Friedman was referring to the elections that took place this week in Iraq.  Marred by violence and delivering an outcome that is still unclear, the Iraqi elections have nevertheless been received as good news for democratic consolidation in Iraq.  They have been extensively covered in the United States, less so in Europe.  In the run-up to the elections, a group of authors from Newsweek wrote, “… [I]t should be understood—now, almost seven hellish years later—that something that looks mighty like democracy is emerging in Iraq. And while it may not be a beacon of inspiration to the region, it most certainly is a watershed event that could come to represent a whole new era in the history of the massively undemocratic Middle East.”

This is hardly a moment for triumphalism.  The success of this election, the long-run tenacity of representative government in Iraq, and the impact such success might have on the broader Middle East, remain uncertain.  Nor is this the time to declare that, in Iraq, the ends justified the means. 

This is, though, a moment to reflect on what these elections might mean in the transatlantic context.

U.S. President George W. Bush’s decision to invade Iraq without a clear United Nations mandate, and with no consensus on the threat Iraq presented, precipitated a crisis in transatlantic relations.  Substantial efforts by President Bush in his second term–including attendance at U.S.-EU summits and frequent conversations with European counterparts–were well-received by European leaders and helped restore a more constructive tenor, but European publics did not pick up on that. 

Europe welcomed President Barack Obama’s election and his efforts to distinguish himself from his predecessor.  Like German Chancellor Gerhard Schroeder and French President Jacques Chirac, Obama had opposed the Iraq invasion.  Obama’s election was attributable in large measure to the economic crisis, but one element in both the 2006 congressional elections and 2008 presidential election was that a majority of the American people had joined in the European view that Iraq was a “bad war.”

After this fairly comprehensive rejection of the Iraq war, what is it that President Bush may have been right about, in the view of Thomas Friedman, Newsweek, and others?

Certainly not about the idea that any culture, Iraqi or another, can be easily brought to embrace representative government.  Certainly not the notion that elections are the only requirement for, and measure of, good governance.  Certainly not an approach whereby unilateral strength is taken to obviate the necessity for vigorous diplomacy among like-minded nations.

But Bush was right about this, in his second inaugural address at the start of what would be a terrible year in Iraq: “[E]very man and woman on this earth has rights, and dignity, and matchless value, because they bear the image of the Maker of Heaven and earth. Across the generations we have proclaimed the imperative of self-government, because no one is fit to be a master, and no one deserves to be a slave.” 

President Obama drew from the same basic convictions in his own words in Cairo last June: “I do have an unyielding belief that all people yearn for certain things:  the ability to speak your mind and have a say in how you are governed; confidence in the rule of law…; government that is transparent…; the freedom to live as you choose.  These are not just American ideas; they are human rights.  And that is why we will support them everywhere.”

The ideas and beliefs that have led Europe and its former North American colonies (as well as our friends Down Under) to create the most accountable governments in history, with the greatest regard for human rights, are what President Bush was right about, as was President Obama.  These ideas have spread beyond the regions of Europe and North America to become the norms of government in most lands, sometimes as authentic governing principles and sometimes only as rhetorical decoys to obscure tyranny.  But they are norms.  The Iraqi elections should assure us that we are right to support these ideas, even as the experience in Iraq has made painfully clear that the means we choose to support them–the question that divided Europe and America in Iraq–must be weighed very carefully.

Joseph R. Wood is a Senior Resident Fellow with the German Marshall Fund in Washington, D.C.

Predictably, the news of China’s export ascent has triggered a great deal of anxiety and angst in the U.S. and Europe, notably among those who believe that China’s soaring exports represent a clear and present danger to workers in the developed nations.  These worries are not unfounded.  China’s increasing role as the “factory to the world” has lead to job losses in the west—notably among lower-skilled workers.  That said, however, “Made in China” is not what it seems.

Lost on many policy makers in the U.S. and Europe is this:  a great deal of what China exports to the United States and the world are goods from so-called foreign invested enterprises, or foreign subsidiaries of various global multinationals. 

The contribution of foreign enterprises to China’s export ascendancy is nothing short of staggering.  From a share of 2% in 1985, aggregate exports of foreign-owned subsidiaries accounted for nearly 60% of China’s total exports in 2005.  That’s another way of saying that China’s true exports to the world are inflated and overstated by official trade statistics.  Take out foreign affiliate exports of $673 billion, and China’s exports to the world totaled $530 billion, roughly on par with total exports from Italy.

Against this backdrop, thousands of low-cost Chinese firms are not flooding the U.S. and European markets with goods, displacing transatlantic workers in the process.  Rather, foreign firms are increasingly leveraging low-cost China to their competitive advantage.  Take the iPod for instance.  The 30 gigabyte video version is manufactured in China by a Taiwanese firm.  It sells for around $224 (wholesale), with China, the master assembler, only receiving $3.70 from the total price.  The bulk of the profits flow to Apple, even though the product—and many others like it—bears the familiar “Made in China” logo.

China has basically outsourced its exports to foreign affiliates over the past quarter century, a strategy that has helped employ millions of Chinese workers, lowered the cost of production for thousands of foreign companies, and stretched the incomes of millions of consumers in the U.S. and Europe.  The hardest hit have been low-skilled labor in the U.S. and Europe, but notably Asia, whose firms have lead the way in shifting manufacturing capacity to the mainland and leveraging China as a low-cost export platform.  In contrast, U.S. and European investment in China is mainly geared toward the domestic market.

Given all of the above, there is little doubt that China has emerged as a significant global exporter of goods.  The mainland is now the world’s top exporter of goods.  However, it’s worth keeping in mind that official trade statistics don’t tell the whole story of China’s rise as a trading power.  Neither do the figures accurately reflect who is really benefiting from China’s surging exports.  For these reasons, China’s export figures should come with an asterisk.

The IMF, a creation of the Bretton Woods accords of the 1940s, was saved by the crisis. Only a few years ago fading into obscurity in the thriving world economy, the global lender of last resort sprung back to business. By the fall of 2009, the Fund had committed over $160 billion in new emergency loans to such nations as Iceland, Pakistan, and Ukraine. Policy consensus shifted rapidly, as well. At the US Treasury’s suggestion, the G-20 pledged to triple the Fund’s lending capacity to $750 billion, and asked it manage the wide-ranging Pittsburgh balanced growth agenda.

Notwithstanding its new windfall and duties, the Fund is under debilitating pressures on its legitimacy and effectiveness. One of the challenges is a specter of disintegration of the global financial architecture – right when the globalization of financial markets and crises alike calls for strong system-wide management. The epicenter of this issue is Asia. Regional nations scarred by the Fund’s tough policy conditionalities in exchange for loans during the 1997-98 regional financial crisis are wary of the world body, and back at building national reserves and regional financial arrangements so as to wean themselves off the Fund’s influence.

The Chiang-mai initiative conceived in 2000 created a new network of bilateral swap arrangements in Asia among the ten Association of South East Asian Nations members and China, Japan and Korea (or ASEAN+3). The arrangement was paralleled by the Asian Bond Markets Initiative, and paved the way to discussions on a regional IMF, an Asian Monetary Fund (AMF).

Contributing to the regional drive is Asia’s perceived lack of influence in the Fund. IMF’s governance structures are seen by many emerging markets as unfairly favoring particularly the Western European members. The US-sponsored September 2009 G-20 pledge to expand emerging markets’ voting share by five percentage points to 48 percent of the total by 2011 got a hesitant reaction in Europe. It is also unlikely to go far enough to address the grudges of China and India, whose calls for greater representation on the basis of their economic weight are justified.

Asians’ urgency to foster Chiang-mai accentuated as the Great Crisis breezed through. The arrangement was expanded to a total of $120 billion, and it was “multilateralized” – made a regional pool for realizing the very same scale economies that the Fund promotes at the global level. The main powers, Japan and China, agreed on equal voting shares. Perhaps observing Asians, also Latin Americans started discussing regional financial response mechanisms.

Thus far, Chiang-mai has had a link to the IMF: borrowers can draw up to 20 percent of their bilateral or multilateral swaps, but then need to agree on an IMF program, including prescribed policy adjustments, to access the remaining 80 percent. As such, Chiang-mai is much more tightly referenced to the Fund than European and US regional rescue schemes – Europe’s balance-of-payments facility, Medium-Term Financial Assistance, and the Treasury’s Exchange Stabilization Fund mostly within the Western Hemisphere – ever were.

But given EU and US powers in the Fund, their schemes had a built-in consistency with the IMF. Asians, with less weight at the Fund, do not necessarily agree on the body’s policies, and are more eager to go it alone. A gradual divorce between the Asian schemes and the IMF would risk conflicts and gaps between regional and IMF responses in the face of crises, an outcome problematic for global financial stability.

More generally, completely regionalizing the management of global financial stability would be sub-optimal. The IMF’s inherently global projection provides three benefits that cannot be replicated by regional schemes.   

First, for any nation believing in the benefits of sound macroeconomic management both at home and abroad, the Fund provides global policy leverage, something a regional fund delinked from the IMF would not give to the outsiders. The Fund’s policy conditionalities, while not perfect, have made a veritable difference. For instance, most studies show that Fund programs, when implemented, improve the recipient’s current account and international reserves. Contrary to its critics, the Fund’s impact on preventing currency crises and reducing macroeconomic imbalances is also positive. Granted, the Fund has made mistakes – and it certainly is no magic wand for misgoverned economies or nations that fail to complete its programs. But many an emerging market could well be a declining market were it not for the IMF’s lending and policy advice. Regional rescues not accompanied by similar demands for good governance would perpetuate moral hazard and, at worst, undercut the IMF’s policy advice. 

Second, the Fund’s surveillance and research on the global economy is something regional funds would not and could not replicate. Yet, that crises all too easily globalize requires system-wide monitoring and policy recommendations. The Fund is the only instance in the world to credibly serve as a systemic police patrol and alarm bell. 

Third, the Fund imparts a further benefit: it economizes bailouts. Pooling resources and rescuing nations multilaterally makes for smarter policy than hoarding reserves unilaterally or structuring rescues bilaterally, or, given the global spread of crises, rescuing only regionally. That the Fund distributes the burdens of emergency insurance across its 186 members prevents free-riding on the main lenders. Fund expert Randall Henning has found that US contributions to the Fund are matched more than four-fold by other states. Global insurance pooling also makes sense also in that crises do not respect borders: a global fund is required to put out rapidly spreading fires. While regional funds can be an excellent complement to the IMF, managing global surveillance or rescues by relying on them alone would be inefficient and risky. 

To be sure, concerns about a world split into regional schemes might be premature. While Asians may have a sufficient kitty for an AMF or a larger Chiang-mai, they are not ready for a separation from the Fund. First, Asia is still much more integrated with the US and European financial markets than intra-regionally. The region’s global exposure calls for multilateral engagement. Second, the regional pool, unless augmented, is still small and untested. Hit rather hard in the current crisis, Korea and Singapore turned directly to Japan and China, and Korea performed its largest, $30 million swap arrangement not with Asia, but with the US Federal Reserve. Third, politics stand in the way. Beijing has grown increasingly enthused about the AMF and made the case for an Asian Currency Unit, but Japan has a large stake in the IMF and wants to continue playing the role of a leading power in Asia. Even if Tokyo and Beijing collaborated seamlessly, political divisions not unlike those at the IMF could erupt between the Sino-Japanese-dominated financial schemes and other nations in the region.

In light of their disenchantment with the IMF and the uncertainties surrounding the regional pool, the first-best strategy for Asian nations for now is unilateral reserve accumulation – even if it de-economized the provision of insurance that the IMF is designed to economize, and unnecessarily diverted funds away from regional investments in, say, education or infrastructure.

The EMF debate, if advancing, will have implications on the dynamics in Asia. It will likely inspire Asians, just as the euro and European integration have done in the region. But by necessarily entailing consideration about the link to the IMF, the EMF discussion also presents an opportunity for the EU, along with the Fund’s leading shareholder, the United States, to set a precedent for a constructive complementary relationship between regional funds and the IMF – one that can be referenced and leveraged with Asia. This notion should be prioritized over any European urges to completely distance the EMF from the IMF: a Chiang-mai-type link should be viewed as being in the broader interest of Europe in the world economy. 

Even if the EMF idea did not prosper, regional initiatives will unlikely go away. The issue requires more thorough discussion. Three steps could be taken.

First, working particularly with Japan, China, and Korea, Washington and Europeans should in the G-20 context fashion a clear set of principles to guide the relationship among the IMF, regional financial facilities, and bilateral arrangements. Money confers influence, but, as President Roosevelt understood in the 1940s, influence can be exercised in a fashion constructive to long-term viability of the global economy. Emerging nations, many with money, will now need to be tied into this paradigm.

Second, US and European support to Asian financial integration should be conditioned on a continued 20 percent link to the IMF. A range of further, non-zero-sum mechanisms can be deployed to foster synergies between Asian schemes and the IMF. One idea is that Chiang-mai members gain voting shares in proportion to their Chiang-mai contributions for Fund decisions concerning the region.

Third, giving emerging Asia and especially China more power in the Fund would unlikely – and ought not – undo plans for a regional fund. But it would provide Asians greater incentives to hone the multilateral financial system and build complementarities between the Fund and their regional arrangements. The ball is now on Europe’s court. The first step is to give  emerging markets the 5 percent share increase, not because it is necessarily the best or the only solution, but because it has already been agreed upon.

First, the problem in Greek public finance cannot be “fixed” quickly. The Greek government is moving ahead with an ambitious austerity plan with potentially destabilizing effects in a society where public employment and entitlements loom large. Moreover, in Greece, Portugal, Spain, and Italy, there will be a natural temptation to avoid the front-loading of responses that many experts see as essential to success. Some of the most painful cuts may be deferred in a bet on revived growth. The prominence of shipping and tourism in the Greek economy ties the revenue fate of the country very closely to global trends. With years of low growth as a very real prospect, this could prove a risky bet.

Second, there is a risk that Europe will evolve into a two-class project in which financially pressed Southern Europe, in particular, is left to fend for itself. Across Europe, states will be left largely responsible for, and exposed to the consequences of, their own economic policies – not unlike the situation of states in the United States, where California now finds itself in the position of a “failed state” and New York is not much better off. This may spare members the moral hazard of underwriting obscure or misguided policies, but it does little for the economic, political, and geopolitical strength of either continent. It is also worth recalling that Germany and France have themselves strayed far from the Eurozone deficit limits to the extent that the limits became essentially unenforceable.  Greece and others in southern Europe will simply be less well-placed than Germany, France, or even Poland to go it alone financially – and politically. By virtue of their size and marginality in the European equation, Southern Europe is critically dependent on the reassurance only major EU partners can give to global financial markets. Not long ago, the EU saw structural assistance to less-developed regions as a key contributor to European integration. Will this tremendous progress in North-South convergence within Europe over the last decades be rolled back?

Third, a future in which Europe’s south is weak and decoupled from core European concerns will spell trouble in political and security terms. On the European side, a weak south will mean less European capacity to deal with the range of pressing strategic challenges emanating from the Mediterranean. From energy to migration, this is Europe’s contemporary front line. The Schengen agreement has shifted the burden of secure borders to the south and firmly linked the future of societies on both sides of the Mediterranean. North-South relations may be just as important to European prosperity and security over the next decades as East-West relations have been since 1945. A slow-growing and troubled Southern Europe will be a much less capable partner within the EU – and NATO.

There will be consequences for the United States, as well. The progressive “Europeanization” of Greece, Portugal, and Spain has had a very positive effect on their often difficult relations with Washington. The United States has benefited tremendously from being able to deal with Southern Europe as a normal part of relations with Europe. The benefits of this have been on display from Kosovo to Afghanistan and Iraq. (Athens, in particular, has been quietly helpful on all these fronts, even when Greek public opinion was skeptical or opposed.) To the extent that Southern Europe is decoupled from the European mainstream, American engagement in this strategically important part of Europe will be more difficult and potentially crisis-prone. An insecure and inward-looking Greece may also be less inclined to consolidate the prevailing détente with Turkey in the Aegean – an issue critical to European and American interests.

Much can be done to avoid this unfavorable geopolitical future. On the European side, Greece’s EU partners will need to be more forthcoming. The new government of Prime Minister George Papandreou is making a valiant effort to confront myriad forces impeding a sweeping austerity and revenue-collection plan. Athens deserves far more support than it has received — financially, yes, but above all, political. The German proposal for a European monetary fund to address future crises may be a worthy idea, but it has little relevance to the Greek case.  With other financial crises looming in the wings, steps taken today will have significant implications for the behavior of markets tomorrow.  Political support from Washington may be equally critical, to offset perceived risks and allow Greece to borrow at more favorable rates and to show that the United States has a strategic stake in the outcome. On both sides of the Atlantic, policymakers need to break out of the longstanding North-North mold and spend more time on Southern Europe as a component of European stability, transatlantic relations, and Mediterranean security.

Ian O. Lesser is a Senior Transatlantic Fellow with the German Marshall Fund.

Today, Yanukovich is on his second official trip abroad — to Moscow. He won the Ukrainian election in the Russian-speaking south and east of his country. From Moscow’s point of view, that means many issues might become easier.  For example, Yanukovich — like Moscow — is against NATO membership for Ukraine.  Yanukovich — like Moscow — is also in favor of extending the deployment of the Russian Black Sea fleet in the Crimea after 2017.  Indeed, his pressing of the “reset button” in Ukraine’s relations with Russia contrasts sharply with his predecessor Yushchenko’s aversion to Russia.

Oddly enough, Yanukovich’s new charm offensive toward Moscow makes it easier for the EU to pursue a more open and integrated neighborhood policy with Ukraine.  For the past five years, and precisely because of Kiev’s aversion to Moscow, any type of cooperation between Brussels and Kiev was viewed with suspicion from Moscow, and some in Brussels became intimidated by Russian growling.  Combined with Ukrainian political and economic deficiencies, European excuses for not working more closely with Ukraine were widespread.

President Yanukovich understands that improved engagement with the EU is in his country’s interest.  Ukraine’s ailing economy needs greater integration into the European Common Market. Even the oligarchs from Ukraine’s Russian-speaking regions that back Yanukovich are far more interested in access to European markets than in the sometimes dirty struggles with Russian businessmen.

With the EU-Ukraine negotiations about the Association Agreement and a deeper Free Trade Agreement, the EU has adequate mechanisms in place to integrate Ukraine’s economy into the European market. Besides this, Yanukovich looks for EU support for securing loans from the International Monetary Fund.  Barroso himself  promised the disbursement of another 500 million euros if Ukraine meets the conditions for IMF loans. At Monday’s talks in Brussels, reform of Ukraine’s opaque gas sector  played a central role, as 80 percent of the EU gas imports from Russia pass through Ukraine. The country’s gas sector might serve as a textbook example for a “de facto” integration of Ukraine’s industry — if the Ukrainian government in the long term is able to meet European transparency standards.

Eventually, such a pragmatic “de facto” integration of Ukrainian industry sectors into the European market might include free trade and visa-free travel. Certainly, it is the most promising route for a rapprochement between Ukraine and the EU given the reservations harbored by most EU member states toward the idea of a Ukrainian membership bid.

It remains to be seen whether Yanukovich’s efforts to rebalance Ukraine’s position between Moscow and Brussels is a deliberate move to maintain his country’s independence from Russia or a pragmatic move to help get his country’s economy back on its feet.  In the meantime, improved relations between the Ukraine and the EU might make it difficult for Europe to keep Ukraine waiting before its closed doors.

Jörg Himmelreich is a Senior Transatlantic Fellow with the German Marshall Fund in Berlin

Lukashenko knows how to play and is an effective self-made practitioner in international relations.  Having ruled with an iron fist over his country of 10 million since 1994, he is one of the longest-serving presidents in Europe and knows very well how to use internal and external conflicts to maintain his rule.  As Lukashenko sees it, Belarusians love and need him as the guarantor of nationhood and stability.  Despite opposition movements, Russian punishments, EU and U.S. sanctions, and color revolutions around him, he remains comfortably ensconced at his palace while European commissioners, patriarchs, popes, and other presidents have come and gone.

But early 2011 will see a presidential election in Belarus and, in some ways, the campaign has already begun.  Of course, it will be a campaign that is specific to Belarus and a select group of other countries of the former Soviet Union, where leaders are hesitant to retire anytime before they die.  This type of election campaign is hardly recognizable to voters or politicians in democratic countries where ballots are actually counted.

The chessmaster Lukashenko understands that he is living in an interdependent and multi-polar world hit by an economic crisis, and he will use the time before next year’s election to test new means of maintaining power that would allow his five-year-old son Kolya (who accompanies him regularly on his domestic and foreign trips) to continue learning from his powerful father until the time that he will be old enough to lead.

Indeed, the 55-year-old Belarusian president, while shaping his peculiar autocratic regime, has learned a great deal about different mechanisms for controlling his own people and limiting the capacity of the outside world to influence his power games.  The recent attacks by the police on the Union of Poles, a group representing the Polish minority (there are about 400,000 Poles living in Belarus, some loyal to the regime, others not) and their ramifications seem to be part of Lukashenko’s skilful pre-election political engineering.

The timing of his Polish crackdown coincides with the pre-presidential elections in Poland and allows him to simultaneously demonstrate his overwhelming power both at home and abroad. Paradoxically, neighboring Poland earlier played a key role in the EU’s recent welcoming overtures toward a Belarus that it argued was undertaking political reforms seriously.  But the recent persecution of Belarus’ Polish minority outraged Polish public opinion; now Poland is engaged in a bitter bilateral diplomatic war and is talking about new sanctions, conditionality, and visa bans. Polish President Lech Kaczynski and two potential presidential candidates — Bronislaw Komorowski, marshal of the Polish Sejm, and Radosław Sikorski, the foreign minister, are all scrambling to find solutions.

They have rightly called upon the institutions of the European Union for help. The EU, which is still working to define individual roles in the post-Lisbon period, reacted quickly.  Jerzy Buzek, the new president of the European Parliament, who coincidentally happens to be from Poland, did his European best to answer Lukashenko’s challenge by calling for a wider approach that doesn’t look only at the issue of the Polish minority.  Catherine Ashton, the EU’s new high representative for foreign and security policy, said that Belarusian actions “undermined our efforts to strengthen relations between the European Union and Belarus.”

Lukashenko is at his chess game again — and winning. Top Western officials are writing him letters, negotiating, and asking him politely to do the things they would like him to do. Fact-finding missions are coming to Belarus to discover what they knew before. While Poland and the EU take the time to consider their next step, Lukashenko is already way ahead of them.  Indeed, his plans likely include making a grand display of stopping the attacks and beginning a reconciliation process between Belarusians and Poles.  But before he does that, he’ll ask for further international financial assistance and other benefits from the very people and institutions who are now asking him to stop persecuting his country’s minorities.  And when that assistance arrives, he will use it to extend his control over domestic resistance and opposition before the new round of elections early next year.

Lukashenko is a tough chess player who frequently uses forbidden moves (including removing pieces from the board) that throw his domestic and international opponents off-balance. The new EU leaders should recognize that their peculiar neighbor will not respond to standard diplomatic warnings and pressure, does not care about EU membership, and is capable of creating the illusion of success for those who enter into negotiations with him. They must appreciate that he is fully aware of the West’s political and economic weaknesses and the increasingly process-driven mentality when it comes to democracy assistance and the protection of human rights. In short, the policy of  engagement  that replaced the strict isolation of Lukashenko’s regime needs to be rethought and recalibrated.

Instead of watching Lukashenko choose the strategy and create illusions, the attacks on the Polish minority in Belarus and Poland’s consequent seeking of European solidarity should help us to rethink our values, commitments, and actions in respect to human rights and democracy, and to come up with real and effective cooperation strategies in this field.  If we succeed in European Belarus, we will do much better in other parts of world.

Pavol Demeš is the director of the Central and Eastern Europe program at the German Marshall Fund of the United States.

In recent weeks, the Greek debt crisis now embroiling European bond markets has been seized upon by conservative commentators in the United States as evidence of the troubles awaiting the US if it does not decisively cut government spending.

This use of Greece’s plight as yet another debating point in Washington’s ideological struggle over the role of the state in the economy short-changes the US’s long-term economic, security and foreign-policy interests in an effective European response to this crisis.

Europe is the US’s largest export market. But, in part due to the Greek crisis, the euro has fallen in value by 8% against the dollar since November 2009, making US products more expensive for Europeans. An extended period of weakness for the euro would undermine the ambitions of President Barack Obama’s administration to double US exports in the next five years.

Moreover, any threat to the euro and the cohesion of the EU runs counter to US interests. Washington has long supported European enlargement, for example, as a means of spurring economic growth and democracy in central and eastern Europe. The Greek crisis could easily slow down the EU’s expansion.

In addition, the intra-European strife that the Greek turmoil may engender will make it even harder to get unified European positions on issues of interest to the US, such as climate change and global financial regulation. Obama should therefore rethink his decision not to attend the proposed US-EU summit in May. Obama needs to be there to show solidarity with the Europeans in their hour of need, to encourage them to get their act together, and to forcefully articulate US interests in their crisis management.

In particular, Obama should lean on Angela Merkel, Germany’s chancellor, to stimulate consumption in Germany, so as to ease the intra-European trade imbalances. In times of trouble, surplus countries have responsibilities, just as deficit nations do.

Moreover, Obama should articulate Washington’s interest in having the International Monetary Fund (IMF) manage and fund a Greek bail-out. It is understandable that Europeans want to clean up their own mess. But self-reliance is only admirable if it has a reasonable prospect of working. The European Commission lacks experience of overseeing the kind of structural reforms needed in Greece. And Berlin, which would have to be the largest pay-master for any bail-out, faces populist opposition to writing cheques to Athens – opposition that could easily undermine the Merkel government at a time when Washington needs it on other issues.

The IMF is already helping Hungary, Latvia and Romania restructure their economies. Moreover, the IMF can tap its own reserves to help pay for the effort, which, from a US geopolitical viewpoint, would be preferable to Greece borrowing from Russia or China. And the IMF could serve as a useful scapegoat for the populist anger that the necessary cutbacks in Greece’s public spending will create. For the sake of the US’s interest in future European solidarity, it would be better if the inevitable protests in Athens were to vilify the IMF rather than Brussels and Berlin. Athens and Brussels face no easy policy choices in the weeks ahead. To paraphrase that renowned economist Woody Allen, Europeans are at a crossroads. One path leads to utter hopelessness and despair, the other to total extinction. Americans can only hope that Europeans have the wisdom to find a better path. And, since the choice they make will affect US interests, Washington can ill afford to stand on the sidelines.

Bruce Stokes is a transatlantic fellow with the German Marshall Fund and a columnist on economics for the National Journal.

I f only the problems in Greece where contained to Greece.  They are not, of course.  The risks associated with the (in)solvency of Greece has rattled other heavily indebted euro zone members like Portugal and Spain, and cast a dark cloud over French and German banks, creditors with extensive debt exposure to Greece.  Juxtaposed against the ongoing financial stress in Greece, real growth in the Euro zone slowed to a crawl in the final quarter of last year, with real GDP rising just 0.1%, a weaker than expected figure.  I don’t expect a turnaround in growth anytime soon—not with tax increases and spending cuts on the way in a host of European nations. The only bright spot are exports, with a weaker euro, the only silver lining to this crisis, expected to boost the exports of Europe’s largest exporters—think Germany, France, and the Netherlands.

Even with a bump from exports, Europe is likely to remain the “sick man” of the world economy in 2010. That is hardly a propitious prospect for corporate America since the global footprint of U.S. multinationals is largest in Europe.  Corporate America’s global presence is overwhelmingly biased toward Europe; below we outline various metrics that outline the depth and integration of the U.S. and Europe. 

Quantifying the Transatlantic Economy

The following metrics underscore the depth and integration of the transatlantic economy.

 1.  Gross Product of Foreign Affiliates

In their own right, US affiliates in Europe and European affiliates in the United States are among the largest economic forces in the world.  For instance, the total output of U.S. foreign affiliates in Europe ($611 billion in 2007) and of European affiliates in the U.S. ($412 billion) is greater than the total gross domestic output of most nations.  On a global basis, aggregate output of U.S. affiliates reached nearly $1.12 trillion in 2007, with Europe accounting for roughly 55% of the total.  The latter figure was roughly unchanged from the prior year.  The United Kingdom, where U.S. investment ties are deepest, accounted for just over 28% of total affiliate output in Europe, followed by Germany (14%) and France (9%).  These three nations accounted for more than half of total U.S. affiliate output in Europe in 2007.  By sector, output was almost evenly split between services and manufacturing output.         

The presence of U.S. affiliates in some European nations is particularly noteworthy.  The gross output of American affiliates in Ireland, for instance, represented 21% of Ireland’s total output in 2007, roughly unchanged from the prior year.  This dynamic reflects, in part, the large U.S. investment base, notably among U.S. technology companies, in the “Celtic Tiger.”   Elsewhere, U.S. affiliates accounted for 6.2% of the United Kingdom’s aggregate output in 2007, 6.7% of Switzerland’s, and 5.2% of Belgium’s total output.  Regarding the latter, it is interesting to note that U.S. foreign affiliate output in Belgium in 2007 ($23.7 billion) was some 6% larger than U.S. foreign affiliate output in China in 2007 ($22.4 billion) and more than four times as large as affiliate output in India ($7.32 billion). 

2.  Assets of Foreign Affiliates

America’s global commercial presence has never been larger, with aggregate foreign assets of corporate America totaling over $13 trillion in 2007.  That represents a rise of 17% from the prior year.  The bulk of these assets—roughly 63%–were located in Europe, with the largest share, by far, in the United Kingdom.  U.S. assets in the latter totaled $3.5 trillion in 2007, roughly one-quarter of the global total, and an amount greater than total combined U.S. assets in Asia, South America, Africa and the Middle East.

U.S. assets in the Netherlands ($1.3 trillion) were the second largest in the world in 2007 (after the United Kingdom).  America’s sizable asset base in the Netherlands reflects the host nation’s strategic role as an export platform/distribution hub for U.S. firms doing business in the rest of the European Union.  To this point, more than half of affiliate sales in the Netherlands are for export, namely within the EU.  Meanwhile, America’s asset base in Germany ($613 billion) was nearly double the base of South America in 2007.  The collective asset base in Poland, Hungary, and the Czech Republic (roughly $65 billion) was twice the size of corporate America’s assets in India.

3.  Affiliate Employment

The common perspective is that when it comes to hiring workers overseas, the bulk of corporate America’s overseas work forces toils in the developing nations.  Reality is different.  Most foreign workers on the payrolls of U.S. foreign affiliates are employed in the industrialized nations, notably Europe.

Out of a global overseas workforce of 10 million in 2007 (only including majority-owned foreign affiliates), roughly 42% were located in Europe.  The bulk of these workers were based in the United Kingdom, Germany and France.  The European workforce of U.S. majority-owned foreign affiliates was almost evenly split between manufacturing and service workers.  That said, it is interesting to note that U.S. affiliates employed just as many manufacturing workers in Europe (1.9 million) in 2007 as they did in 1990.  However, while the aggregate number has stayed the same, the geographic distribution of U.S. manufacturing employment in Europe has shifted over the past fifty years.  In general, the shift has been toward lower cost locations like Ireland and Spain, at the expense of the United Kingdom and Germany.  Between 1990 and 2007, for instance, U.S. affiliate manufacturing employment in the United Kingdom and Germany fell by roughly 32% and 18%, respectively.  Meanwhile, manufacturing employment in Ireland soared over 30% over the same period, while rising by over 20% in Spain.  However, even with the decline of manufacturing employment in Germany, the manufacturing workforce of U.S. affiliates in Germany alone totaled 372,000 workers in 2007, not far from the number of manufactured workers employed in China by U.S. affiliates (402,800). 

4.  Research and Development (R&D) of Foreign Affiliates

While most multinationals still tend to cluster their R&D expenditures and activities in their home country, foreign affiliate R&D has become more prominent over the past decade as firms seek to share development costs, spread risks and tap into the intellectual talent of other nations.  Alliances, cross-licensing of intellectual property, mergers and acquisitions and other forms of cooperation have become more prevalent characteristics of the transatlantic economy in the past decade.  The internet, in particular, has powered greater transatlantic R&D.

Research and development among U.S. foreign affiliates totaled $35 billion in 2007.  The bulk of such activity was carried out in the developed nations, where the largest pool of skilled labor resides.  In 2007, U.S. affiliates sunk $23 billion on research and development in Europe, or nearly 66% of total R&D expenditures.  The United Kingdom, Germany, France, and Switzerland represented markets where R&D expenditures by U.S. affiliates were greatest.  These four nations accounted for roughly 45% of U.S. global spending on R&D in 2007.

5.  Foreign Affiliate Sales

U.S. foreign affiliate sales (goods and services) were nearly $5 trillion in 2007, well in excess of U.S. exports of $1.6 trillion.  Europe accounted for half of total global foreign affiliate sales, with sales topping $2.8 trillion in 2007, up 15% from the prior year.  Reflecting just how important Europe is to corporate America, sale of U.S. affiliates in Europe were roughly double comparable sales in the entire Asia/Pacific region.  Affiliate sales in the United Kingdom ($672 billion) exceeded aggregate sales in Latin America.  While U.S. affiliate sales in China have soared over the past decade, they do so from a low base, and still remain well below comparable sales in Europe.  For instance, U.S. affiliate sales of $146 billion in China in 2007 were slightly below sales to Italy ($155 billion) and well below those in Germany ($357 billion) or France ($228 billion).

6.  Foreign Affiliate Profits

The transatlantic profits boom continued in 2007 although the tide turned in the second half of the year and into 2008.  Looking just at 2008, U.S. affiliates in Europe earned a $173 billion, down slightly from 2007 but more than three times the level of the cyclical lows of 2001, when slow growth on both sides of the Atlantic resulted in a transatlantic profits downturn.  In the first half of 2008, U.S. affiliate income from Europe rose 9% from the same period a year ago but then the bottom fell out — affiliate income plunged along with the economic downturn that swept Europe in late 2008.  On a global basis, Europe remains the most profitable region of the world for U.S. multinationals, with Europe accounting for over half of total global affiliate earnings in 2007 and 2008.

Just how important Europe is to the global earnings of U.S. multinationals is reflected by the following:  in 2008, U.S. affiliate income from Europe was more than double the total earnings from Latin America and Asia.  Up until late 2007, U.S. affiliates have enjoyed the best of both worlds in Europe—a weaker currency and stronger final demand, although both variables have turned against U.S. affiliates.  The affiliate earnings environment, on both sides of the Atlantic, will be very challenging in 2009. 

 The bottom line:  as the debt crisis plays out in Greece, the stakes for both Europe and the United States are huge.

Four years from now, the Winter Olympic Games will be held in Sochi, Russia.  Unlike Vancouver, Sochi, and the eastern Black Sea region where it sits, is synonymous with poverty, corruption, and violence.  The question to ask between now and the closing ceremony of the Sochi Games is: will the bright glow of the Olympics influence Sochi and its neighborhood positively, or will the unstable character of the region tarnish the Olympic spirit?

As a port to the Black Sea, and home to a beautiful resort, Sochi is a summer destination for Russians and indeed visitors seeking a relaxing getaway from all over the former Soviet Union.  There is little surprise that the pristine landscape of the Caucasus mountains caught the eye of Olympic officials—as well as Josef Stalin, who decades earlier made Sochi his summer retreat— who decided to award the Games to the Russian resort town.  Yet Sochi’s palm trees and Krasnaya Poliana’s pristine slopes are only the tip of a dangerous iceberg.

Sochi borders Russia’s six autonomous republics of the Northern Caucasus, home of the Chechen wars and violent feuding that surfaced after the breakup of the Soviet Union and continues to date.  All of the republics have severe social problems that stem from massive unemployment and bad governance.  Islamist extremism and the terrorism associated with it continues to be a threat.  In Ingushetia, the clashes between local militias and the government restarted in 2009 with even more violence than before.  For 18 years, Chechnya has not known real peace; the fights between separatists and pro-Russian authorities have been replaced by the murders and kidnapping of human rights activists and opposition politicians.  In 2009, Freedom House placed Chechnya on its Worst of the Worst list of most repressive societies.

And Chechnya is not Sochi’s only vicious regional neighbor.  The entire region of the Northern and Southern Caucasus Mountains are an intricate web of ethnic minorities and long-standing conflicts.  Indeed, the first shots of the August 2008 Russia-Georgia war were fired as the opening ceremony of the Beijing Olympic Games got underway.  Eighteen months later, the level of tension has not significantly diminished.

But violence and the potential of war are not the only features of the region.  No, Southern Russia and the Eastern Black Sea region is also a nest for organized transnational crime.  It is both a source and a route for trafficking people, drugs, and weapons—including documented instances of radioactive materials – into Europe.

Along with Sochi, poverty, unemployment, corruption, crime, and violence, very well might host the 2014 Winter Olympic Games.  To some, it might be too disheartening to think that the very expression of peace, tolerance, and fairness would be held hostage to a region where these ideas have little meaning.  But to the Russian hosts and organizers, it should be viewed as an important opportunity to heal so many wounds and at least try to begin real reconciliation processes.

Of course, the likelihood of real peace and reconciliation in a region where there is no real history of tolerance is unlikely before the Sochi Games.  But by campaigning to host the Olympic Games in Sochi, Moscow—maybe inadvertently—entered into a public trust with not only the peoples of the Eastern Black Sea region, but with the peoples of the world.  Russia’s commitment now can be no less than what is advertised on the Sochi Olymic Games official website: striving to become the embodiment of peaceful, productive dialog between peoples.

In all likelihood, taking on the large, until-now unsolvable conflicts will be too daunting.  Instead, Russia might seriously address rule of law issues and crack down hard on corruption and organized crime, including trafficking.  If Russia chooses to take this challenge on earnestly, it would be an important confidence builder for the entire region leading up to the Games.

If Russia does not want the Sochi Games to tarnish the Olympic spirit, and risk damaging Russia’s own reputation, it must also demonstrate its serious intention to promote increased tolerance instead of increased violence.  If Russia is serious, the international community should play its part and help as well.  In a region where soccer diplomacy has been known to play an important role, it is conceivable that Olympic diplomacy will have a significant role too.  If Russia is not serious and makes no real effort to improve the situation, the tension between rival athletes during the Games will be nothing compared to the real tensions only miles away from the Olympic village.

Alina Inayeh is the director for the Black Sea Trust for Regional Cooperation for GMF.

In Macedonia alone, a politically fragile state with a rather nationalistic government and a 30 percent unemployment rate, nearly 300 Greek companies have invested during the last five to eight years. A withdrawal of this investment or even its mere stagnation could bring this EU candidate country close to collapse.

Bulgaria and Romania are worried about their admission into the eurozone since EU member states north of Budapest doubt the fiscal discipline of the new candidates.

Before the economic crisis, the Balkans underwent rapid privatization, and experienced high growth rates and foreign capital investments. Now, the forecasts of the European Bank for Reconstruction and Development (EBRD) for the Balkans indicate a serious decline in GDP growth. Lest we forget, all Balkan countries are struggling with their unemployment rates so any destabilization of the economy would likely lead to further migration and brain drain to more economically-sound countries.  This would then push those capacity-striving states backwards, further hindering the seemingly everlasting transition process.

The Bright Side of Life is that this summer, most Southern Europeans will be able to afford a nice holiday in this attractive tourist destination. Prices have already gone down and are aiming to attract as many tourists as possible.

Gordana Delic is a senior program officer with GMF in Belgrade.