U.S. Watches Greece's Debt, Will It Spread?

Euro notes and coins lie on a table. i i

Every country that uses the euro as its currency has a stake in a successful financial outcome for Greece. Photo illustration by Sean Gallup/Getty Images hide caption

itoggle caption Photo illustration by Sean Gallup/Getty Images
Euro notes and coins lie on a table.

Every country that uses the euro as its currency has a stake in a successful financial outcome for Greece.

Photo illustration by Sean Gallup/Getty Images

Many Europeans believe that Greece bears considerable responsibility for its own financial problems. After the country adopted the euro as its currency, the Greek government overspent and over-borrowed and wound up deeply in debt. But European monetary union means that every country that uses the euro as its currency has a stake in a successful financial outcome for Greece.

Increasingly, so does the United States.

To the extent European governments have to come up with the money to help Greece pay its debts, they will have less to invest in their own economies. Looming fiscal pressure means government will have to cut back on public spending. Military budgets, never popular in Europe, are sure to take a hit. The United States will be left to pick up more of the tab for the war in Afghanistan and other international challenges.

"Not only will [European] governments be less inclined to spend on defense, but their slow growth rates will give them a lot less money to spend even when they want to," says Kori Schake, a senior fellow at the Hoover Institution at Stanford University and a professor of security studies at West Point.

U.S. administrations have long complained that too many Europeans don't see the need for a strong military and are unwilling to carry their share of the defense burden. Defense Secretary Robert Gates picked up that theme in a speech this week at the National Defense University.

"The demilitarization of Europe," Gates said, "has gone from a blessing in the 20th century to an impediment to achieving real security and lasting peace in the 21st."

The deepening euro crisis may also be destabilizing political relations at a critical moment. Tensions are rising within Europe, between the relatively thrifty Germans, for example, and their more free-spending Mediterranean neighbors. Given how the United States now depends on Europe as a security partner, new divisions there would worry Washington.

"Our nation faces threats elsewhere in the world," Secretary of State Hillary Clinton said this week, "but we view peace and stability in Europe as a prerequisite for addressing all of the other challenges."

The prevailing U.S. view is that if European countries start squabbling, if their monetary union is endangered, if European integration begins to falter, U.S. interests will suffer.

"To the extent that the Europeans are more fragmented or just more distracted by all this internal economic turmoil, they're going to be much less effective at working with the U.S. on a whole host of issues," says Ian Bremmer, president of the Eurasia Group, "from dealing with Iran to helping out in Afghanistan to helping coordinate solutions on climate change. I think all of these things are increasingly problematic for the U.S."

Just a few years ago, there was a vigorous political debate in the United States over whether a unified Europe was even in the U.S. national interest. There was a fear that if the Europeans went off on their own, their commitment to NATO might suffer. It might prompt anti-Americanism. But with the U.S. commitments stretched thin, that argument has lost force. Kori Schake, who served as a foreign policy adviser to presidential candidate John McCain, is one of those whose views on this issue have evolved.

"I am homesick for the days of a Europe that was ambitious to take a big role in the world," she says. "I think the problem for the United States is a Europe that views its interests too narrowly and contributes too little to the common problems we have."

For the moment, much of Europe's attention is focused squarely on Greece. On a visit to Athens this week, European Union finance inspectors told the Greek government that it has to get its budget deficit under control if it is to get European assistance in paying off its huge debts. The prospect of a Greek default has undermined the euro on world currency markets.

In the short run, the U.S. dollar benefits as a safe haven. "When confidence is lost in other markets, investors will often turn to the U.S. dollar and dollar-denominated assets," says Randall Henning of the Peterson Institute for International Economics.

But Henning points out that in the long term, the United States may need to take a lesson from Greece and other European countries facing budget difficulties: Overspending gets governments in trouble.

"Over the next three or four years," Henning says, "we need to put the federal government on a more sustainable path, and the need for that is highlighted by this crisis in Europe."

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