Hope Fades for Reversing Trans-Atlantic Drift

On the banks of the Rhine and in Prague, NATO and the European Union will pay homage to the new American president in early April. There will be pretty pictures and lofty speeches on the future of the trans-Atlantic relationship - in other words, business as usual.

But prior to the Strasbourg and Prague summits, trans-Atlantic relations will be put to the test at the G-20 summit in London. US President Barack Obama's election was meant to improve everything - or so it was hoped. The drift in trans-Atlantic relations during the eight years of George W. Bush's presidency was meant to be stopped - and even reversed. That hope is fading, as the global economic crisis brings the differences between America and Europe to a head.

Of course, at the end of the London summit, the assembled leaders will agree on a joint statement, because nobody can afford failure. But differences will remain. The United States wants to resolve the global crisis by providing substantially more financial help, which Europe is refusing to commit, preferring to focus on financial regulatory reform. In the end, a formulaic compromise will be found to include both in the statement.

The media will then praise their respective governments' "courage" and "assertiveness," and cast the outcome as "win on points." But what will fall by the wayside is a forceful global response to the gravest crisis since 1929. For that battle, there is still no leadership in sight.

The main reason for the new dose of trans-Atlantic drift is that the crisis is being experienced differently. America fears deflation; Europe - driven by its largest economy, Germany - fears national debt and inflation.

The US has made a complete U-turn in ideological and practical terms, relying on Keynes and massive debt-financed public demand to rein in further economic decline. But Europeans, while having launched national recovery plans, remain unwilling to take on a similar debt risk. Moreover, the European welfare state will cushion the impact of the economic crash, at least for some time.

But political tactics also play a role. Obama has just been elected for four years, and his political fate depends on whether he can engineer an economic recovery. Any hesitation could have profound and irreparable consequences for him. In Europe, however, leaders face very different imperatives.

British Prime Minister Gordon Brown is in a hopeless situation. The economic crash in the United Kingdom is at least as severe as in America, forcing the government to rely almost entirely on deficit spending to prevent a complete meltdown of its financial system. Brown has few options left, and the UK is nowhere near the worst of the crisis. Only a miracle can save him.

Brown's fate has far-reaching effects for both Germany and France, because it is seen as the writing on the wall. German Chancellor Angela Merkel and French President Nicolas Sarkozy don't want to gamble away their own political futures. Merkel will play the central role in deciding how Europe positions itself, not only because she is the leader of the EU's largest economy, but also because she wants to be re-elected in September.

The outcome of that election is increasingly uncertain, and Merkel is now in a very uncomfortable position, which could grow into a real predicament. If Merkel opts for substantial deficit spending now, she will lose support, which is already fading fast because of increased state debt, nationalization, stimulus programs, and so forth. But if unemployment shoots up in the early summer and some household-name companies go under, she could be seen as having done too little, allowing the Social Democrats to grab the election.

It remains to be seen whether the outcome will be decided on the basis of unemployment or state debt. But Merkel will do whatever she can to avoid committing herself prematurely, and the London summit is much too early.

This kind of legitimate and yet petty-minded thinking has serious international consequences. The quarrel between Europe and America is blocking concerted action by the two main Western economies, thereby weakening the West as a whole. Moreover, it is driving the US away from Europe and further in the direction of China. This will undermine the trans-Atlantic relationship even more, enhance China's role in the global handling of the crisis, and in all probability ensure that the Chinese emerge as its biggest winner.

The world will have changed once the global economic crisis is over, and the Europeans will not be able to complain about it then. The world will be more Pacific and less trans-Atlantic, and the new axis of global politics will be formed by the Sino-American tandem.

Secretly, the hope in Berlin, Paris, and other European capitals appears to be that Obama will still sort things out. If he succeeds as a super Keynes, no one will have had to take any risks with their own political future. If he fails, well, thank God one wasn't involved.

Both stances are equally dangerous as far as Europe's vital interests are concerned. If Europe sees its role in this crisis - which might yet turn into a full-blown depression - as that of a free-rider, it will be treated accordingly in the future.