The Dollar and the Defense of the West

The world economic system is in deep trouble. The threat to the international economic system has been a long time in the making: the growth of the world economy has depended overwhelmingly on the strength of the U.S. economy and the dollar. Paradoxically, many have thought growth depends on continuous dollar deficits, the source of growing monetary reserves believed essential to expanding world trade. But others have long feared that this dependence on the dollar points toward eventual disaster. Three decades ago Robert Triffin warned that a strong dollar and chronic U.S. payments deficits could not indefinitely coexist. Either the dollar would weaken and the system would break down, or the American payments deficit would end, the supply of monetary reserves would contract and economic expansion of the system would cease.

But no purely economic explanation for today’s gathering crisis is adequate. All along, U.S. deficits have been in large measure a consequence of America’s willingness to carry the heaviest share of the defense burdens of the noncommunist world. An end to the American deficits suggests an end to the American burdens. This gives the present financial crisis a geopolitical and historical dimension. It appears a crisis, not only of the dollar, but of American "hegemony" and of the global political economy which that hegemony has built. This creates the grim possibility that the United States, the country that created the postwar global economy, is now on a course fated to destroy it. As Professor Paul Kennedy’s recent book reminds us, history is full of examples of hegemonic powers that brought themselves down because they were unable to sustain a viable relationship between geopolitical pretensions and economic resources. His is an ancient and recurrent lesson among historical moralists: a country with too-great power grows overextended and then self-destructive.

If this course is to be averted, it must be understood that the solution to America’s dollar problem is not purely economic but also geopolitical. Furthermore, the adjustments needed cannot be made by the United States alone, but must also involve its major allies. There are few alternatives: the current method of financing the Pax Americana makes a weak and fluctuating dollar inevitable and has increasingly destructive consequences for the world economy.

II

The Bretton Woods fixed exchange rate system broke down in 1971-73. But with the switch to a system of floating exchange rates, something closely resembling the old system of open international trade relations survived. The floating rate system has made it possible to believe that the essentials of a liberal international order could be preserved. While the United States remained in balance-of-payments deficit—which the widening budget deficit of the Reagan years worsened seriously—the dollar remained the world’s principal currency, and the United States the chief provider of military protection for the noncommunist world. The monetary system survived, at least in a semi-stable state, because the American payments deficit was covered by capital inflow from abroad. Even though the American national debt grew by more than $1.5 trillion over the Reagan years, foreign governments were eager to prevent both a collapse of the dollar and a withdrawal of the United States from its defense commitments. Nor did the United States want to give up the dollar’s role or America’s political-military hegemony, despite the heavy costs.

Yet events in 1987, culminating in the stock market crash that began in New York and swiftly ran around the world, again raised fears that the American-led economic and security system would end with a bang. Those fears were eased by actions taken in 1987 and early 1988 by the United States and its major allies to arrest a further fall of the dollar, which had plummeted to an all-time low. Profound and volatile anxiety nevertheless remains. Unfortunately, it seems well founded.

The year 1988 opened inauspiciously for the American economy. With a heavy hangover of inventories from the final months of 1987, a recession appeared to threaten as consumers began to react to the October crash by cutting spending. Fear of a recession in an election year now dominates thinking about economic policy in Washington. The Administration is giving top priority to keeping the economy growing and would doubtless, in a crisis, use monetary and fiscal policy actively to that end. But excessive stimulus would weaken the dollar, causing Wall Street and the financial community to worry about renewed downward pressure on U.S. securities markets. Part of the country, however, welcomes the dollar’s slide as providing an opportunity for American farmers and manufacturers to recapture markets lost to foreigners. Unlike Europeans, most Americans have never learned to see the value of their money on the foreign exchanges as a measure of the nation’s economic health.

The Reagan Administration has blown hot and cold on the dollar, depending on the pressures of the moment. When concerns about the trade deficit mount, the Administration threatens to let the dollar fall further; when worries about the securities markets or a slowing of foreign capital inflow rise, it seeks to stabilize the dollar. Actually, the U.S. authorities seem quite prepared to see the dollar fall wherever markets and foreign central banks will allow. Europe and Japan, the Administration assumes, are anxious enough about the effect of the dollar’s decline on their exports to support it indefinitely.

The expectation underlying this latter-day Republican version of "benign neglect," akin to the earlier Carter and Nixon versions, is that the dollar’s fall will narrow the U.S. trade deficit and restore confidence in the dollar once it has fallen far enough. Foreign investors will again be willing to finance a persistent but diminishing trade deficit by buying U.S. securities and other dollar assets on a large scale, as they did before they dropped that responsibility in the lap of the central banks over a year ago. All this will happen, some optimists assume, regardless of the posture of U.S. fiscal and monetary policy. Hence, the theory goes, the Administration and the Federal Reserve are free to use expansive monetary and fiscal policy to forestall a possible recession without having to give more than lip service to the problem of the dollar.

But less cheerful analysts warn that "benign neglect" of the dollar contains, in present circumstances, the threat of a financial crisis or series of crises that could drive the dollar into a free-fall, which would drive interest rates up and bring on a severe recession throughout the Western world. According to this view, there is no clear bottom for the dollar if U.S. domestic policy remains stimulative: if fiscal and monetary policy are used to spur domestic demand, imports will stay high and the trade balance will scarcely improve in real terms and could even worsen, due to the constantly renewed effect of a falling dollar in raising U.S. import prices. Foreign private investors’ confidence would then not be restored, and they would stay away from dollar investments. Sooner or later, the willingness of foreign central banks to support the dollar would falter, as it did in 1979, and for the same reason.

Any prudent policy avoids placing all its bets on one scenario. Yet in a serious crisis, wavering can be disastrous. So great are the present dangers that we believe the United States should abandon its gamble on "benign neglect" and resolutely adopt a strategy that gives a high priority to preventing undue deterioration of the dollar. The reasons seem clear from a closer analysis of how the crisis has been unfolding.

III

The critical difference between the two possible approaches—benign neglect based on belief in a self-stabilizing dollar and defense of the dollar to prevent a major crisis of confidence—lies in the assumption made about the connection between the foreign exchange market and the financial markets. In the first, more sanguine view, the dollar’s fall will be self-limiting as it restores trade equilibrium. There will, therefore, be no untoward consequences for interest rates and securities prices. In the second view, however, a falling dollar would eventually trigger a collapse in the U.S. credit and securities markets, with grave consequences for the real economy.

Which view is more likely to prove correct? The experience of the last couple of years throws light on this question. In early 1986 the dollar unexpectedly lost 11 percent of its value against the West German mark in only six weeks. Although the U.S. currency had been declining irregularly for nearly a year, there had not previously been so steep a plunge or an adverse reaction in the U.S. bond market. This time, however, the U.S. bond market nose-dived; in late April 1986 it lost more than seven points. At the time, it was the largest one-week fall in memory.

Until then, foreign investors had been willing to buy U.S. bonds and other dollar assets despite the falling dollar. Why? Because the advantage in U.S. interest rates or the expected capital gains on dollar investments compared to other currencies offset the exchange risk. Then, in January 1986, as the dollar plunged, foreign investors’ assessment of the exchange risk changed, with two consequences. One was that many investors, unwilling to buy more dollar securities or even hold all those they already owned without hedging the exchange risk, hedged by borrowing dollars from banks in the United States or abroad and then selling the borrowed dollars for hard foreign currencies such as the Japanese yen, the German mark or the Swiss franc. The surge of demand for dollar credit drove up short-term interest rates in the United States and the Eurodollar market, and the selling of the borrowed dollars drove the dollar down.

The second effect was on the U.S. bond market; the new perception of increased exchange risk knocked bond prices down and raised U.S. long-term interest rates. Fears of rising U.S. import prices and inflation due to the falling dollar further lifted long-term rates.

The dollar’s plunge in January-March 1986 had been precipitated by the decisions of the Federal Reserve, which was under heavy pressure from the Administration and manufacturing and farm interests to try to remedy the situation by opening the money tap wider. The money supply took off, with M1 accelerating from 11.5 percent in 1985 to nearly 17 percent in 1986. In this expansive monetary environment the dollar was bound to go on falling. By the spring of 1987 there was a full-fledged crisis. Treasury bond prices declined, and net private foreign purchases of dollars fell to zero and below; purchases of U.S. securities were offset by short-term bank outflows reflecting borrowing to hedge against dollar exposures. To finance the trade deficit and slow the dollar’s fall, foreign central banks had to step into the breach and absorb $70 billion in five months (January-May 1987). Since then, the financing of the U.S. trade deficit and the support of the dollar have been in the hands of the central banks, particularly the Bank of Japan.

For the year 1987 as a whole, foreign central banks bought a total of $140 billion to underpin the dollar but succeeded only in slowing its fall. Quite evidently, something more than central bank intervention will eventually be needed to avoid a hard landing, for intervention on this scale cannot continue indefinitely. To close the external deficit there must be enough excess domestic production to take advantage of the lower relative prices of domestic versus foreign goods caused by the devaluation.

In our view, the notion that there can be a painless correction of a large trade deficit is an illusion, though a convenient one for a party or government facing an election. It minimizes the costs and dangers that lie ahead, and rationalizes a policy of trying to put onto foreign governments the main responsibility for the fate of the dollar and the U.S. economy.

This is not to suggest that U.S. economic policy is solely responsible for the present difficulties and their solution. The present dangerous imbalance of trade and capital flows between the United States and the two main surplus countries, West Germany and Japan, is after all the joint product of the opposite macroeconomic strategies the debtor and surplus countries have followed over the last few years. In the United States huge fiscal deficits, along with monetary expansion, have encouraged consumption at the expense of saving; in Germany and Japan fiscal consolidation and monetary restraint have held down consumption and made a large surplus of savings available for investment or loans in the United States.

IV

Purely economic analysis cannot explain why the United States has followed policies so different from the Germans and Japanese. Nor can purely economic analysis cope with the broader geopolitical consequences that might be expected if the United States were to change its economic policies.

America’s large geopolitical role bears a heavy responsibility for its fiscal deficit, which compels, in turn, its monetary instability. As America’s relative economic strength has diminished, its geopolitical burdens have grown harder to carry.

What should American policymakers do to reduce the imbalance between America’s public resources and commitments? How much of the remedy lies with a reallocation of domestic resources and how much with a readjustment of international role? There is as yet no national consensus on that critical question. It raises political issues well beyond the bounds of economic analysis. The search for an answer should begin with examining the causes of the fiscal deficit. What does our political system demand that causes us regularly to exceed our fiscal resources?

Some blame America’s budget deficit on an excessive level of public welfare and "entitlements." But others respond that claims that the share is excessive cannot be supported by comparing such American spending with that of other advanced Western countries. Compared to West European countries that have similar ratios of wealth to population, the American level of public benefits and civilian spending is remarkably low. Public spending in France and West Germany is, in proportion to their economies, much higher than in the United States. But so is their taxation.

From a European perspective—and that of many Americans as well—the U.S. fiscal imbalance arises not from spending too much but from taxing too little. Yet American resistance to paying higher taxes seems deeply rooted—and the landslide defeat of Walter F. Mondale on the tax issue in 1984 makes politicians wary of proposing it too boldly or openly.

Why are European countries able to raise so much more in taxes, proportionately, than the United States? Judging from Europe’s experience, America’s fiscal problem may be that it spends too little on civilian benefits rather than too much. It seems difficult to separate the greater tolerance for higher taxes among French and German citizens from the substantially higher level of benefits those citizens—particularly middle-class taxpayers—receive from the state. Higher pensions, heavily graduated according to working incomes, free medical care, excellent free secondary schools, superior public transport, better police protection and superior public amenities in general—above all in the big cities—make Europeans’ willingness to pay higher taxes not so difficult to understand. But to expect Americans to pay a European level of taxes in return for an American level of civilian expenditures is politically unrealistic.

Equally unrealistic, in our view, is the strategy that would eliminate the deficit by heavy cuts in our country’s comparatively underdeveloped welfare spending, as the Reagan Administration has always advocated rhetorically, or by huge cuts in America’s comparatively low level of "middle-class entitlements," as advocated by many of the Administration’s critics. Despite its rhetorical enthusiasm for cutting civilian spending, the Reagan Administration has been unable to do more than slow its growth somewhat. The already comparatively low level of such expenditures, plus the widespread complaints about the insufficiencies of education, public housing, health services, pollution control and public infrastructure, all point to more rapid growth of civilian spending in the future. America’s fiscal profile—its particular mix of taxation and civilian and military spending—seems unable to achieve equilibrium.

V

If a combination of lower civilian spending and higher taxes is unlikely, what then are the prospects for cutting military spending?

Although American public spending and taxation are substantially lower than in France and Germany, American military spending is very much higher—over twice the proportion of national income in the United States as in the Federal Republic. While military spending has powerful support in the United States, the American defense constituency evidently cannot generate support for European levels of taxation. Despite the insistence of advocates of high military spending that the public can and must be "educated" to pay the necessary taxes, postwar experience does not suggest that the experiment can succeed. Congress and the American electorate do not generally disapprove of the country’s geopolitical role, but have been reluctant to raise enough taxes to pay for it.

How can military spending be cut and with what consequences? Roughly speaking, there are three strategies for reducing the military budget substantially. The first is what might be called managerial efficiency; the second, hegemony on the cheap; and the third, geopolitical efficiency.

Every new administration vows to make the Pentagon more efficient. International comparisons suggest great possibilities. European states, France in particular, are thought to be far more efficient in the management of their military resources. Why cannot the United States similarly cut its costs without impairing its power? Present circumstances, after all, seem particularly promising. After the buildup during the Weinberger period, it would be surprising if there were not substantial room for managerial improvement. Recent changes in the structure of the Joint Chiefs of Staff, moreover, promise more efficient coordination of operations and weapons procurement.

The fundamental problem remains, however: America’s federal budgetary process is such that no president or secretary of defense has the power to maintain the same tight control over spending that is characteristic of the more centralized political structures of Western Europe. While the struggle to improve the efficiency of American military spending is indispensable, without fundamental and perhaps undesirable changes in our constitutional processes it may not succeed sufficiently to have a profound effect on our present fiscal imbalances.

Furthermore, many experts predict that ballooning costs are built into maintaining our present force posture and will not be easy to reverse. Costs for our increasingly sophisticated weapons technology seem to rise inexorably. Many weapons systems already being developed show sharp projected increases once the systems are ready for deployment. Thus, if the Pentagon wants to keep its present force structure, it will be hard put to keep its present budget from shooting upward.

Savings in the Pentagon budget mean, therefore, deciding which weapons systems and forces are essential and which are not. Reducing forces and weapons systems, however, logically implies reducing our capacity for certain geopolitical roles and commitments. Reduced spending without reduced burdens constitutes the familiar strategy of hegemony on the cheap, the consequences of which will be taken up presently.

Some experts, however, believe that very substantial savings can be made in our military budget without changing America’s military commitments or even troop levels. For example, in an analysis for the authors, Professor William W. Kaufmann, a defense specialist at Harvard University, proposes specific five-year cuts in a long array of military programs that he argues would save $367.2 billion from the last projected Weinberger five-year defense outlay of $1,577.4 billion (in constant fiscal year 1988 dollars).

In terms of reduction by mission, Kaufmann’s approach would break down into savings over five years in the categories and amounts set out in Table 1 (see next page). The "other" category includes savings on military personnel ($17.5 billion), national guard and reserve ($8.5 billion), civil service ($9.5 billion), retirement pay ($0.5 billion), military construction ($20 billion), other research, development, testing and equipment ($31.2 billion), and burden-sharing ($30 billion—$15 billion with the Federal Republic of Germany and $ 15 billion with Japan.)

The cuts in weapons programs would break down into savings of $6.5 billion for the army, $75.3 billion for the navy, and $168.2 billion for the air force.

TABLE 1

REDUCTION BY MISSION

(in billions of 1988 dollars)

Mission Savings

Strategic nuclear retaliation $120.8

Land warfare 6.5

Amphibious warfare 22.8

Carrier battle groups 33.2

Antisubmarine warfare 6.1

Air superiority / interdiction 28.3

Intercontinental mobility 32.3

Other 117.2

Total $367.2

Kaufmann is hardly alone in believing that very substantial savings in the defense budget can and must be made. Secretary of Defense Frank Carlucci has submitted a new five-year plan involving one percent real annual growth from the fiscal year 1988 total outlays and 1.7 percent annual real growth in budget authority; in 1989 dollars this growth amounts to $ 122.7 billion in outlays and $188.4 billion in budget authority. Such a plan could yield savings, over five years, of about $140 billion in defense outlays and $190 billion in budget authority from the Weinberger baseline, which projected three percent annual real growth.

Some downward adjustment, provoked by economic pressures, is now clearly in process. How durable and efficacious will these defense cuts prove to be? Is it true that they can or should be made without any corresponding geopolitical adjustment—that is, without any change in American commitments? Defense spending has, of course, been severely pruned in the past. But cuts have never proved durable.

Postwar American military spending has always tended to be a cyclical process, with the United States regularly trying to sustain traditional commitments with cheaper forces. Thus, after the buildup that accompanied the Korean War, the Eisenhower Administration cut military force levels substantially while relying on nuclear weapons to sustain our geopolitical commitments. Realization that the Soviets were developing serious nuclear capabilities of their own in turn prompted the Kennedy-Johnson military buildup of the 1960s. By Nixon’s time, with Congress refusing to sustain military spending and eliminating conscription, the American global position relied on MIRVs (multiple independently targetable reentry vehicles), détente, arms control, the "China card" and hyperactive diplomacy in general. By the mid-1970s a dangerous gap between American global commitments and the military forces able to back them up began to be perceived widely throughout America and Europe. Carter’s buildup was succeeded by Reagan’s more massive buildup. Today, with the United States already into a new period of retrenchment, arms control, détente and "smart" weapons are again in favor.

What are the prospects for a retrenchment more durable than Nixon’s or Eisenhower’s? Are the 1990s fated to discover a new "missile gap" or "window of vulnerability," to be followed by another hectic buildup in response? The Reagan rearmament has been highly wasteful, and therefore offers ample opportunities for greater management efficiency, but has it been any more so than the Korean or Vietnam Wars?

The durability of defense cutbacks depends on whether what results represents some reasonable fit between forces, military doctrines and geopolitical commitments. To cut forces and weapons systems without corresponding coherent alterations in military doctrines or geopolitical commitments obviously runs the risk of merely perpetuating the old cyclical pattern of defense spending, itself a major cause not only of military inefficiency but also of fiscal waste.

VI

Since the Eisenhower presidency nuclear weapons have allowed the United States to maintain its military protectorate for Western Europe without having to match Soviet conventional forces on the Eurasian continent. In effect, the United States has threatened to initiate a nuclear war rather than see Europe overrun by Soviet conventional forces. A nuclear defense of this kind has always been much cheaper than conventional defense—a differential grown still greater with the years. NATO’s reliance on U.S. nuclear deterrence has, of course, continued long after the Soviets developed intercontinental ballistic missiles. An enormous American superiority in missiles and bombers persisted through the 1960s and continued to lend credence to the nuclear protectorate. A lead in MIRV technology prolonged the American superiority still longer. By the later 1970s, however, strategic parity had clearly come about, and it had become widely perceived that the U.S. nuclear commitment to Europe could suddenly expose the United States to a high degree of risk.

A number of trends have followed. Europeans have demanded further reassurance of American "coupling." Hence the dual-track decision in 1979 to deploy new American missiles in Europe capable of reaching the Soviet Union. The United States, in turn, has grown more fearful of the nuclear risks. Hence the Strategic Defense Initiative, the Intermediaterange Nuclear Forces Treaty and the new American emphasis on conventional as opposed to nuclear defense for Europe.

The prospect of having to maintain a European military balance with less reliance on nuclear weapons has already started to cause severe strains within the Atlantic alliance. Some American military experts see the solution in a transformation of military weaponry in order to give NATO a more powerful conventional defense. One school, for example, argues for a revolutionary new form of conventional defense based on technologically advanced "smart" weapons. Another group sees a radical transformation of American ground tactics, weapons and formations away from reliance on static positions and overwhelming firepower. But neither solution, whatever its intrinsic military merits, seems a promising way to reconcile the traditional American position in European defense with an urgent need to shrink budgetary deficits. If the past is any guide, high-tech conventional weapons will not save money. Nor is the American military likely itself to develop, let alone lead its allies through, a revolutionary transformation of forces and tactics that will bring large budgetary savings.

This situation explains the revival of interest in a greater "Europeanization" of NATO. This is a solution that would hope to cut American military spending through geopolitical efficiency rather than hegemony on the cheap. Since the European allies are much stronger economically in relation to the United States and the Soviet Union than in 1950, when NATO’s hegemonic pattern was established, the United States ought to be able to devolve to those allies some of the geopolitical responsibilities for sustaining the Pax Americana from which all have profited so handsomely. In particular, the time has come for the European states to take the primary role in organizing their own territorial defense. Current strategic trends suggest that a Europeanized NATO could be more efficient militarily.

By the Pentagon’s own calculations the U.S. commitment to NATO is responsible for roughly half of the American defense budget. Why the NATO portion of the U.S. defense budget is so large is easy to understand. Of America’s 18 standing divisions, for example, ten are devoted to NATO—five deployed in Europe and five more in the United States ready to arrive in Europe within a few days, where they are to find large quantities of stored equipment and supplies. Unlike air and naval forces assigned to NATO, these very expensive and heavily armored land divisions are not easily adaptable to purposes beyond the NATO theater. Hence the particular attractiveness, military as well as fiscal, of a substantial reduction in these ground forces—particularly those deployed in the United States.

Obviously, Europeans have a very substantial comparative advantage over the United States when it comes to providing land forces for European territorial defense. And certainly, if European defense is to depend increasingly on conventional forces, U.S. fiscal conditions preclude an increased American contribution to those forces. On the contrary, with severe cuts in military spending likely, these forces are a logical target.

Even if no U.S. troops were withdrawn from Europe, some analysts estimate that gradually eliminating the five U.S.-based NATO divisions could, in the long run, save as much as $50 billion annually in the U.S. defense budget. While exact calculations are inevitably contentious and elusive, common sense suggests that cutting five of our 18 divisions would eventually have major fiscal consequences, even if the cuts took several years to reach their full extent.

The argument for devolution in NATO is, of course, military as well as fiscal. Replacing NATO forces that are based an ocean away from Europe with, for example, an enlarged and firmly committed French force could be more effective militarily as well as substantially cheaper. Indeed, it is not easy to imagine a serious conventional defense for Western Europe without the wholehearted participation of the French. Military arguments for Europeanization can also be made in the realm of nuclear forces. Strategic parity has inevitably undermined the effectiveness of America’s extended deterrence. To the extent that Europeans wish to continue relying on nuclear deterrence, the future does not lie with more American coupling but with a larger role for indigenous European nuclear forces. The United States can perhaps help sustain those European nuclear forces, but it cannot expect that it would have dominance over them.

Europeanization of NATO is hardly a new idea, but it means different things to different people. Traditionally, American administrations have called for greater "burden-sharing," by which is meant a desire for Europeans to contribute more money and forces to the American-run NATO defense. The past forty years have made clear the limits of such an approach. Present military and fiscal trends suggest more radical alternatives. Among these are not only "devolution"—a reduced American participation under a European-run NATO command—but also "disengagement," an outright American withdrawal from NATO.

Complete American disengagement from Europe would constitute a diplomatic revolution difficult to justify in terms of American interest. While other parts of the world have gained in importance since the 1950s, the American-European connection is as vital to the postwar system as ever. Western Europe is still an agglomeration of industrial, commercial and financial power rivaled in scale only by the United States itself. Culturally and politically, Western Europe is the other part of the world where political and economic liberty is deeply implanted and reliably practiced. Western Europe also has three of the world’s half-dozen major modern military powers, two of them nuclear. Thanks principally to the alliance between the United States and the major states of Western Europe, the Soviet Union has been contained in Eurasia and the United States has been given the margin of superior power to shape the global system. If, instead, Western Europe and the Soviet Union were allies, we would be living in a very different world.

The very strength of Europe is, however, what makes the radical alternative of devolution seem feasible. Not only do West European states have great economic and military resources, but they also have had extensive postwar experience in intimate confederal cooperation. The European Community is by far the most impressive experiment in intergovernmental cooperation in modern history. The cooperation required to coordinate Europe’s economies reaches intimately into the domestic interest-group politics of every member state. Compared to the difficulties of an economic confederation, managing a military coalition against the Soviet Union should be relatively simple, once the necessity of replacing part of the American military forces committed to NATO is clear.

Proponents of devolution, moreover, see it not as a policy reflecting American weakness or failure but as an overdue adjustment to the consequences of America’s successful earlier policies. Building a liberal global order that has rejuvenated Western Europe and Japan, developed at least parts of the Third World and contained the Soviets has also inevitably eroded the overwhelming American global predominance that characterized the earlier postwar decades.

Devolution is the logical policy of adjustment. While managing it undeniably carries risks, to its proponents those risks are preferable to the almost certain deterioration that would follow from trying either to sustain the old predominance or to withdraw from the global order.

The attractiveness of devolution, to be sure, is greater to Americans than to many Europeans, who have grown comfortable in a military dependence that has exacted a very low political and economic price. Those who hunt through the present European scene for illustrations of the risks and limits will have no trouble finding them. There is no way to prove that Europe will rise to the occasion of an American devolution. Most European leaders have little interest in precipitating such a move by affirming their capacity to cope with it. Publicly, they take every opportunity to profess their own weakness. Privately, some are more sanguine. Few European politicians, of course, care to be blamed for giving the Americans a pretext to reduce their NATO forces.

Nevertheless, the major European states—France, Germany and to some extent Britain—have clearly been intensifying their own military cooperation, at least partly in anticipation of American pressures for a greater European role in the alliance. Progress so far suggests hope, but no easy assurance. Military and political differences remain that make the familiar American leadership seem a more comfortable alternative. But given the urgent need to bring America’s budget under control, those comforts are very precarious. Those in this country who genuinely want to save NATO should get on with reforming it. And those Europeans who want an Atlantic alliance would be well advised to get to work on its European pillar.

VII

American policy in recent years has been more and more addicted to wishful thinking. Economically, as we have suggested, the era of comfortable self-indulgence appears near its close. Today the United States is on a collision course with history. The American fiscal dilemma must be resolved, and the perpetual instability of the dollar that is its consequence must cease. This will require a radical and resolute policy to stop the United States from perpetually living beyond its means. Austerity will have to include the federal government and there will be no quick fix by either an abrupt rise in taxes or a sharp cut in civilian spending. Taxes will have to be raised from their Reagan levels, but so will civilian expenditures. Major and durable military cuts are essential and these logically require a readjustment of America’s geopolitical role and alliance commitments. Needless to say, none of this will be easy. Under normal circumstances, political leaders here and in Europe would certainly prefer to patch up the status quo one more time.

Present trends are not likely to present them with the opportunity to succeed, however. In the next decade the world’s most critical problems are likely to be in the economic sphere. The prospect of a breakdown of world monetary and trading arrangements now constitutes so grave a danger that no responsible American government can ignore our own heavy responsibility for the present disarray. American policymakers can no longer give military commitments automatic priority over fiscal balance. The United States needs a long-term geopolitical posture that is compatible with a durable fiscal and monetary balance. European and Japanese governments, too, are faced with a compelling self-interest in seeing the United States regain its political and economic equilibrium.

But while reality is finally closing in on the economic fantasies of the past, there is the danger of a new explosion of wishful thinking in the geopolitical sphere. This is fed by the marked change in Soviet internal policies and external tactics. While the Soviet shifts may offer new opportunities to sustain a military balance at a lower cost and with less tension, they also pose the danger that both Americans and Europeans will find a new pretext for putting off the long-needed reform of the Western alliance itself. As in the early 1970s, détente and arms control once more seem to offer promising prospects for fiscal retrenchment without geopolitical adjustment. The Soviet Union now shows an interest in reducing its own military spending, and therefore in pursuing arms control agreements and perhaps in finding solutions to the political tensions that make armaments seem so necessary.

Skeptics note, however, how limited and transitory periods of détente have proved in the past. Even if Gorbachev should be taken seriously as a domestic reformer or diplomatic conciliator, his internal and alliance problems are formidable and his own capacity to control or even survive them is questionable. In any event, however Gorbachev fares, the Soviet Union will remain a great Eurasian military power, its very existence weighing on the independence of the neighboring countries of Europe, Asia and the Middle East. The need for a powerful military counterweight will remain, even if the level of the balance can be somewhat reduced and stabilized.

Under the circumstances, it is imperative that the United States not become so preoccupied with Soviet relations that it fails to make the fundamental changes in the West that are the precondition for future stability within the global system. No imaginable arms control agreement is going to eliminate the urgent necessity for the United States to reduce its highly destabilizing budget deficits by, among other steps, very substantial cuts in current military outlays. If arms control agreements with the Soviets may offer an intelligent way to reduce some part of the cost and danger of sustaining a military balance in Europe, they will not eliminate either the need for such a balance or the need for the Europeans to bear a greater responsibility for sustaining it.

To argue for the priority of Western needs over U.S.-Soviet détente is not to denigrate détente’s opportunities. It may be that the Soviets now feel constrained to accept a more modest agenda of global ambitions in return for urgently needed progress at home. If so, it will confirm with success the long-standing Western policy of containment. But the victory will be Pyrrhic, and highly transitory, if meanwhile there is a breakdown of the global economy. The swarm of troubles that a Western economic breakdown would generate would soon reconvert the Soviets to Leninism. In any event, an economic crash will set many other demons loose in the world besides Soviet ambition.