The Foreign Service Journal, February 2012

24 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 growing. “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- many. 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 trim € 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 F OCUS The U.S.-European partnership has weathered potentially debilitating challenges in the past. But future success can’t be taken for granted.