European debt crisis: Does Obama get how serious this is?

Europe’s debt crisis is more significant than you think and apparently more significant than the Obama administration thinks, because America’s voice and leadership at a time of dramatic change on the Continent are strangely absent. Either we are unaware of this change or we do not wish to influence the outcome; both possibilities are unacceptable.

How many times will America turn away from Europe only to return to it at great cost?

Beyond urgent bailouts and stock-market gyrations, Europe’s ongoing crisis is spawning large and violent riots in major European capitals, high unemployment, creeping authoritarianism in some governments and shaky coalitions in others, the rise of nationalism and extremism, and population expulsions.

1.4 trillion reasons

Such turbulence should be sufficient to motivate US engagement on this issue, but there are 1.4 trillion other reasons why America has serious skin in Europe’s game: $1.4 trillion represents the estimated amount of European debt that American banks currently hold.

The size and scope of US-European economic ties is often underestimated. As America’s largest external creditor, Europe currently holds more than nearly $3 trillion worth of US Treasuries. Last year, the total global output of US foreign affiliates was more than $1.2 trillion, with over half of the total originating in Europe.

At the end of 2008, US corporate investment in Europe was almost four times greater than its investment in Asia. Europe is America’s largest trading partner, and it purchases 21.4 percent of American exports.

Conventional wisdom suggests that US foreign policy interest in Europe is very “yesterday,” as America focuses its economic and political energies on China and other emerging economies. Washington’s enthusiasm for Europe may have waned, but China’s interest and engagement in Europe is surging, illustrated by this month’s European tour by Chinese Vice Premier Li Keqiang. Curiously, it is not Europe’s closest ally and friend, the United States, which is sending encouraging public messages about the economic crisis; it is China.

Beijing is purchasing large quantities of European debt (a $7.8 billion purchase of Spanish debt announced recently) and being awarded strategic investment opportunities. It is China that is using some of its newly gained economic leverage in Europe for political purposes. Perhaps if China continues to focus on Europe, the United States once again will become more interested in the Old Continent.

What happens if the contagion is not contained?

So, what happens if Europe’s economic contagion is not contained and continues to widen and deepen? Perhaps it already has. The yield on Greek bonds has surpassed pre-May 2009 crisis levels; Spain’s bond yields are at the highest levels in almost 11 years; and Europe’s most indebted countries must roll over tens of billions of euros in sovereign debt this year.

Although no one wishes to dwell on doomsday scenarios, we could see Europe fall back into a recessionary period that will curtail America’s economic growth, undermine consumer confidence, and depress rehiring. If one or several European countries default on their debt, it could jeopardize the global economic recovery and trigger another global banking crisis.

And that’s just what the crisis might do to the United States and the rest of the world. Perhaps more insidious is what the crisis is doing to Europe itself right now: the fraying of intra-European coordination and consolidation and the eventual division of Europe into the northern “haves” and the southern “have nots.”

During the cold war, the Fulda Gap divided West from East and was one of the defining symbols of Europe’s military and ideological division. What is emerging today is a new and yawning economic gap that divides Europe economically north from south and could be Europe’s next divisive symbol. Now, as it was during the cold war, Germany’s role in this divide is absolutely critical.

It is time to make a choice. Washington can choose to continue to be a mildly interested spectator and intervene when absolutely essential, or it can become much more involved both in how the European Union and the International Monetary Fund are addressing future bail-outs and instituting stabilization measures, while urging greater creativity and innovation.

It may now be time to create a European Monetary Fund that allows for the restructuring of sovereign debt; Washington should work closely with the IMF and the EU to shape that potential outcome. The Federal Reserve must enhance its relationship with the European Central Bank, not just with liquidity, but also with ideas and support. Finally, a senior-level economic and political dialogue must be immediately established between Washington, Brussels, and Berlin to provide the necessary leadership and coordination to navigate this crisis. Out of crisis, opportunity will rise; but we must first seize the opportunity.

Heather A. Conley is senior fellow and director of the Europe program at the Center for Strategic and International Studies in Washington and a former deputy assistant secretary of State in the Bush administration.