Thinking Global

America’s friends around the globe are watching the presidential elections with a mixture of horror and hope. They are dismayed by the expense, the duration and the self-indulgence of an election campaign that does more to entertain and polarize Americans than to enlighten and galvanize them. Despite that, they hope the U.S. once again will confound its critics and produce the leadership and political will to confront a historic pivot point that is as crucial as World War Two’s immediate aftermath.

It is obvious to me, after recent trips to the Middle East and Europe, that despite all the talk about America’s decline, the world’s thought leaders consider the U.S. vote in November to be of great global significance – even though much of that was absent from President Obama and Governor Romney’s first debate last week.

This significance stems partly from the backlog of crucial issues that is growing too large for any U.S. President to easily manage. More important, however, the election coincides with generational shifts – geopolitical, geo-economic, technological and societal – that add up to the biggest change in political and economic influence and power since the revolutions of the 18th century, which produced America’s rise in the first place.

American debt has reached perilous proportions at a time when the ongoing euro zone crisis could turn even nastier. Meanwhile, the threat of violent conflict spreads. In the Middle East alone, America’s commander in chief must confront Iran’s nuclear proliferation, carnage in Syria and the fragility of new democracies in Egypt, Libya and Tunisia.

Both candidates favor U.S. troop withdrawals from Afghanistan by 2014, but both sweep this issue under the rug for now. Neither has a plan to address the inevitable power vacuum and instability that will result amid the already furious jockeying of the neighboring Iran, China, India and Pakistan.

For all the urgency of those issues, however, what gives this election its historic importance is that Americans will be electing a president who must define their nation’s place in a dramatically changing world. The landscape is driven by factors such as the rapid rise of new powers (in particular, China); individual empowerment – for everyone from terrorists to scientists – of a sort the world has never seen; a growing demand for finite resources like energy, water and food; and demographic shifts that may leave aging societies behind and create ever larger and less manageable megacities.

It was with some hope that the world watched the first presidential debate last week, a refreshing marker in an otherwise desultory campaign. The debate was unusually substantive on economic issues, but it fell far short of addressing the magnitude of the historic moment.

Governor Mitt Romney came closest to referring to such a moment in his closing statement, saying:

I know this is bigger than an election about the two of us as individuals. It’s bigger than our respective parties. It’s an election about the course of America. What kind of America do you want to have for yourself and your children.

Even more compelling had been former Secretary of State Condoleezza Rice’s speech at the Republican National Convention in Tampa, which has not received the attention it deserves. It captured the urgent need for stronger U.S. leadership and weighed it against the desire of U.S. voters to shed their global burdens following long conflicts in Afghanistan and Iraq:

And I too know there is a weariness…a sense that we have carried these burdens long enough. But if we are not inspired to lead again, one of two things will happen – no one will lead and that will foster chaos – or others who do not share our values will fill the vacuum.

The president who serves for the next four years will lead as the combined national products of Europe and the United States fall below that of the emerging world. This era will require a different sort of American leadership, one with a deeper and more determined engagement than has been the Obama administration’s preference, but also one that must go far beyond the nostalgia for an unrecoverable past. Governor Romney referred to these roots of history in a major foreign policy address to the Virginia Military Institute this week. In his speech, Romney understands the need for American leadership, but his thinking is rooted in the past. Recalling the period after World War Two, when America contributed to the rebuilding of Europe, Romney said:

Statesmen like [General George] Marshall rallied our nation to rise to its responsibilities as the leader of the free world. We helped our friends to build and sustain free societies and free markets. We defended our friends and ourselves from our common enemies. We led. We led.

The world still needs and wants American leadership, but of a different, less dominant and more sophisticated variety. In this post-Western world, U.S. leadership will mean not only dealing more effectively with close and trusted friends to preserve a global system shaped by the right values, but at the same time, working more effectively with countries that don’t share our values. We must strive with them to establish common interests.

If the U.S. fails to lead, the outcome is not likely to be its replacement by a similarly well-intentioned power or group of powers, but probably a dangerous power vacuum of uncertain consequences. For the foreseeable future it will be the United States acting, not unilaterally, but rather as the only possible “pivotal power” around which positive historic change can galvanize.

The question is not whether America can pass the global baton, but whether it will be dropped, because for the moment there is no one to pick it up.

Editor’s note: This column has been updated to include a sentence dropped in the original editing process.

PHOTO: Supporters cheer while U.S. Republican presidential nominee Mitt Romney speaks at a campaign rally in Fishersville, Virginia October 4, 2012. REUTERS/Brian Snyder

Abu Dhabi – The United Arab Emirates has always been a good place to watch shifting geopolitical sands. From its days as a pearl-rich, British protectorate in the 19th century to its oil-rich reality today, assured by a robust U.S. defense presence, the region has had many backgrounds.

Now leaders throughout the monarchical states of the Middle East Gulf are bracing for the sandstorm of what they fear may be a “post-Western era.” That is, potentially decades to come of regional upheavals and realignment shaped by reduced U.S. engagement, a dysfunctional Europe and the influence of less-enlightened state actors and emboldened extremist groups.

The past week’s wave of anti-American rage across the Middle East and North Africa has sharpened the reality that the region is facing an escalating double threat: that of a nuclear-charged, expansionist Shiite Iran and the spread of Sunni, jihadist extremism from Somalia to Syria and from Cairo to Benghazi. Particularly troubling are the death of the U.S. ambassador in Libya and the torching of an American-run school in Tunisia. The events took place in two countries where Arab Spring hopes have burned brightest, where U.S. and European engagement has been welcome and where democratic change has been most promising.

The mob violence that followed the circulation of an amateur film negatively portraying the Islamic prophet Mohammad, coinciding with the 11th anniversary of the attacks on the World Trade Center, is likely to reduce rather than increase the American public’s appetite to engage more deeply in the Middle East. American voters are weary of war, worried about the economy and becoming less dependent on Middle East energy thanks to the expanding natural shale gas exploration in the U.S.

The past week’s events will at the same time dramatically complicate consideration of more concerted Turkish-Arab-U.S. efforts to counter Syrian leader Bashar al-Assad and end a gruesome civil war that has already claimed 30,000 lives.

Gulf officials, who spoke to me under agreement of anonymity, must feel a sense of empty vindication now, after warning the Obama administration that it had been too quick to abandon Egyptian leader Hosni Mubarak and too slow to recognize the dangers of what forces or disorder might replace him. Stage two of the year-and-a-half-old Arab Awakening has begun. Although stage one, in their view, was driven primarily by idealistic youth and ordinary citizens, stage two risks being hijacked by more nefarious forces and political operatives aligned with the Muslim Brotherhood and its allies.

In a region that thrives on conspiracy, moderate Arabs believe U.S. and European leaders may be accommodating to the rise of Islamist parties and to the emergence of a nuclear Iran, leaving them all the more isolated and vulnerable. If the costs of preventing Iranian nuclear weapons appear too great, the fear is that the U.S. may gradually shift to a containment strategy with Iran. This may seem fine 6,300 miles away in Washington, but not 25 miles across the Strait of Hormuz. Such concerns in the region have been fueled further by the Obama administration’s much-publicized “pivot to Asia” and the shift of defense resources that would involve.

On the face of it, it would seem that the Gulf, and particularly the UAE, would have little reason to question Obama’s commitments. U.S. airpower and anti-missile defenses have been significantly increased in recent months. A second carrier group has arrived in the Gulf alongside considerable increases in arms sales, special forces deployments and four more minesweepers. The worry is less about the present and more about Washington’s ability to exercise influence around the region in non-kinetic ways.

What is still missing from the Middle East perspective is a coherent, updated U.S. strategy for the region that clearly defines and defends American interests in a new context. This admittedly probably will not happen until after the November elections, but many fear it may not come even then. Yet the urgency for such a strategy is clear at a time when people in the Middle East worry not just about Syria’s future but also about the stability of fellow hereditary monarchies Saudi Arabia and Jordan.

First, Gulf state leaders are warning their U.S. counterparts that a Middle Eastern nuclear arms race, triggered by an Iranian breakout, would be far more perilous than the U.S.-Soviet standoff of the Cold War. That, they argue, is because the Cold War was fought by rational actors — stable governments operating under a set of rules that created a twisted state of certainty. It is hard to imagine such a negotiated, long-lasting standoff emerging among Israel, Iran, the Gulf and others as nuclear weapons proliferate.

Second, leaders caution that the retreat of moderate Islamic states will reduce the number of U.S. allies in the fight against terror, undermine any U.S. efforts to contain Iran and render impossible any new initiatives to promote lasting peace between Israelis and Palestinians. And even if the U.S. itself grows less dependent on Middle East energy, uncertain supplies could endanger key American allies and the global economy.

When speaking of the past days’ violence and the situation in Egypt, Gulf officials remind Americans of how President Jimmy Carter’s abandonment of Iran’s Shah more than 30 years ago was interpreted as a sign of weakness by mullahs who came to power and then inaugurated three decades of anti-Western, clerical rule.

The situations then and now are vastly different, but Washington would be unwise to dismiss worst-case scenarios in the Middle East, one of the world’s worst neighborhoods. What was at stake then was an Islamic revolution in a single, important state, but now the consequences could have even wider, longer-lasting and more global consequences.

One can understand why Americans, in the heat of their presidential elections, may prefer to retreat from a region that looks more and more inhospitable. Yet the costs of inattention remain far higher for the U.S., the region and the world.

PHOTO: Protesters shout slogans during a demonstration against security forces seeking to arrest Tunisian Salafist leader Saif-Allah Benahssine over clashes at the U.S. Embassy last week, at the al-Fatah mosque in Tunis September 17, 2012. REUTERS/Zoubeir Souissi

In private conversations with visiting U.S. business leaders, Russian officials close to President Vladimir Putin have recently referred to President Barack Obama as “your Gorbachev.” And they haven’t meant it positively.

For the West, former Soviet leader Mikhail Gorbachev was the visionary leader who tackled the economic and political failings of the Soviet Union’s authoritarian system, with Perestroika and then Glasnost, introducing an era that ended Communist oppression, brought down the Berlin Wall, ended the Cold War and expanded Europe’s community of democracies.

For President Putin, who returned to the Kremlin among violent demonstrations last May, Gorbachev’s legacy was national humiliation and Soviet collapse, which the Russian leader has called the “greatest geopolitical catastrophe of the century.” When the members of his inner circle compare Obama to Gorbachev, they betray a conviction that the U.S. is in a state of decline under a leader who is accelerating that trajectory through his efforts at reform.

The Obama-Gorbachev comparison is easily dismissed. Even before the Soviet Union’s disintegration in 1991, it suffered from decades of internal rot and never enjoyed America’s regenerating, democratic dynamism. What Obama and Gorbachev have in common is that both are reform-minded lawyers, but little connects them beyond that thin reed.

What’s more significant about the Gorbachev-Obama comparison is what it reveals about Putin’s thinking.

Leaders’ intentions can be best judged by their first days in office. Even measured against two stints as prime minister (1999-2000 and 2008-2012) and another two terms as president (2000-2008), Putin’s first actions upon returning to the Kremlin in May have alarmed Western diplomats. He launched a harsh crackdown on domestic opposition, imposed strict Internet controls (of the sort employed by the Chinese and Iranians), stubbornly supported and armed Syria’s increasingly murderous regime and now presides over a hot summer of anti-American hostility. The latter has included accusations of U.S. interference in Russian elections, attacks on President Obama’s missile defense plans and charges that McDonald’s food imperils the Russian public.

Putin intentionally snubbed Obama through his decision not to attend the U.S.-hosted May G8 and NATO Summits. Instead, the following month he made his first state visit to China since returning to the presidency, during which the Russians and Chinese joined hands on Syria and signed a number of economic and security agreements. The recent escalation of Chinese and Russian claims on islands disputed with Japan followed those discussions.

Putin’s crowd sees little downside in frustrating Obama administration policies and insufficient upside for a more cooperative relationship – with the exception of issues where Putin sees powerful self-interest, such as support for U.S. disengagement and withdrawal from Afghanistan.

One U.S. senior official, who deals with Russian issues, believes accommodating Putin will be nearly impossible for three reasons: his deep, irreconcilable hostility toward the U.S., his determination to regain lost ground in his region, his view that the Syrian confrontation is also a proxy war between Moscow and the West, and the domestic political benefits that come with stoking nationalism at a time when domestic opposition and growing economic uncertainties pose unprecedented threats to his rule.

Finally, Putin’s people believe Obama is so distracted by his own election campaign and U.S. fiscal and political dysfunction that they can act with impunity.

As Andrew Weiss recently wrote in Foreign Policy:

The most important yet overlooked aspect of the current situation … may be the cynicism and casual indifference that Putin has displayed toward the U.S.-Russian relationship in the face of his much bigger problems at home … He also must contend with the ripple effects of the euro zone drama and the global economic slowdown…

The image of a compliant U.S. president before a rising Putin has been a matter of growing discussion in Russia since an open microphone picked up what had been meant to be a private exchange between Obama and then-outgoing President Dmitry Medvedev at a nuclear disarmament summit in Seoul last March.

Obama said, apparently referring to Russian objections to U.S. missile defense plans: “This is my last election … After my election I have more flexibility.”

Medvedev responded sympathetically: “I understand. I will transmit this information to Vladimir.”

In the days that followed in Russia, the phrase “I will transmit this to Vladimir” became such a national joke that a Cyrillic twitter hash tag #владимиру (#ToVladimir) was in the top 10 list of the most popular Russian tweets.

In the mudslinging madness of the U.S. presidential campaign, the contenders will do more to score points over the Russian issue than reflect on its growing importance. Mitt Romney will condemn the failure of Obama’s efforts to “reset” relations with Russia, and Obama will attack Romney’s reckless reference to Russia as “America’s No. 1 Geopolitical foe.”

More useful would be a discussion about what’s driving Putin and what sort of response that may require.

Putin has come to regard the U.S. with a mixture of dread and disdain.

As he sees it, the United States engineered the fall of the Soviet Union and then, lacking its superpower opponent, encouraged East European revolutions and then the removal of Russian allies and clients like Serbian leader Slobodan Milosevic, Iraqi dictator Saddam Hussein and Libya’s Muammar Gaddafi.

Seen through this prism, it is easy to understand Putin’s refusal to align with international opposition to Syrian leader Bashar al-Assad and Russia’s continued military assistance. As he sees it, Russia’s support for action against Libya inadvertently gave the international community license to remove authoritarian leaders who are, like himself, in conflict with their population.

Although the Obama-Gorbachev link is strained, a John F. Kennedy-Obama comparison may better fit the moment. Today’s Russia isn’t the global adversary or threat that the Soviet Union was, but history has shown that misperceptions of American leaders can spawn dangerous miscalculations of U.S. resolve.

As I argued in my recent book Berlin 1961: Kennedy, Khrushchev and the Most Dangerous Place on Earth, it was Soviet leader Nikita Khrushchev’s perception of Kennedy’s weakness, gained through the Bay of Pigs debacle and the Berlin Wall’s construction in 1961, that prompted him to risk putting nuclear weapons in Cuba a year later.

The result could have been nuclear war.

Although these seem like less perilous times, whoever leads the United States should not underestimate Putin’s disruptive potential.

The only reasonable U.S. course is to redouble efforts, through multiple channels, at establishing a positive agenda for a cooperative relationship, something State Department special envoy Ellen Tauscher has called “mutually assured stability.”

At the same time, the U.S. must increase the clarity with which it “transmits to Vladimir” the costs to him and Russia of playing the spoiler.

(CORRECTION: This article incorrectly referred to Hafez al-Assad, Syrian president from 1991-2000, instead of Bashar, his son and successor.)

PHOTO: Russian President Vladimir Putin participates at a forum of pro-Kremlin youth groups in the Seliger region, July 31, 2012. REUTERS/Alexei Nikolsky/RIA Novosti/Kremlin

America deserves better.

If only this year’s presidential candidates were as focused on global competitiveness as are America’s business leaders, the world’s most important economy and democracy would already have become the “Comeback Kid,” portrayed on this week’s Economist cover as a muscle-bound Uncle Sam.

We are witnessing the most expensive and one of the most negative presidential contests in U.S. history. Thus far it is serving little purpose aside from enriching  the advertising industry.

With global economic growth waning, the euro zone imploding and America approaching a fiscal cliff, President Barack Obama and Governor Mitt Romney remain on the low road of ad hominem attacks that badly serve Americans and the world.

The most crucial question for American centrists, who are likely to decide this November’s elections (and I count myself as a card-carrying member), is whether Obama or Romney can reverse the dangerous signs of eroding U.S. competitiveness and shore up the beginnings of an economic resurgence.

It is a question of historic significance.

Just as the best candidate during the four decades of the Cold War era was the one who most clearly understood how to tap America’s dynamism and stare down a very real Soviet threat (Ronald Reagan fit that bill), today’s most effective president will be the one who can best navigate a similarly extended period that is shaping up to be an era of global competition.

In this new age, great-power military conflict of the U.S.-Soviet variety is all but unthinkable, yet smaller rivalries proliferate where there are economic gains to be had. It is an age in which the battlefield has been transformed by communication technologies and the addition over the past two decades of a billion people to the global workforce in emerging nations. They are not only manufacturing shirts and toys but also, empowered by the Internet, competing against America’s highly skilled computer engineers, lab technicians and architects with their outsourced labor.

The good news is that America is uniquely qualified to do well in this less dangerous yet more complex era, given the scale of its market, its agile private sector, its youthful demographics (compared with other advanced economies) and the fact that, unlike Europe, it acted more quickly and decisively to address its financial rot and remake its banks. America leads the world in exploiting shale gas, and its export sector is thriving. The U.S. has a fighting chance to meet President Obama’s goal, stated in his 2011 State of the Union address, of doubling exports in five years. Exports to China alone have grown by 65 percent since 2007, making the country the third-largest American export market.

The bad news, captured Tuesday in Federal Reserve Chairman Ben Bernanke’s bleak testimony to the Senate Banking Committee and in this month’s IMF annual report on the U.S. economy, is that the threats to this potential rebound are immediate. IMF Managing Director Christine Lagarde called the U.S. economic recovery “tepid,” predicting the U.S. will have just 2 percent growth through the rest of the year. The downside risks that could reduce growth further include the euro zone crisis, the slowing growth of emerging markets and Washington’s political dysfunction.

Although the American business environment remains one of the world’s most attractive, a recent survey by Harvard Business School shows that 70 percent of its alumni expect American competitiveness to decline over the next three years. During 2011 alone, more than 1,700 respondents were personally involved in decisions about whether to place business activities in the U.S. or elsewhere, and in two-thirds of the cases they decided against the U.S.

The respondents pinpointed weaknesses that the candidates should be addressing, but are not. Among them: America’s cumbersome tax code, its failing elementary education, its overregulation, its aging infrastructure, its inadequate workforce skills and, yes, its political gridlock.

In analyzing the findings, Michael E. Porter and Jan W. Rivkin wrote:

Many see jobs as the goal, when in fact it is only through restoring American competitiveness that good jobs can be created and sustained. Many see income inequality as the central problem, when in fact inequality is the outcome of underlying problems in skills, opportunities and other fundamentals that must be addressed if inequality is to fall.

In his 2011 State of the Union address, President Obama dramatically spoke of “our generation’s Sputnik moment,” comparing the new global competitiveness challenge to what Dwight D. Eisenhower faced following the Soviet launch of the first orbiting satellite. The outcome was a national mobilization that resulted in the birth of NASA, the education of a new generation of engineers and, ultimately, victory in the space race.

The problem is that Obama and Romney now are acting more as politicians out to win the next turn of the news cycle rather than as statesmen providing a roadmap for this new era of global competition. The Obama campaign’s portrayal of Romney as a rapacious capitalist is as unhelpful as the Romney campaign’s attacks on Obama as a closet Marxist.

The American private sector is doing much to rise to the challenge. It’s time for the two men vying for the Oval Office to stop playing gotcha and provide leadership for this new generational challenge.

They may have to channel Eisenhower.

PHOTO: Prime Minister David Cameron of Britain (center L-R) , President Barack Obama, Chancellor Angela Merkel of Germany, José Manuel Barroso, president of the European Commission, and others, including French President François Hollande (seated R), watch the overtime shootout of the Chelsea vs. Bayern Munich Champions League final in the Laurel Cabin conference room during the G8 Summit at Camp David, Maryland, May 19, 2012. REUTERS/White House/ Pete Souza/POOL

To help illustrate Germany’s historic dilemma as it calculates the risks of rescuing Europe, Ronald Freeman, a London banker friend, conjured up an image of Chancellor Angela Merkel as a weary mountaineer leading a perilous rock climb. Still some distance from safety, Merkel alternates between shouting instructions to those hanging behind her on a taut and fraying rope, and wondering whether to take out her knife and cut loose some of the burden.

What Merkel must calculate, says Freeman, a former European Bank for Reconstruction and Development first vice-president, is how to get everyone to the top of Mt. Europe without imperiling herself. “Until Germany agrees to switch from specific and inadequate bail-outs of over-indebted sovereigns to the unlimited back-up that only the European Central Bank can provide, the crisis will not end,” he says, leaving countries like Greece, Spain and Italy dangling below an ambivalent Germany.

Investors last week applauded Germany’s agreement to provide weaker climbers the equivalent of a temporary ledge to stand upon: access to Europe’s permanent bailout fund to provide capital directly to troubled banks anywhere in the euro area. In return, governments agreed to give banking oversight to European authorities so that they could supervise and potentially dismantle banks.

Although the decision marked a change of German heart, it neither addressed the urgency of the crisis (the banking supervision won’t be put in place until year’s end) or the scale of capital required (the roughly 500 billion euros that would be available is less than a third of what the U.S. Treasury considers necessary). Beyond that, Merkel is holding the rope at a time when German public support for the single currency is eroding. A recent Pew survey shows that more than half of Germans say their country would have been better off without the euro, and only two in five Germans have a favorable opinion of the European Central Bank.

In a thought-provoking analysis of what they call “the new German question,” European Council on Foreign Relations analysts Ulrike Guérot and Mark Leonard, who is also my Reuters Opinion colleague, explain much of Germany’s indecisiveness during the ongoing crisis. “There is not yet a new national narrative about what Germany should be or wants to be – or what place in Europe it wants to occupy.” They see Germany as passing through a dramatic moment of self-examination and reinvention, a “kind of unipolar moment,” perhaps even laying the foundation for a new Sonderweg, or special path, where it is increasingly assertive in promoting European economic policies even as it charts its own relations with larger powers like China and Russia.

Given German history, any process of realignment could be wrenching for Europe and the world. As Guérot and Leonard remind us, quoting the prewar German satirist Kurt Tucholsky: “Nothing makes the Germans lose their composure as much as when trying to find themselves.”

That said, it seems to be more common sense than historical neurosis that informs this new German thinking. “Germany wants to be responsible and respected,” says Peter Behr, a principal at the financial advisory boutique Signet Ltd. “It is aware of its own history and all of its existential geopolitical significance, and of the social value of currency stability and low inflation. It understands the direct and indirect benefits to it of European economic prosperity and political stability, but is unwilling to endlessly and in the end pointlessly underwrite those, especially when wholesale structural reforms are essential for the future of both.”

A new generation of Germans has grown weary of lectures about history’s lessons. It isn’t yet ready to seize the full responsibility of European leadership, and instead is focused primarily on what it will take to ensure that Germany doesn’t lose its hard-won gains of low unemployment, high productivity and steady growth, which has made it the world’s second-largest exporter after China.

Because of that, Germans shrugged off the recent warning issued to Chancellor Merkel from her 93-year-old predecessor Helmut Schmidt.  “More than once we Germans have caused others to suffer because of our position of power,” he said, warning her against making excessive austerity demands on smaller European nations.

They also paid little heed to a George Soros appeal, issued in an interview with Der Spiegel Online, that Germans should play the modern-day role of benevolent power, as America did after World War Two through the Marshall Plan. Although the economic cost was great, he argued, the geopolitical benefit was greater.

Somewhat more appealing to Germans is Tony Blair‘s advice to Financial Times editor Lionel Barber that individual European states can only defend their interests as a collective against the might of the Americans or the Chinese. “The rationale for Europe today is not peace; it is power,” he said.

There is no doubt that Germany is currently in its most influential position of European leadership since World War Two. Yet one doesn’t feel a sense of historic urgency when visiting the country, but rather a desire, if possible, to protect an increasingly threatened status quo. While Greece, Spain and Italy are all suffering different degrees of economic pain, the worst that has befallen Germany recently was the 2-1 loss to the Italians in the European soccer cup semifinals.

Which brings us back to Chancellor Merkel as the mountain climber weighing her choices in the face of Europe’s growing burdens. With an eye to history, she looks down-mountain and appreciates how far Europe has already advanced. With a view to the future, she understands the benefits of bringing all euro zone states safely to the summit.

Yet Chancellor Merkel most importantly must survive in the moment.  If the weather again turns worse, count on her to think of Germany’s well-being first.

If the euro is saved, the much-maligned power of global financial markets will deserve much of the credit.

The conventional wisdom among many on the intellectual left is that unbridled financial players threaten to destroy the European Union, one of history’s noblest, war-ending projects. The truth, however, is something else. To be sure, speculators lack noble motives, and global capital is a blunt instrument that tends to overshoot. But markets are forcing European leaders to fix their fatally flawed monetary union, a union that can only last with deeper economic integration and greater political (and democratic) legitimacy.

Last weekend’s agreement by Spain to accept a bank bailout, based on a European aid package of $125 billion, is a dramatic case in point. Senior Obama administration officials, in a series of urgent conversations with their European counterparts, warned that Spain posed the possibility of a “Lehman moment,” with global reverberations that no one could predict. If European leaders didn’t demonstrate to markets that they would pool their resources to address the banking meltdown of Europe’s fourth-largest economy, the contagion could have spread, what remained of U.S. and global growth could have evaporated, and the European Union itself would have been endangered.

In retrospect, it may have been wiser to build Europe without a common currency, one senior Obama administration official told me, given all the historical and national differences. However, now that the euro is used by 17 countries and has become a global reserve currency, the euro zone can’t be dismantled without unacceptable European and global risk. Thus, U.S. officials had been urging European leaders to settle the Spanish bank crisis before the Greek election next Sunday, June 17, and the G-20 meeting June 18-19, to avoid convening on the brink of financial catastrophe.

In the end, however, it wasn’t President Obama who forced a Spain deal through his lobbying with the top three euro country leaders – Chancellor Angela Merkel, French President François Hollande and Italian President Mario Monti. (Side note: One does wonder whether British Prime Minister David Cameron isn’t beginning to feel left out). Instead, it was the unrelenting pressure of European and global creditors and investors, who were withdrawing in droves from Spain, unsure whether a German-led Europe would provide the financial bazooka required.

The simple fact is that Europe some time ago ceased having a true monetary union. Although no country has withdrawn from the euro, markets have quit treating it as a trusted, common currency. As Irish economist Colm McCarthy writes: “Europe’s single financial market has been sundered through deposit flight and nation-by-nation re-matching of assets and liabilities.”

At an event jointly hosted by the Atlantic Council and Germany’s Suddeutsche Zeitung on Friday, IMF chief Christine Lagarde worried about political cycles running behind economic and market cycles, as “a movie we have watched one too many times.”

It looks something like this. Tensions escalate and, out of necessity, policy makers take action. But just enough for the danger to subside. Then the urgency is lost, momentum wanes, then the policy discourse begins to fracture, too focused on their own backyards and not enough on the big picture. And so tensions start to rise again.

But, with the passing of each cycle, we reach a higher and higher level of uncertainty, and the stakes rise. At this point, stability is at stake. Growth is at stake. In the case of Europe, the cycles are now threatening the very existence of the European project.

Markets tell politicians what they don’t want to hear. Economist Jean Pisani-Ferry says bond markets won’t be convinced until they see Europe has a banking union (Europe-wide banking supervision, deposit insurance, and crisis resolution), sufficient tax pooling (so that EU-level institutions can take charge of financial stability), and mutualization of enough of the costs of the crisis to convince markets that their bets against the euro are in vain.

Markets will continue to test Europe’s leaders until they are convinced they are committed to correcting their system’s flaws. And resisting markets is like complaining about the rain, and this one is a deluge. Global markets have a weight that no one anticipated when the Maastricht Treaty created the single currency in 1992.  Since then, global financial stock has quadrupled through 2010 to $212 trillion, from $54 trillion in 1990, according to the McKinsey Global Institute. More stunning yet, Lagarde says the total amount of outstanding OTC derivatives in 2011 was $648 trillion in 2011, compared with just $12.1 trillion in 1992.

Josef Ackermann, former Deutsche Bank chief executive and now chairman of Zurich Insurance Group, said at the Atlantic Council last week that markets have done Europe a favor by forcing upon it financial and structural reforms and greater discipline. “There’s no politician who stood up and said we have to change that – not one,” he said. Without markets shifting credit spreads, he believes Greek profligacy would have gone on for some more years. “We’ve completely changed the discipline of European countries going forward, and that’s a good thing.”

Beyond that, however, he says politicians need to do much more to convince voters of Europe’s value. “A fragmented Europe has no way for self-determination,” he warned. “We will have to accept what the United States, China, India, Brazil and other countries [dictate to] us. This cannot be the future of our children.”

If Europe manages this crisis successfully, Ackermann argues, it will instill a new self-confidence that will express itself globally as Europe jointly conquers a historic challenge. Conversely, it follows that failure could dramatically reduce Europe’s influence and unity for at least a generation to come.

PHOTO: A demonstrator hangs fake Euro notes on her leg during a protest against Spain’s bailout at La Constitucion square in Malaga, southern Spain, June 10, 2012. REUTERS/Jon Nazca

MADRID – What brought me to Spain during the most threatening week of the country’s recent history was an invitation to speak about one of Europe’s darkest hours a half-century ago, pegged to the Spanish-language publication of my book Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth.

One of Spain’s most senior government officials was quick to make the connection between 1961, when Germany’s postwar division was deepened by the Berlin Wall, and the historic moment today, when a reunified Germany, acting from its most powerful European perch since the Third Reich, will determine whether the continent will be newly divided – this time along North-South lines, with Spain outside the euro. But more sharply, this official – who won’t speak for attribution as he must deal daily with German counterparts – believes Germany’s actions (and, more frequently inactions) have put the euro and the European Union project itself at risk.

It is in that context, he said, that Spain has put forward an urgent plan for a European banking union, complete with a pan-European deposit guarantee fund and banking supervisor. The idea has now been endorsed by the European Commission, European Central Bank President Mario Draghi, Italy, Ireland and others. German Chancellor Angela Merkel has not followed suit. Spanish officials are lobbying hard for this idea because they believe it’s urgently needed, but also because they hope to force Germany’s hand in a manner that would move markets and reverse Spain’s downward spiral. So that his purpose couldn’t be missed, Spanish Prime Minister Mariano Rajoy over the weekend surprisingly called for centralized control of national budgets in the euro zone – teeing up a crucial auction of Spanish treasury bonds this Thursday.

Yet Rajoy’s top economic advisers say that whatever they may do themselves, it is beyond them to remain in the euro if markets aren’t more convinced of Germany’s commitment. Although Rajoy’s government has reduced pension burdens, introduced labor market reforms, recapitalized banks, cut deficits and written debt limits into the constitution, markets continue to bet against Spain. Ten-year sovereign bond yields, at more than 6.5 percent, are 550 basis points higher than those in Germany and perilously close to the 7 percent levels at which Portugal, Ireland and Greece required bailouts.

In many respects, Spain has already been forced out of the single market. Most Spanish issuers and companies can no longer access funds from outside Spain, which had long been one of the biggest benefits of the euro zone. The euro’s exchange rate remains strong only because investors are fleeing to Germany as a safe haven, wagering that appreciation could be 40 percent if the Germans leaves the euro.

If global investors were certain Spain would remain in the euro, its assets would look cheap, capital flight could be contained, and new investments would flow. For the moment, however, investors are hedging against a Spanish departure from the euro. Even today’s discounted prices look high, then, as they reckon “the new peseta” would come with a minimum 30 percent depreciation.

One conversation after another in Madrid underscored a growing Spanish resignation that their fate rests in German hands and an escalating frustration that German leaders have been too slow to recognize the economic stakes, the historic moment or what steps could most quickly save the euro project.

Spanish experts list the many things German leaders could have embraced in past months that might have produced a different outcome: euro zone bonds, an expansion of funds available from the European Stability Mechanism (currently 500 billion euros) and the ability of banks to access them directly, a more expansive European monetary policy or a Europe-wide guarantee for the threatened banking system.

The failure of the Germans to act with the urgency and scale other Europeans consider necessary has led markets to believe, along with more than a few Spaniards, that Germans themselves may no longer think the euro was such a good idea and that it may be time to cut their losses. That notion has been dramatically fed by the new publication of former Bundesbank director Thilo Sarrazin’s best-selling book, Europe Doesn’t Need the Euro.

A survey in Germany’s Focus magazine last week, which got wide notice here in Spain, showed that while 45 percent of Germans agree with Chancellor Merkel’s view that a euro failure would lead to a broader European failure, nearly the same number, or 43 percent, embrace Sarrazin’s opposing thesis. (Twelve percent are undecided.) Indeed, a rumor is swirling around Madrid that the Germans are already secretly printing Deutschemarks. Although this has no apparent basis in fact, it does reflect the mood.

This growing distrust of German intentions in Spain – a country that has been among of the most welcoming toward Germans, who vacation here in droves – is worrying and expanding. The increased resentment is captured by a history lesson one Spanish business leader says he would like to give Germans, but he won’t do it on the record for fear it would hurt his German business.

First, he said, national division was the price Germany paid for misery it exacted upon Europe. Second, he continued, giving up the Deutschemark and monetary sovereignty was the price for German reunification after the Cold War. Thus, he said, Germany’s historic responsibility must be above all to save the euro, as its creation marked the ultimate European reconciliation and end to World War Two.

“If Europe blows up [because of the Germans],” he asks provocatively, “are we authorized to say Germany should be divided again?”

Spaniards know the euro zone may have been a flawed construction, so they are eager to change it. And they realize it will take years to unwind their debt binge, leaving them owing foreigners 1 trillion euros, or about 90 percent of GDP (though they remind Germans that Spanish profligacy was fueled by euro interest rates set too low for Spain but just right for Germany’s then-stagnant economy).

Yet the Rajoy government now acts with full knowledge of the moment. If Spain leaves the euro, it would be a setback of historic dimensions. The country would overnight go from being an integral part of the world’s largest economic market – to again being a second-rate European player.

Spaniards are convinced Germany would lose even more, in exports, in global position, and in the many unpredictable reverberations of the euro’s unraveling.

Yet until they see a more convincing German response, Spanish officials brace for the worst even while lobbying Berlin and Brussels with the intensity of the damned.

PHOTO: Spain’s Prime Minister Mariano Rajoy looks at his nails during the XXVIII Meeting of the Economic Circle “Cercle D’economia” in Sitges, near Barcelona June 2, 2012. REUTERS/Gustau Nacarino

CHICAGO — As measured from President Obama’s re-election campaign perspective – the White House’s litmus test for foreign policy issues through November – last weekend’s G-8 and NATO Summits were bell ringers.  Obama campaign strategists couldn’t have scripted their outcomes better – perhaps because they did script them.

Given the potential for dissent, President Obama could be satisfied that his guests adhered (mostly) to the desired story line. At Camp David, President Obama was the jobs-and-growth champion. In hometown Chicago, with leaders of some 60 countries arrayed around him, he was the president who would wind down an unpopular war. (That his Chicago White Sox trounced the Cubs during NATO Night at Wrigley Field, in a game that opened with an honor guard carrying flags from the 50 countries engaged in Afghanistan, was an added benefit.)

The only problem with this pretty picture is that getting the campaign message right is a long way from getting the world right. What really connected the G-8 and NATO meetings was a growing realization that the biggest threat to the alliance – and, for that matter, to Obama’s re-election hopes – is the euro zone crisis. That risk comes at a time when U.S. debt and political dysfunction makes the West far less resilient. So for all the talk in Chicago about common purpose in Afghanistan, NATO’s most existential danger now comes from within, and its root causes are economic.

When NATO strategists weigh the many threats facing them, they tend to focus first on their founding treaty’s Article 5, which requires all members to defend a single ally against an external security threat. Insiders also often discuss Article 4, which allows for a member country like Turkey to seek urgent alliance consultations when it foresees new dangers, as was the case during the Iraq war and is now again the case concerning Syria.

Yet it’s time for NATO to dust off its long-forgotten Article 2, known at the treaty’s writing in 1949 as “the Canadian article,” because of that ally’s early insistence that military strength couldn’t be separated from economic health. It committed all NATO members to “strengthening their free institutions” and “promoting conditions of stability and well-being. They will seek to eliminate conflict in their international economic policies and will encourage economic collaboration between any and all of them.”

That article was put forward by then-Canadian Foreign Minister Lester Pearson, and was enthusiastically supported by the U.S., because both countries feared NATO would become too much of a military assistance program without sufficient economic cooperation or benefit. Under the logic of Article 2, ambitious free trade and investment agreements – of the sort the Obama administration is currently postponing with Europe – are as strategically important as defense programs.

Some have argued that NATO need not consider such matters, since they have become the domain of the European Union. Indeed, as part of NATO’s recent reforms, it got rid of its economic directorate altogether. Yet now that the EU itself is under threat, it’s time for the alliance to consider the security implications of financial and economic shifts – and how they could alter the strategic balance of power.

According to Article 2, it is also a NATO matter whether Greece leaves the euro zone, given its European, transatlantic and global repercussions. How France and Germany settle their dispute over the policies of growth versus austerity, again, is an issue of deepest concern to the alliance. The growing divide that the euro crisis is creating between the north and south of Europe has significant implications for the future solidarity of NATO members that goes far beyond, but also includes, the sharp decline of defense budgets.

The wider implications of the euro crisis go right to the heart of the geopolitical and security issues that concern NATO. The problems stem both from the European Union’s flagging energy for external engagement and its eroding attractiveness to the outside world as the model of prosperity and stability – to be emulated and, when possible, joined.

A weak, introverted Europe and a debt-laden and distracted United States are encouraging Russia to reassert its influence, in part through its new Eurasian Union, which would be far less attractive were it not for the EU’s troubles. In the Balkans, recent Serbian elections that favored a more nationalist candidate, who represents an anti-EU party, were influenced by the euro crisis. Across the Middle East and North Africa, a battle for hearts and minds is under way: Less attractive influences emerge when the U.S. and Europe are no-shows.

“As more crises may develop, the danger is that we will be so introspective we won’t address them,” says Michael Clarke, director general of the Royal United Services Institute in London. “Europe is losing the ability to be an actor even in its own continent, let alone in world politics.”

NATO leaders can rightly congratulate themselves for coming away from Chicago with a good amount of agreement on the three major agenda items: ending combat engagement in Afghanistan by 2014, pooling more defense capabilities in the face of austerity, and deepening relationships with their most capable partners.

Yet they didn’t begin to address this far more fundamental threat. It’s time for the North Atlantic Council of allied leaders to convene, as provided for under Article 2, to address economic issues that have become matters of strategic consequence.

PHOTO: President Barack Obama holds a news conference on the second day of the NATO Summit in Chicago, May 21, 2012. REUTERS/Jim Young

White House reporters can be forgiven their collective shrug when they received the readout from President Obama’s meeting last week with NATO Secretary General Anders Fogh Rasmussen, in advance of the alliance’s Chicago summit this weekend. Laced with the usual, mind-numbing NATO-speak, the dry listing of the summit’s three areas of focus – Afghanistan, defense capabilities, and partnerships – didn’t sound like the stuff of history.

However, beneath the third agenda item – partnerships – lies a potential revolution in how the world’s most important security alliance may operate globally in the future beside other regional organizations – and at the request of the United Nations. At a time of euro zone crisis, U.S. political polarization and global uncertainty, it provides a possible road map for “enlarging the West” and its community of common values and purpose. “NATO is now a hub for a global network of security partners which have served alongside NATO forces in Afghanistan, Libya and Kosovo,” Obama and Rasmussen agreed.

As America’s willingness and capability to act unilaterally declines, any U.S. president will find himself increasingly drawn to NATO as an even more vital tool for foreign and defense policy – against a host of global threats ranging from Syrian upheavals and North Korean nuclear weapons to cyber attacks and piracy. The problem, however, is that NATO members more often than not won’t be located where they are most needed. Or due to lack of political will or inadequate military muscle, many NATO members may not have the capability to intervene. That means regional partners will be increasingly necessary to provide both the credibility and resources for the most likely future operations.

Although many experts, including then-Secretary of Defense Robert Gates, opposed NATO’s 2011 intervention in Libya, the operation’s ultimate success provides something of a model for this sort of future. NATO operated alongside key regional and European non-alliance partners within NATO structures – with the blessing of the Arab League and the United Nations Security Council. The alliance – and by extension the United States – achieved its objectives with no allied casualties, minor collateral damage and limited U.S. engagement. The war lasted seven months and cost the alliance just $1.2 billion, the equivalent of one week of operations in Afghanistan.

Such situations never repeat themselves precisely. Should NATO ultimately be involved in Syria, for example, regional engagement would likely be far greater. In a North Korean scenario, it is hard to imagine any response that wouldn’t be coordinated with America’s Asia-Pacific allies and China. Regarding maritime security, the NATO countries involved and local partners would shift given the threat, whether off the Gulf of Guinea or the Straits of Hormuz. What’s clear is that for the model of NATO at the hub of a global security network, the alliance will need to become more flexible and adaptable – and to build a broader and deeper array of global partnerships.

The expected discussions of NATO leaders this weekend about how best to wind down their decade-long Afghan military operation and about how to maintain sufficient defense capabilities, despite growing budget cuts, risk leaving the impression of an alliance in retrenchment or decline. That’s hardly an inspiring or helpful message for a U.S. president heading home to Chicago at the beginning of his re-election campaign.

By contrast, NATO’s efforts to broaden and deepen cooperation with capable partner nations can be rolled out as a pro-active, forward-looking initiative that has NATO going on offense for a new era. So that no one misses his notion of NATO at the core of a global security network, President Obama and his allies will stage an unprecedented summit meeting with 13 partner nations – from South Korea, Japan, New Zealand and Australia in Asia-Pacific to Jordan, Morocco, Qatar and the United Arab Emirates in the Middle East and North Africa. Also present will be five European states that aren’t members of the alliance but routinely contribute to alliance activities – Austria, Finland, Sweden and Switzerland.

What they’ll be trying to do is give teeth to an agenda for NATO that I first saw discussed in detail by former National Security Adviser Zbigniew Brzezinski in a major Foreign Affairs article in October 2009. He argued against those who wished to expand NATO into a global alliance of democracies. He said that would dilute the crucial importance of the U.S.-European connection, which still accounts for half of the world’s economy, and that none of the world’s rising powers would be likely to accept membership in a global NATO. An ideologically defined democratic alliance would needlessly draw institutional lines between the U.S. and, for example, China.

“NATO, however, has the experience, the institutions, and the means to eventually become the hub of a globe-spanning web of various regional cooperative-security undertakings among states with the growing power to act,” he wrote. “In pursuing that strategic mission, NATO would not only be preserving transatlantic political unity; it would also be responding to the twenty-first century’s novel and increasingly urgent security agenda.”

It would also rescue the alliance from geostrategic irrelevance.

PHOTO: NATO Secretary General Anders Fogh Rasmussen addresses a news conference in Brussels, May 11, 2012. REUTERS/Francois Lenoir

Imagine that an American intelligence agency organizes an “exercise,” as one occasionally does, on how to manage an unwanted but inescapable Washington role in a Chinese leadership struggle. Throw in the following scene-setting facts:

• With the Chinese Communist Party confronting a decisive leadership transition, a provincial police chief takes refuge in a U.S. consulate and spills the beans on a corruption and murder story swirling around Bo Xilai, whose populist, Maoist campaign threatens the establishment.
• Just a week before the visit to Washington of Vice-President Xi Jianping, who is in line to become paramount leader this autumn, President Obama takes sides. Although Bo’s forces are circling the consulate, the U.S. releases the police chief to Beijing’s leaders.
• With that crisis solved and Chinese leaders indebted to Obama, a blind human rights activist dramatically escapes house arrest and takes refuge in the U.S. embassy in Beijing. With Secretary Hillary Clinton arriving for a high-level Sino-U.S. summit, both sides enter crisis management mode.

It’s no wonder that the intellectual salons of Washington have grown a bit bored with the ongoing U.S. election campaign and have shifted their interest instead to Chinese domestic politics. The reasons are obvious: The details are juicier, the drama is more immediate and the historic stakes are considerably more significant.

That’s because any U.S. president, whether named Obama or Romney, will operate within a well-established constitutional framework and democratic habits. While the U.S. has managed 43 peaceful transitions of power over the past 223 years, Communist-led China has managed a smooth handoff only once since its 1949 revolution, and that was in 2002, when Deng Xiaoping engineered the rise of the current premier, Hu Jintao.

Former U.S. National Security Adviser Brent Scowcroft believes China has entered its most decisive domestic political period since the weeks preceding the government crackdown on the Tiananmen Square protests in 1989, which resulted in the arrest and purge of Deng Xiaoping’s presumptive heir, Zhao Ziyang, along with a large-scale removal of other officials sympathetic to the protesters. Tiananmen’s immediate aftermath strengthened the hand of hardliners, until Deng, with difficulty, reasserted himself and market reforms in 1992.

Former U.S. National Security Adviser Stephen Hadley regards the current split within the Chinese leadership to be the most severe since 1971. It was then that Defense Minister Lin Biao, in an apparent attempt to defect to the Soviet Union, died in a plane crash in Mongolia while trying to flee the country after a failed attempt to assassinate Mao Tse Tung. The Communist Party branded him a traitor posthumously.

The global stakes, however, are far greater now than either in 1971 or 1989.

China remains the world’s most important engine for economic growth, it has become the biggest owner of U.S. debt, and it has vastly expanded its global reach through investments and trade. China is likely to surpass the U.S. in the next decade as the world’s largest economy – and its political influence and military capabilities grow apace. Domestic uncertainties now make China the most crucial wild card for the global future.

Beyond that, the country’s leaders in the coming years will face a set of new strains that defy easy solution: Growth will inevitably slow, a rising middle class will make increased political demands, growing wages will make export markets more difficult to win, and the demographics of an aging society and its single-child policy will produce new social and financial pressures.

Thus, the fifth generation of Communist leaders, who will be installed at the 18th Party Congress this autumn, will inherit a China whose unreformed political structure isn’t equipped to manage the demands of its increasingly complex, modern state. They also will face a public angered by widening reports of official corruption amid growing gaps in income.

The seven new individuals who this autumn will be appointed to the nine-member Central Politburo Standing Committee of the Communist Party, the country’s highest decision-making authority, have been bred during the country’s meteoric economic rise. If the current scandal has revealed anything, it is a seething unrest among party leaders over how to manage a country that has moved so far beyond communist ideology.

The conventional wisdom is that the battle lines have been drawn between those who advocate liberal constitutional and political reforms – most prominently represented by Premier Wen Jiabao – that would bring greater pluralism and more powerful rule-of-law, versus those who favor greater state and party controls. Yet lines are far messier and opaque than that: China’s factions, personal rivalries and underlying ideologies defy Western categories.

To sort out the plot, watch closely to see which shoes drop next. That may indicate how much support Bo had at senior leadership levels both for himself and his populist approach, which was laced with Maoist nostalgia and “red culture,” emphasizing large public works, state company ownership and a brutal (if ultimately hypocritical) crime and corruption crackdown.

The standing committee removed Bo, but it’s not yet clear what party disciplinary or criminal actions he will face – or how transparent they will be for the public. In particular, how might party leaders handle the powerful Chinese interior minister Zhou Yangkang, a Bo ally, whose seat on the standing committee is the one Bo had sought? Will military heads roll, as it is rumored that Bo has enjoyed a following as well among uniformed brass.

Most analysts still believe the party congress will produce its forecast personnel outcome: the elevation of Chinese Vice-President Xi Jinping. Indeed, the Bo scandal may have guaranteed that outcome as leaders circle their wagons. But watch as well who takes the other leadership seats, in particular Wang Yang of Guangdong province, the leading next-generation reformist leader, who had been Bo’s predecessor in Chongqing.

China’s leaders seem to agree that the status quo is unsustainable. What’s at stake is who will change it – and in which direction.

For President Obama, this exercise provides just one policy course: Do no harm, avoid providing hardliners a scapegoat, and pray for the best.

PHOTO: China’s former Chongqing Municipality Communist Party Secretary Bo Xilai (L) and former Deputy Mayor of Chongqing Wang Lijun (R) attend a session of the Chinese People’s Political Consultative Conference (CPPCC) of the Chongqing Municipal Committee, in Chongqing municipality, January 7, 2012. REUTERS/Stringer