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F O R E I G N S E R V I C E J O U R N A L / F E B R U A R Y 2 0 1 2
provision for a nation leaving. Fi-
nally, the political commitment of
the continent’s leaders to the proj-
ect was so strong that it was widely
assumed they would never let the
euro fail.
But as the crisis has metasta-
sized, the inconceivable has become
possible. Last November, a credit
rating firm, Moody’s, told its clients:
“The probability of multiple de-
faults by euro area countries is no
longer negligible. A series of de-
faults would also significantly increase the likelihood of
one or more members not simply defaulting, but also leav-
ing the euro area.”
This is true even though it has become increasingly
clear that if any nation leaves the euro zone, it will prob-
ably have to leave the European Union, as well. In the
wake of a default on its government debt and the effective
devaluation that would accompany a reversion to its for-
mer currency, bank deposits, people without jobs and
goods would all flee.
In turn, other European governments would likely feel
the need to limit those flows to protect their own
economies. This would effectively terminate a country’s
participation in the European Union.
A Lost Decade?
A splintering Europe would be disastrous for the con-
tinent’s economy as a whole. The euro zone, which the
European Commission thought would grow by 1.8 per-
cent in 2012, is now expected to increase by no more than
0.5 per cent.
Individual nations could fare even worse: growth for
Italy is forecast at just 0.1 per cent, while Portugal’s econ-
omy should shrink by 3 percent and Greece’s by 2.8 per-
cent. And even these estimates may prove optimistic.
Accordingly, Europe risks a “lost decade,” not unlike
that experienced by Japan in the 1990s — but with far
graver consequences for the rest of the world. After all,
Tokyo had a deep pool of national savings to draw on. Eu-
rope does not.
The most immediate strategic problem for the United
States created by the euro crisis will be the erosion of Eu-
rope’s capacity to share the burden of paying for global
public goods. Debt-strapped countries are already tight-
ening their belts, with even greater
austerity in their futures. Flatlin-
ing growth will also mean de-
creased revenues, compounding
their budgetary woes.
The Impact on Defense
The first casualty of the crisis is
likely to be military spending. In
2010, the United States devoted
4.8 percent of its GDP to defense,
while the United Kingdom spent
2.7 percent and Germany just 1.3
percent. So a burden-sharing gap already exists — and is
“In Europe, defense spending has dropped almost 2
percent annually for a decade,” noted U.S. Secretary of
Defense Leon Panetta, in a speech in Brussels in early
October. And since the financial crisis began in 2008, Eu-
ropean nations have cut military spending by an amount
equivalent to the entire annual defense budget of Ger-
This translates into real reductions in military capac-
ity. Over the next several years, the United Kingdom
plans to curtail defense spending in real terms by 7.5 per-
cent by phasing out its troop deployment in Germany,
scrapping the Nimrod reconnaissance aircraft, moth-
balling one planned aircraft carrier and leaving the other
carrier with no planes to land on it for several years.
For its part, Berlin had already announced plans to
8.4 billion from its
31.5 billion annual defense
budget. It also plans to suspend conscription, reducing
armed forces personnel from 250,000 to 185,000. The
Luftwaffe will curtail its planned acquisition of Eu-
rofighters and reduce its contingent of Tornado aircraft,
and the air force’s fleet of military transport aircraft will be
cut back.
All of these measures will reduce Germany’s airlift po-
tential and expeditionary capability. And since all of these
cuts had already been announced before the euro crisis
hit with full force, more reductions in defense spending
can be expected.
The cost of shortchanging defense was already evident
during the Libyan conflict, in which Britain and France
would not have been able to carry out their successful
mission without U.S. munitions. Factoring in America’s
own budgetary constraints, with the Pentagon facing tens
The U.S.-European
partnership has weathered
potentially debilitating
challenges in the past.
But future success can’t be
taken for granted.