Divergence of U.S. and Europe

Since the outbreak of the world financial crisis in 2008, the difference in interests and policy between the United States and the European Union has become more apparent. The U.S. and E.U. have different opinions on economic development models, the root cause of the financial crisis, external financial regulation, international monetary policy and the best route to recovery, and they may never reconcile their differences. At the recent G20 Summit in Canada, the U.S. pressed for continuous economic stimulus, while the E.U. wanted to slash deficits. As a result, they have each gone their own way, in the name of so-called “mutual understanding.”

The U.S.-E.U. alliance was formed during the Cold War between the U.S. and USSR, as a foundation of international politics and economic stability for the Western developed countries. With the end of the Cold War, the Eastern European consortium began to diminish, and the “common enemy” as a consolidating element among the West began to lose its function. Overall, the Western European countries put their own national interests ahead of the E.U. relationship. Furthermore, with the unification of Germany and a One-Europe movement, the balance of power between U.S. and Europe has changed. The combined GDP of the E.U. is gradually surpassing that of the U.S. With the disappearance of a mutual threat and the change in the balance of power, it is inevitable that the U.S. and E.U. will discover more conflicts and divergences in policy, despite both having common values and the so-called democratic system. Both the U.S. and Europe suffered in the 2008 financial crisis, at different levels, but it has intensified existing conflict between them.

Economic interest is the major source of conflict between the U.S. and Europe. Both are developed countries with economic development at the same level: their economic and financial bonds are very tight, but their conflict and competition are also increasing. This financial crisis was rooted in Wall Street, making Europe so far the biggest casualty; it also intensifies the competition between the two world currencies, the U.S. dollar and euro. The supreme position of the U.S. dollar is the cornerstone of U.S. power. Since the inception of the euro, its share as a percentage of national foreign reserve has risen from 17.9 percent in 1999 to the current 26 percent, and the euro is now the second largest world currency. The U.S. never stops trying to weaken the euro through foreign exchange, so that the latter cannot establish enough stability to facilitate economic growth of the European nations. Europe is aware of this.

When the financial crisis broke out, the European nations were among the first to criticize the U.S., requesting reform of its existing regulation on international financial institutions. The U.S., however, has tried everything to avoid and evade doing so. At the beginning of this year, the U.S.’s recovery was coming along faster than Europe. The European sovereign debt crisis triggered by Greece was a good excuse for the U.S. to retaliate the criticism. Despite the intrinsic problem of the euro, many U.S. hedge funds intensified the crisis by shorting the euro. American credit rating agencies worsened the situation by downgrading Greece, Spain and Portugal, resulting in the fall of the euro against the U.S. dollar. The E.U. decided to strengthen its regulation on foreign financial institutions. Timothy Geithner, the U.S. Secretary of the Treasury, wrote to European Commission officials to express his opposition, openly warning that its regulation on hedge funds and private equity funds is discriminatory towards U.S. companies, and that such regulations may result in the divergence of the two Atlantic coasts. In order to resolve the sovereign debt crisis, under combined pressure from the market and the U.S., Europe has to allow the U.S.-dominated IMF to interfere with the euro, further shaking up the Euro’s reputation.

The European sovereign debt crisis brings the competition between the U.S. dollar and the euro to the public’s attention. The United Kingdom’s Sunday Telegraph has an editorial criticizing the U.S. as the largest currency manipulator in history. The competition between the U.S. dollar and euro never stops; we will have to wait and see how it develops. Such competition will leave a deep impact on the U.S.-European relationship.