europe. The European Union is first and foremost an arrangement for managing Europe’s economy. Its bureaucracy in Brussels has increased its authority and effectiveness throughout the last decade. The problem with the European Union is that it was an institution designed to manage prosperity. When it confronted serious adversity, however, it froze, devolving power to the component states.

Consider the European Central Bank (ECB), an institution created for managing the euro. Its primary charge — and only real authority — is to work to limit inflation. But limiting inflation is a problem that needs to be addressed when economies are otherwise functioning well. The financial crisis is a case where the European system is malfunctioning. The ECB was not created to deal with that. It has managed, with the agreement of member governments, to expand its function beyond inflation control, but it ultimately lacks the staff or the mindset to do all the things that other central banks were doing. To be more precise, it is a central bank without a single finance ministry to work with. Unlike other central banks, whose authority coincides with the nations they serve, the ECB serves multiple nations with multiple interests and finance ministries. By its nature, its power is limited.

In the end, power did not reside with Europe, but rather with its individual countries. It wasn’t Brussels that was implementing decisions made in Strasbourg; the centers of power were in Paris, London, Rome, Berlin and the other capitals of Europe and the world. Power devolved back to the states that governed nations. Or, to be more precise, the twin crises revealed that power had never left there.

Between the events in Georgia and the financial crisis, what we saw was the breakdown of multinational entities. This was particularly marked in Europe, in large part because the Europeans were the most invested in multilateralism and because they were in the crosshairs of both crises. The Russian resurgence affected them the most, and the fallout of the U.S. financial crisis hit them the hardest. They had to improvise the most, being multilateral but imperfectly developed, to say the least. In a sense, the Europeans were the laboratory of multilateralism and its intersection with crisis.

But it was not a European problem in the end. What we saw was a global phenomenon in which individual nations struggled to cope with the effects of the financial crisis and of Russia. Since the fall of the Soviet Union, there has been a tendency to view the world in terms of global institutions, from the United Nations to the World Trade Organization. In the summer of 2008, none of these functioned. The only things that did function effectively were national institutions.

Since 2001, the assumption has been that subnational groups like al Qaeda would define the politico-military environment. In U.S. Defense Department jargon, the assumption was that peer-to-peer conflict was no longer an issue and that it was all about small terrorist groups. The summer of 2008 demonstrated that while terrorism by subnational groups is not insignificant by any means, the dynamics of nation-states have hardly become archaic.
The Importance of the State

Clearly, the world has pivoted toward the nation-state as the prime actor and away from transnational and subnational groups. The financial crisis could be solved by monetizing the net assets of societies to correct financial imbalances. The only institution that could do that was the state, which could use its sovereign power and credibility, based on its ability to tax the economy, to underwrite the financial system.

Around the world, states did just that. They did it in very national ways. Many European states did it primarily by guaranteeing interbank loans, thereby essentially nationalizing the heart of the financial system. If states guarantee loans, the risk declines to near zero. In that case, the rationing of money through market mechanisms collapses. The state must take over rationing. This massively increases the power of the state — and raises questions about how the Europeans back out of this position.

The Americans took a different approach, less focused on interbank guarantees than on reshaping the balance sheets of financial institutions by investing in them. It was a more indirect approach and less efficient in the short run, but the Americans were more interested than the Europeans in trying to create mechanisms that would allow the state to back out of control of the financial system.

But what is most important is to see the manner in which state power surged in the summer and fall of 2008. The balance of power between business and the state, always dynamic, underwent a profound change, with the power of the state surging and the power of business contracting. Power was not in the hands of Lehman Brothers or Barclays. It was in the hands of Washington and London. At the same time, the power of the nation surged as the importance of multilateral organizations and subnational groups declined. The nation-state roared back to life after it had seemed to be drifting into irrelevance.

The year 1989 did not quite end the Cold War, but it created a world that bypassed it. The year 2001 did not end the post-Cold War world, but it overlaid it with an additional and overwhelming dynamic: that of the U.S.-jihadist war. The year 2008 did not end the U.S.-jihadist war, but it overlaid it with far more immediate and urgent issues. The financial crisis, of course, was one. The future of Russian power was another. We should point out that the importance of Russian power is this: As soon as Russia dominates the center of the Eurasian land mass, its force intrudes on Europe. Russia united with the rest of Europe is an overwhelming global force. Europe resisting Russia defines the global system. Russia fragmented opens the door for other geopolitical issues. Russia united and powerful usurps the global stage.

The year 2008 has therefore seen two things. First, and probably most important, it resurrected the nation-state and shifted the global balance between the state and business. Second, it redefined the global geopolitical system, opening the door to a resurgence of Russian power and revealing the underlying fragmentation of Europe and weaknesses of NATO.

The most important manifestation of this is Europe. In the face of Russian power, there is no united European position. In the face of the financial crisis, the Europeans coordinate, but they do not act as one. After the summer of 2008, it is no longer fair to talk about Europe as a single entity, about NATO as a fully functioning alliance, or about a world in which the nation-state is obsolete. The nation-state was the only institution that worked.

This is far more important than either of the immediate issues. The fate of Georgia is of minor consequence to the world. The financial crisis will pass into history, joining Brady bonds, the Resolution Trust Corp. and the bailout of New York City as a historical oddity. What will remain is a new international system in which the Russian question — followed by the German question — is once again at the center of things, and in which states act with confidence in shaping the economic and business environment for better or worse.

The world is a very different place from what it was in the spring of 2008. Or, to be more precise, it is a much more traditional place than many thought. It is a world of nations pursuing their own interests and collaborating where they choose. Those interests are economic, political and military, and they are part of a single fabric. The illusion of multilateralism was not put to rest — it will never die — but it was certainly put to bed. It is a world we can readily recognize from history.



This report may be forwarded or republished on your website with attribution to www.stratfor.com

[dalmations202]

The German Question
October 6, 2008 | 1934 GMT


By George Friedman

German Chancellor Angela Merkel went to St. Petersburg last week for meetings with Russian President Dmitri Medvedev. The central question on the table was Germany’s position on NATO expansion, particularly with regard to Ukraine and Georgia. Merkel made it clear at a joint press conference that Germany would oppose NATO membership for both of these countries, and that it would even oppose placing the countries on the path to membership. Since NATO operates on the basis of consensus, any member nation can effectively block any candidate from NATO membership.

The fact that Merkel and Germany have chosen this path is of great significance. Merkel acted in full knowledge of the U.S. view on the matter and is prepared to resist any American pressure that might follow. It should be remembered that Merkel might be the most pro-American politician in Germany, and perhaps its most pro-American chancellor in years. Moreover, as an East German, she has a deep unease about the Russians. Reality, however, overrode her personal inclinations. More than other countries, Germany does not want to alienate the United States. But it is in a position to face American pressure should any come.
Energy Dependence and Defense Spending

In one sense, Merkel’s reasons for her stance are simple. Germany is heavily dependent on Russian natural gas. If the supply were cut off, Germany’s situation would be desperate — or at least close enough that the distinction would be academic. Russia might decide it could not afford to cut off natural gas exports, but Merkel is dealing with a fundamental German interest, and risking that for Ukrainian or Georgian membership in NATO is not something she is prepared to do.

She can’t bank on Russian caution in a matter such as this, particularly when the Russians seem to be in an incautious mood. Germany is, of course, looking to alternative sources of energy for the future, and in five years its dependence on Russia might not be nearly as significant. But five years is a long time to hold your breath, and Germany can’t do it.

The German move is not just about natural gas, however. Germany views the U.S. obsession with NATO expansion as simply not in Germany’s interests.

First, expanding NATO guarantees to Ukraine and Georgia is meaningless. NATO and the United States don’t have the military means to protect Ukraine or Georgia, and incorporating them into the alliance would not increase European security. From a military standpoint, NATO membership for the two former Soviet republics is an empty gesture, while from a political standpoint, Berlin sees it as designed to irritate the Russians for no clear purpose.

Next, were NATO prepared to protect Ukraine and Georgia, all NATO countries including Germany would be forced to increase defense expenditures substantially. This is not something that Germany and the rest of NATO want to do.

Finally, and perhaps most importantly, Germany spent 1945-1992 being the potential prime battleground of the Cold War. It spent 1992-2008 not being the potential prime battleground. Germany prefers the latter, and it does not intend to be drawn into a new Cold War under any circumstances. This has profound implications for the future of both NATO and U.S.-German relations.

Germany is thus in the midst of a strategic crisis in which it must make some fundamental decisions. To understand the decisions Germany has to make, we need to understand the country’s geopolitical problem and the decisions it has made in the past.
The German Geopolitical Problem

Until 1871, Germany was fragmented into dozens of small states — kingdoms, duchies, principalities, etc. — comprising the remnants of the Holy Roman Empire. The German-speaking world was torn apart by internal tensions and the constant manipulation of foreign powers.

The southeastern part of the German-speaking world, Austria, was the center of the multinational Hapsburg Empire. It was Roman Catholic and was continually intruding into the predominantly Catholic regions of the rest of Germany, particularly Bavaria. The French were constantly poaching in the Rhineland and manipulating the balance of power among the German states. Russia was always looming to the east, where it bordered the major Protestant German power, Prussia. (Poland at the time was divided among Prussia, Russia and Austria-Hungary.) Germany was perpetually the victim of great powers, a condition which Prussia spent the roughly half-century between Waterloo and German unification trying to correct.

To unify Germany, Prussia had to do more than dominate the Germans. It had to fight two wars. The first was in 1866 with the Hapsburg Empire, which Prussia defeated in seven weeks, ending Hapsburg influence in Germany and ultimately reducing Austria-Hungary to Germany’s junior partner. The second war was in 1870-1871, when Prussia led a German coalition that defeated France. That defeat ended French influence in the Rhineland and gave Prussia the space in which to create a modern, unified Germany. Russia, which was pleased to see both Austria-Hungary and France defeated and viewed a united Germany as a buffer against another French invasion, did not try to block unification.

German unification changed the dynamic of Europe. First, it created a large nation in the heart of Europe between France and Russia. United, Germany was economically dynamic, and its growth outstripped that of France and the United Kingdom. Moreover, it became a naval power, developing a substantial force that at some point could challenge British naval hegemony. It became a major exporting power, taking markets from Britain and France. And in looking around for room to maneuver, Germany began looking east toward Russia. In short, Germany was more than a nation — it was a geopolitical problem.

Germany’s strategic problem was that if the French and Russians attacked Germany simultaneously, with Britain blockading its ports, Germany would lose and revert to its pre-1871 chaos. Given French, Russian and British interest in shattering Germany, Germany had to assume that such an attack would come. Therefore, since the Germans could not fight on two fronts simultaneously, they needed to fight a war pre-emptively, attacking France or Russia first, defeating it and then turning their full strength on the other — all before Britain’s naval blockade could begin to hurt. Germany’s only defense was a two-stage offense that was as complex as a ballet, and would be catastrophic if it failed.

In World War I, executing the Schlieffen Plan, the Germans attacked France first while trying to simply block the Russians. The plan was to first occupy the channel coast and Paris before the United Kingdom could get into the game and before Russia could fully mobilize, and then to knock out Russia. The plan failed in 1914 at the First Battle of the Marne, and rather than lightning victory, Germany got bogged down in a multifront war costing millions of lives and lasting years. Even so, Germany almost won the war of attrition, causing the United States to intervene and deprive Berlin of victory.

In World War II, the Germans had learned their lesson, so instead of trying to pin down Russia, they entered into a treaty with the Soviets. This secured Germany’s rear by dividing Poland with the Soviet Union. The Soviets agreed to the treaty, expecting Adolf Hitler’s forces to attack France and bog down as Germany had in World War I. The Soviets would then roll West after the bloodletting had drained the rest of Europe. The Germans stunned the Russians by defeating France in six weeks and then turning on the Russians. The Russian front turned into an endless bloodletting, and once again the Americans helped deliver the final blow.

The consequence of the war was the division of Germany into three parts — an independent Austria, a Western-occupied West Germany and a Soviet-occupied East Germany. West Germany again faced the Russian problem. Its eastern part was occupied, and West Germany could not possibly defend itself on its own. It found itself integrated into an American-dominated alliance system, NATO, which was designed to block the Soviets. West and East Germany would serve as the primary battleground of any Soviet attack, with Soviet armor facing U.S. armor, airpower and tactical nuclear weapons. For the Germans, the Cold War was probably more dangerous than either of the previous wars. Whatever the war’s outcome, Germany stood a pretty good chance of being annihilated if it took place.

On the upside, the Cold War did settle Franco-German tensions, which were half of Germany’s strategic problem. Indeed, one of the by-products of the Cold War was the emergence of the European Community, which ultimately became the European Union. This saw German economic union and integration with France, which along with NATO’s military integration guaranteed economic growth and the end of any military threat to Germany from the west. For the first time in centuries, the Rhine was not at risk. Germany’s south was secure, and once the Soviet Union collapsed, there was no threat from the east, either.
United and Secure at Last?

For the first time in centuries, Germany was both united and militarily secure. But underneath it all, the Germans retained their primordial fear of being caught between France and Russia. Berlin understood that this was far from a mature reality; it was no more than a theoretical problem at the moment. But the Germans also understand how quickly things can change. On one level, the problem was nothing more than the economic emphasis of the European Union compared to the geopolitical focus of Russia. But on a deeper level, Germany was, as always, caught between the potentially competing demands of Russia and the West. Even if the problem were small now, there were no guarantees that it wouldn’t grow.

This was the context in which Germany viewed the Russo-Georgian war in August. Berlin saw not only the United States moving toward a hostile relationship with Russia, but also the United Kingdom and France going down the same path.

French President Nicolas Sarkozy, who happened to hold the rotating EU presidency at the time, went to Moscow to negotiate a cease-fire on behalf of the European Union. When the Russians seemed unwilling to comply with the terms negotiated, France became highly critical of Russia and inclined to back some sort of sanctions at the EU summit on Georgia. With the United Kingdom being even more adamant, Germany saw a worst-case scenario looming on the distant horizon: It understood that the pleasant security of the post-Cold War world was at an end, and that it had to craft a new national strategy.

From Germany’s point of view, the re-emergence of Russian influence in the former Soviet Union might be something that could have been blocked in the 1990s, but by 2008, it had become inevitable. The Germans saw that economic relations in the former Soviet Union — and not only energy issues — created a complementary relationship between Russia and its former empire. Between natural affinities and Russian power, a Russian sphere of influence, if not a formal structure, was inevitable. It was an emerging reality that could not be reversed.

France has Poland and Germany between itself and Russia. Britain has that plus the English Channel, and the United States has all that plus the Atlantic Ocean. The farther away from Russia one is, the more comfortable one can be challenging Moscow. But Germany has only Poland as a buffer. For any nation serious about resisting Russian power, the first question is how to assure the security of the Baltic countries, a long-vulnerable salient running north from Poland. The answer would be to station NATO forces in the Baltics and in Poland, and Berlin understood that Germany would be both the logistical base for these forces as well as the likely source of troops. But Germany’s appetite for sending troops to Poland and the Baltics has been satiated. This was not a course Germany wanted to take.
Pondering German History

We suspect that Merkel knew something else; namely, that all the comfortable assumptions about what was possible and impossible — that the Russians wouldn’t dare attack the Baltics — are dubious in the extreme. Nothing in German history would convince any reasonable German that military action to achieve national ends is unthinkable. Nor are the Germans prepared to dismiss the re-emergence of Russian military power. The Germans had been economically and militarily shattered in 1932. By 1938, they were the major power in Europe. As long as their officer corps and technological knowledge base were intact, regeneration could move swiftly.

The Soviet Union collapsed in 1991 and its military power crumbled. But as was the case in Weimar Germany, the Russian officer corps remained relatively intact and the KGB, the heart of the Soviet state, remained intact if renamed. So did the technological base that made the Soviets a global power. As with Germany after both world wars, Russia was in chaos, but its fragments remained, awaiting reconstruction. The Germans were not about to dismiss Russia’s ability to regenerate — they know their own history too well to do that.

If Germany were to join those who call for NATO expansion, the first step toward a confrontation with Russia would have been taken. The second step would be guaranteeing the security of the Baltics and Poland. America would make the speeches, and Germans would man the line. After spending most of the last century fighting or preparing to fight the Russians, the Germans looked around at the condition of their allies and opted out.

The Germans see their economic commitment as being to the European Union. That binds them to the French, and this is not a bond they can or want to break. But the European Union carries no political or military force in relation to the Russians. Beyond economics, it is a debating society. NATO, as an institution built to resist the Russians, is in an advanced state of decay. To resurrect it, the Germans would have to pay a steep economic price. And if they paid that price, they would be carrying much of the strategic risk.

So while Germany remains committed to its economic relationship with the West, it does not intend to enter into a military commitment against the Russians at this time. If the Americans want to send troops to protect the Baltics and Poland, they are welcome to do so. Germany has no objection — nor do they object to a French or British presence there. Indeed, once such forces were committed, Germany might reconsider its position. But since military deployments in significant numbers are unlikely anytime soon, the Germans view grand U.S. statements about expanded NATO membership as mere bravado by a Washington that is prepared to risk little.
NATO After the German Shift

Therefore, Merkel went to St. Petersburg and told the Russians that Germany does not favor NATO expansion. More than that, the Germans at least implicitly told the Russians that they have a free hand in the former Soviet Union as far as Germany is concerned — an assertion that cost Berlin nothing, since the Russians do enjoy a free hand there. But even more critically, Merkel signaled to the Russians and the West that Germany does not intend to be trapped between Western ambitions and Russian power this time. It does not want to recreate the situation of the two world wars or the Cold War, so Berlin will stay close to France economically and also will accommodate the Russians.

The Germans will thus block NATO’s ambitions, something that represents a dramatic shift in the Western alliance. This shift in fact has been unfolding for quite a while, but it took the Russo-Georgian war to reveal the change.

NATO has no real military power to project to the east, and none can be created without a major German effort, which is not forthcoming. The German shift leaves the Baltic countries exposed and extremely worried, as they should be. It also leaves the Poles in their traditional position of counting on countries far away to guarantee their national security. In 1939, Warsaw counted on the British and French; today, Warsaw depends on the United States. As in 1939, these guarantees are tenuous, but they are all the Poles have.

The United States has the option of placing a nuclear umbrella over the Baltics and Eastern Europe, which would guarantee a nuclear strike on Russia in the event of an attack in either place. While this was the guarantee made to Western Europe in the Cold War, it is unlikely that the United States is prepared for global thermonuclear war over Estonia’s fate. Such a U.S. guarantee to the Baltics and Eastern Europe simply would not represent a credible threat.

The other U.S. option is a major insertion of American forces either by sea through Danish waters or via French and German ports and railways, assuming France or Germany would permit their facilities to be used for such a deployment. But this option is academic at the moment. The United States could not deploy more than symbolic forces even if it wanted to. For the moment, NATO is therefore an entity that issues proclamations, not a functioning military alliance, in spite of (or perhaps because of) deployments in Afghanistan.

Everything in German history has led to this moment. The country is united and wants to be secure. It will not play the role it was forced into during the Cold War, nor will it play geopolitical poker as it did in the first and second world wars. And that means NATO is permanently and profoundly broken. The German question now turns into the Russian question: If Germany is out of the game, what is to be done about Russia?


This report may be forwarded or republished on your website with attribution to www.stratfor.com

[alexamenos]

thanks dal....stratfor was always a place I went for good reading on the Iraq thing, Friedman is an astute analyst. Never thought of getting his take on the current economic thing.

[dalmations202]

Obama’s Challenge
November 5, 2008 | 1802 GMT

By George Friedman
* The 2008 U.S. Presidential Race

Barack Obama has been elected president of the United States by a large majority in the Electoral College. The Democrats have dramatically increased their control of Congress, increasing the number of seats they hold in the House of Representatives and moving close to the point where — with a few Republican defections — they can have veto-proof control of the Senate. Given the age of some Supreme Court justices, Obama might well have the opportunity to appoint at least one and possibly two new justices. He will begin as one of the most powerful presidents in a long while.

Truly extraordinary were the celebrations held around the world upon Obama’s victory. They affirm the global expectations Obama has raised — and reveal that the United States must be more important to Europeans than the latter like to admit. (We can’t imagine late-night vigils in the United States over a French election.)

Obama is an extraordinary rhetorician, and as Aristotle pointed out, rhetoric is one of the foundations of political power. Rhetoric has raised him to the presidency, along with the tremendous unpopularity of his predecessor and a financial crisis that took a tied campaign and gave Obama a lead he carefully nurtured to victory. So, as with all politicians, his victory was a matter of rhetoric and, according to Machiavelli, luck. Obama had both, but now the question is whether he has Machiavelli’s virtue in full by possessing the ability to exercise power. This last element is what governing is about, and is what will determine if his presidency succeeds.

Embedded in his tremendous victory is a single weakness: Obama won the popular vote by a fairly narrow margin, about 52 percent of the vote. That means that almost as many people voted against him as voted for him.
Obama’s Agenda vs. Expanding His Base

U.S. President George W. Bush demonstrated that the inability to understand the uses and limits of power can crush a presidency very quickly. The enormous enthusiasm of Obama’s followers could conceal how he — like Bush — is governing a deeply, and nearly evenly, divided country. Obama’s first test will be simple: Can he maintain the devotion of his followers while increasing his political base? Or will he believe, as Bush and Cheney did, that he can govern without concern for the other half of the country because he controls the presidency and Congress, as Bush and Cheney did in 2001? Presidents are elected by electoral votes, but they govern through having public support.

Obama and his supporters will say there is no danger of a repeat of Bush — who believed he could carry out his agenda and build his political base at the same time, but couldn’t. Building a political base requires modifying one’s agenda. But when you start modifying your agenda, when you become pragmatic, you start to lose your supporters. If Obama had won with 60 percent of the popular vote, this would not be as pressing a question. But he barely won by more than Bush in 2004. Now, we will find out if Obama is as skillful a president as he was a candidate.

Obama will soon face the problem of beginning to disappoint people all over the world, a problem built into his job. The first disappointments will be minor. There are thousands of people hoping for appointments, some to Cabinet positions, others to the White House, others to federal agencies. Many will get something, but few will get as much as they hoped for. Some will feel betrayed and become bitter. During the transition process, the disappointed office seeker — an institution in American politics — will start leaking on background to whatever reporters are available. This will strike a small, discordant note; creating no serious problems, but serving as a harbinger of things to come.

Later, Obama will be sworn in. He will give a memorable, perhaps historic speech at his inauguration. There will be great expectations about him in the country and around the world. He will enjoy the traditional presidential honeymoon, during which all but his bitterest enemies will give him the benefit of the doubt. The press initially will adore him, but will begin writing stories about all the positions he hasn’t filled, the mistakes he made in the vetting process and so on. And then, sometime in March or April, things will get interesting.
Iran and a U.S. Withdrawal From Iraq

Obama has promised to withdraw U.S. forces from Iraq, where he does not intend to leave any residual force. If he follows that course, he will open the door for the Iranians. Iran’s primary national security interest is containing or dominating Iraq, with which Iran fought a long war. If the United States remains in Iraq, the Iranians will be forced to accept a neutral government in Iraq. A U.S. withdrawal will pave the way for the Iranians to use Iraqi proxies to create, at a minimum, an Iraqi government more heavily influenced by Iran.

Apart from upsetting Sunni and Kurdish allies of the United States in Iraq, the Iranian ascendancy in Iraq will disturb some major American allies — particularly the Saudis, who fear Iranian power. The United States can’t afford a scenario under which Iranian power is projected into the Saudi oil fields. While that might be an unlikely scenario, it carries catastrophic consequences. The Jordanians and possibly the Turks, also American allies, will pressure Obama not simply to withdraw. And, of course, the Israelis will want the United States to remain in place to block Iranian expansion. Resisting a coalition of Saudis and Israelis will not be easy.

This will be the point where Obama’s pledge to talk to the Iranians will become crucial. If he simply withdraws from Iraq without a solid understanding with Iran, the entire American coalition in the region will come apart. Obama has pledged to build coalitions, something that will be difficult in the Middle East if he withdraws from Iraq without ironclad Iranian guarantees. He therefore will talk to the Iranians. But what can Obama offer the Iranians that would induce them to forego their primary national security interest? It is difficult to imagine a U.S.-Iranian deal that is both mutually beneficial and enforceable.

Obama will then be forced to make a decision. He can withdraw from Iraq and suffer the geopolitical consequences while coming under fire from the substantial political right in the United States that he needs at least in part to bring into his coalition. Or, he can retain some force in Iraq, thereby disappointing his supporters. If he is clumsy, he could wind up under attack from the right for negotiating with the Iranians and from his own supporters for not withdrawing all U.S. forces from Iraq. His skills in foreign policy and domestic politics will be tested on this core question, and he undoubtedly will disappoint many.
The Afghan Dilemma

Obama will need to address Afghanistan next. He has said that this is the real war, and that he will ask U.S. allies to join him in the effort. This means he will go to the Europeans and NATO, as he has said he will do. The Europeans are delighted with Obama’s victory because they feel Obama will consult them and stop making demands of them. But demands are precisely what he will bring the Europeans. In particular, he will want the Europeans to provide more forces for Afghanistan.

Many European countries will be inclined to provide some support, if for no other reason than to show that they are prepared to work with Obama. But European public opinion is not about to support a major deployment in Afghanistan, and the Europeans don’t have the force to deploy there anyway. In fact, as the global financial crisis begins to have a more dire impact in Europe than in United States, many of these countries are actively reducing their deployments in Afghanistan to save money. Expanding operations is the last thing on European minds.

Obama’s Afghan solution of building a coalition centered on the Europeans will thus meet a divided Europe with little inclination to send troops and with few troops to send in any event. That will force him into a confrontation with the Europeans in spring 2009, and then into a decision. The United States and its allies collectively lack the force to stabilize Afghanistan and defeat the Taliban. They certainly lack the force to make a significant move into Pakistan — something Obama has floated on several occasions that might be a good idea if force were in fact available.

He will have to make a hard decision on Afghanistan. Obama can continue the war as it is currently being fought, without hope of anything but a long holding action, but this risks defining his presidency around a hopeless war. He can choose to withdraw, in effect reinstating the Taliban, going back on his commitment and drawing heavy fire from the right. Or he can do what we have suggested is the inevitable outcome, namely, negotiate — and reach a political accord — with the Taliban. Unlike Bush, however, withdrawal or negotiation with the Taliban will increase the pressure on Obama from the right. And if this is coupled with a decision to delay withdrawal from Iraq, Obama’s own supporters will become restive. His 52 percent Election Day support could deteriorate with remarkable speed.
The Russian Question

At the same time, Obama will face the Russian question. The morning after Obama’s election, Russian President Dimitri Medvedev announced that Russia was deploying missiles in its European exclave of Kaliningrad in response to the U.S. deployment of ballistic missile defense systems in Poland. Obama opposed the Russians on their August intervention in Georgia, but he has never enunciated a clear Russia policy. We expect Ukraine will have shifted its political alignment toward Russia, and Moscow will be rapidly moving to create a sphere of influence before Obama can bring his attention — and U.S. power — to bear.

Obama will again turn to the Europeans to create a coalition to resist the Russians. But the Europeans will again be divided. The Germans can’t afford to alienate the Russians because of German energy dependence on Russia and because Germany does not want to fight another Cold War. The British and French may be more inclined to address the question, but certainly not to the point of resurrecting NATO as a major military force. The Russians will be prepared to talk, and will want to talk a great deal, all the while pursuing their own national interest of increasing their power in what they call their “near abroad.”

Obama will have many options on domestic policy given his majorities in Congress. But his Achilles’ heel, as it was for Bush and for many presidents, will be foreign policy. He has made what appear to be three guarantees. First, he will withdraw from Iraq. Second, he will focus on Afghanistan. Third, he will oppose Russian expansionism. To deliver on the first promise, he must deal with the Iranians. To deliver on the second, he must deal with the Taliban. To deliver on the third, he must deal with the Europeans.
Global Finance and the European Problem

The Europeans will pose another critical problem, as they want a second Bretton Woods agreement. Some European states appear to desire a set of international regulations for the financial system. There are three problems with this.

First, unless Obama wants to change course dramatically, the U.S. and European positions differ over the degree to which governments will regulate interbank transactions. The Europeans want much more intrusion than the Americans. They are far less averse to direct government controls than the Americans have been. Obama has the power to shift American policy, but doing that will make it harder to expand his base.

Second, the creation of an international regulatory body that has authority over American banks would create a system where U.S. financial management was subordinated to European financial management.

And third, the Europeans themselves have no common understanding of things. Obama could thus quickly be drawn into complex EU policy issues that could tie his hands in the United States. These could quickly turn into painful negotiations, in which Obama’s allure to the Europeans will evaporate.

One of the foundations of Obama’s foreign policy — and one of the reasons the Europeans have celebrated his election — was the perception that Obama is prepared to work closely with the Europeans. He is in fact prepared to do so, but his problem will be the same one Bush had: The Europeans are in no position to give the things that Obama will need from them — namely, troops, a revived NATO to confront the Russians and a global financial system that doesn’t subordinate American financial authority to an international bureaucracy.
The Hard Road Ahead

Like any politician, Obama will face the challenge of having made a set of promises that are not mutually supportive. Much of his challenge boils down to problems that he needs to solve and that he wants European help on, but that the Europeans are not prepared to provide the type and amount of help he needs. This, plus the fact that a U.S. withdrawal from Iraq requires an agreement with Iran — something hard to imagine without a continued U.S. presence in Iraq — gives Obama a difficult road to move on.

As with all American presidents (who face midterm elections with astonishing speed), Obama’s foreign policy moves will be framed by his political support. Institutionally, he will be powerful. In terms of popular support, he begins knowing that almost half the country voted against him, and that he must increase his base. He must exploit the honeymoon period, when his support will expand, to bring another 5 percent or 10 percent of the public into his coalition. These people voted against him; now he needs to convince them to support him. But these are precisely the people who would regard talks with the Taliban or Iran with deep distrust. And if negotiations with the Iranians cause him to keep forces in Iraq, he will alienate his base without necessarily winning over his opponents.

And there is always the unknown. There could be a terrorist attack, the Russians could start pressuring the Baltic states, the Mexican situation could deteriorate. The unknown by definition cannot be anticipated. And many foreign leaders know it takes an administration months to settle in, something some will try to take advantage of. On top of that, there is now nearly a three-month window in which the old president is not yet out and the new president not yet in.

Obama must deal with extraordinarily difficult foreign policy issues in the context of an alliance failing not because of rough behavior among friends but because the allies’ interests have diverged. He must deal with this in the context of foreign policy positions difficult to sustain and reconcile, all against the backdrop of almost half an electorate that voted against him versus supporters who have enormous hopes vested in him. Obama knows all of this, of course, as he indicated in his victory speech.

We will now find out if Obama understands the exercise of political power as well as he understands the pursuit of that power. You really can’t know that until after the fact. There is no reason to think he can’t finesse these problems. Doing so will take cunning, trickery and the ability to make his supporters forget the promises he made while keeping their support. It will also require the ability to make some of his opponents embrace him despite the path he will have to take. In other words, he will have to be cunning and ruthless without appearing to be cunning and ruthless. That’s what successful presidents do.

In the meantime, he should enjoy the transition. It’s frequently the best part of a presidency.