Ian Bremmer

By Ian Bremmer
The opinions expressed are his own.

The European Union now faces a sovereign debt crisis that threatens the viability of the entire experiment, one that looms over the economies of even the sturdiest EU countries. Fair or not, debt crises in Greece and Portugal, and the spectre of them in Spain and Italy, have markets questioning whether the eurozone remains viable.

There is some good news. Everyone in Europe, from Germany’s state-level officials to Members of the EU Parliament, takes this issue seriously. The time for kicking the can down the road has passed. The bad news is that the only long-term solution to the crisis is the one that may be a bridge too far for most of the major players: a fiscal union that controls spending across all of the EU’s economies. Fiscal union might sound like a politically impossible concept, but market leaders, like Pimco’s Mohammed El-Erian, are urging Europe to at least consider, ”a unified European balance sheet,” as a logical and badly needed extension of the currency union. To join the euro, governments surrendered control of their monetary policy. Surrendering control of fiscal policy amounts to an enormous psychological step.

A little background: EU member states still control their own spending — and their indebtedness. The EU specifies spending and debt limits for its member nations, but can’t really enforce its guidelines. That’s why Greece was able to hide the problem that too many of its citizens have evaded income taxes for decades, despite the government providing them substantial social benefits. This problem created the country’s debt crisis. Local control of fiscal policy also allowed Portugal to base its budgets on wildly optimistic economic growth projections for years. That’s why the debt crisis spread out of control — every country kept its own books, but few of the strong countries realized that to protect the euro, they would have to bail out weaker countries that rode the economic boom for years—including up to and during the global financial crisis and its aftermath.

Some more background: Soon after the dawn of the euro, as the benefits became clear, European governments were all too eager to join, to enjoy the rising tide, and to abandon their national currencies. This may have been the right economic move, but few of these countries understood the impact of surrendering control of their money supplies. Perhaps they were just too caught up in the long economic boom to care.

Now, in a time of crisis, European governments know exactly what must give up if they are to form a fiscal union. For the greater economic good of the EU—that is, for the good of citizens in other countries—they would have to surrender control of national spending priorities. A piece of their sovereignty would have to be renounced, probably forever. Before the current crisis, this is something most European leaders probably never seriously considered. The signatories to the Maastricht Treaty that created the EU and the conditions for adopting the euro hoped they would never be forced to test the strength of their union. Now, that is exactly what they are being asked to do.

Despite excellent leadership from Olli Rehn, currently serving as EU Economic and Monetary Affairs Commissioner, the EU is clearly an imperfect union, one that allows individual member countries to stray too far from what should have been common economic goals. The U.S. government as formulated under a comparably strong Constitution was able to create a bailout package that saved the financial system (and indeed, has turned out to be profitable) without the risk of fracturing the union. Can the EU move beyond a loose confederation into a stronger union to realize its full economic potential? The first indicator of whether this is possible should come at the European Commission summit this Thursday, where a solution to the Greek debt problem will be the most important item on the agenda.

Any votes that the EU takes to retroactively penalize countries like Greece and Portugal for straying from debt limits and putting the euro at risk will be seen as political punishments. In essence, the EU can’t exercise its strongest powers because they are punitive. It needs the power to prevent these problems from happening in the first place. But why is fiscal union such a politically fraught idea in the first place?

Just as American voters punished some Democratic lawmakers for their votes in favor of health care reform, the rise of right-wing nativist parties in Europe adds to the risk that moves to strengthen the power of the EU at local expense could endanger the very governments that are now asking voters to accept painful austerity measures. These leaders are caught between a rock and a hard place: they have to move Europe towards a strong union on one hand, but on the other, those very moves are likely to sway local voters to elect ultra-nationalist coalitions, endangering the cohesion of the entire European project.

Europe can’t afford this risk, for one very big reason: China. Here’s another: Saudi Arabia. So far, these wealthy countries and other holders of euros or euro-denominated debt have remained on the sidelines, but they have ample reason to want a viable alternative to the U.S. dollar as a reserve currency. They simply won’t let the currency tank — if it gets cheap due to strife over the bailout, propping it up becomes a buying opportunity for them.

In taking on more euro holdings, the influences of Asia and the Middle East over EU economic policy will grow, perhaps to uncomfortable levels. For now, countries with means are watching and waiting, while Europe’s politicians contemplate a fiscal union or some other solution to the crisis. But make no mistake, the outsiders won’t wait forever. If further debt crises hit larger economies in Europe, “muddling through” will no longer be a credible option—for markets or major debt holders, sovereign or otherwise. To avoid a repeat of this process, the EU will need a sustainable economic framework for the future. We’ll see renewed calls for fiscal union, but that would demand a willingness to compromise that today’s Europe may not have.

This essay is based on a transcribed interview with Bremmer.

PHOTO: EU Economic and Monetary Affairs Commissioner Olli Rehn addresses a news conference in Brussels on May 13^th. Thierry Roge / Reuters

Bremmer spoke to Reuters correspondent Kyoko Gahsa about Japan’s recovery, the lessons of the Europe crisis, and the new leadership at the International Monetary Fund.

By Ian Bremmer
The views expressed are his own.

When President Barack Obama announced in late 2009 that he would send an additional 30,000 troops to Afghanistan, few were as pleased as Defense Secretary Robert Gates. A holdover from the George W. Bush administration, Gates had championed the 2007 surge of troops into Iraq, a move that helped turn both the tide in that country and public opinion in the U.S. on its future. Gates and the generals hoped for similar success against the Taliban.

But how do you measure success in a place like Afghanistan? Soldiers, no matter how many, can’t build democratic, financial and industrial institutions overnight. At best, they can help make Afghans safer and life much harder for those who would launch attacks beyond the country’s borders. By that measure, the record of both surges is mixed, if generally positive. But post-surge, one thing is certain: Obama allowed Gates to prosecute the war on his terms, but new Defense Secretary Leon Panetta will be asked to implement a plan that has less to do with Kandahar than with Capitol Hill.

Withdrawal is the right move, maybe the only move, for Team Obama. The president has gotten the politics of the moment exactly right, yet again. In the first half of his term, he retained Bush’s team at the Pentagon and reshuffled his top generals, namely David Petraeus, through various leadership positions in Iraq and Afghanistan. A surge that seemed to be working was allowed to play out, and Bush was likely to take the blame if the strategy failed. But President Obama knows that Bush’s burdens are now his—the economy, jobs and the wars.

Now the president has put Petraeus, who understands how to use intelligence as a military commander, in charge of the CIA. In this role he’ll likely use agency operatives to conduct the kinds of covert operations that will keep Afghanistan (and Iraq) free of influence from large terrorist networks. Panetta, having learned the CIA’s capabilities during his tenure as its chief, takes charge at a Pentagon braced for budget cuts. The war is being moved off of the Defense Department’s books, but that doesn’t mean the U.S. can afford to simply pack up and head home. Afghanistan will become a quieter conflict, allowing for “nation-building here at home,” as the president said in his statement announcing the end of the surge, and a forward-looking platform for his re-election campaign next fall. Bush is the president who promised to avoid nation-building, but it’s Obama who is keeping that promise.

If Obama can afford to turn to domestic challenges, that’s largely thanks to the stunning successes of special forces and counter-terror operations—in both Iraq and Afghanistan. The effect of the troop surges on the long-term prospects for stability in these two countries is debatable, but bin Laden is dead and al Qaeda has been routed. This won’t be last time you read about the successful mission to kill Osama bin Laden in Pakistan vis-à-vis the coming presidential election.

But what if Obama is wrong? What if the Taliban refuses the president’s offer to talk? What if China or Russia or both decide that departing U.S. troops create opportunities for a bid to lay claim to the country’s vast natural resources? Worst of all, what if Afghanistan starts to crumble? What if the corrupt men that President Karzai has been protecting allow the country to again become an international locus for terrorists? What if the 68,000 U.S. troops set to remain in the country find themselves besieged by tribal warlords or Qaeda militants? What if Iran and Pakistan, for entirely different reasons, create turmoil in Afghanistan that again destabilizes the region?

In other words, it would take less than a miracle for Afghanistan to become Obama’s problem all over again. Even if Republicans nominate a candidate who wants to end the war, conservative pundits could still score points at the president’s expense. Obama — the president who killed Osama bin Laden — could find himself painted as Jimmy Carter, a leader reacting to events rather than shaping them.

More damaging still, a flare-up in Afghanistan could divert Obama from his primary electoral challenge, making it impossible for him to focus his closing political argument on job creation and the health of the American economy.

That’s a fight the president knows he must win.

This essay is based on a transcribed interview with Bremmer.

PHOTO: An Afghan shepherd walks with a flock of sheep past a U.S. Marines armored vehicle of the Weapons Company, 1st Battalion, 3rd Marines outside the Camp Gorgak in Helmand province, southern Afghanistan July 5, 2011. REUTERS/Shamil Zhumatov