Economics and Its Importance to European FAOs
There can be no mistaking the fact that we in the FAO business tend to view the world through a
political-military prism where much of our opinion and advice is derived. Our viewpoint is understandable
given the fact that most of us have taken our cues from history and the traditional ways of looking at
things. By design, many of our graduate degrees and FAO job descriptions fall neatly into this Pol-Mil
arena. We are preoccupied with regional military history and geopolitical relationships which have at their
root a nationstate focused realpolitik bent. Accordingly, our ICTs focus on military-to-military contacts,
briefings from embassy Pol-Mil officers, and regional travel.
Our familiar ways of viewing reality and defining what it is a FAO brings to the table need to be
reexamined as we enter the 21st Century. Increasingly, the Pol-Mil arena as we know and understand it is
not being driven by traditional Pol-Mil issues. Rather, these most traditional arenas are being influenced
by economic and business interests. It is easy to resist this economic intrusion because many of us are not
familiar with it. But now we are at a crucial crossroads; we can either turn a blind eye and dive back into
our familiar Pol-Mil ground, or we can give economics the equal weight it demands. Let's for a moment
examine what has transpired the last several years.
HOW HAS GLOBALIZATION CHANGED OUR PRECONCEIVED
NOTIONS?
Since the Treaty of Westphalia in 1648 we have commonly defined terms in a nation state context. It
makes it easy for us to look at common peoples, languages, and histories and analyze what it is the
"French" feel, or the "Japanese" etc. It can also certainly be argued that today in the military and political
arenas that this basic nationstate assumption still remains valid. Nevertheless, the economic arena appears
to be an entirely different matter. Traditional nationstate economies are increasingly influenced by what
the economists call "free floating capital." This free floating capital is predominantly controlled by non-
government organizations such as hedge funds, multi-national corporations, currency speculators, and even
the common mutual fund investor. This money which knows no home, and which has no boundaries, is
free to seek out the highest return regardless of location. There is arguably no longer a world organization
or central bank which is large enough with appropriate control levers to control this capital. Billionaire
investor George Soros will be the first to tell you how easy it is to rapidly move enormous sums of money
around the globe. The result is a new world of free floating capital which has in effect forced nationstate
economies and political systems to compete against each other to attract this capital and ensure acceptable
living standards. Those systems which are deemed unattractive for capital investment suffer accordingly.
Witness the capital flight from Russia, Indonesia, Thailand, and Korea. Ultimately, when enough capital
flees a country, it collapses politically with a possible corresponding outflow into a changed military
strategy. Can we as trained regional specialists afford to deemphasize this important economic third leg of
the regional spectrum? If we continue to be trapped by our vestigial thought processes, we might
eventually make ourselves obsolete and no more attuned to what's going on than the typical tourist. A
1991 study conducted for the FAO Proponent assessed the preparedness in 16 categories of our FAOs for
one of our regions. Ranking next to last on the preparedness spectrum was an understanding of "regional
economic issues." Another 1991 study by a different research firm analyzed the European FAO program
and concluded much the same. Speaking directly to graduate school training, the study concluded that,
"Economics is key to understanding the transition process occurring in Europe. Curricula should cover a
multitude of subjects related to the transition from command to market economies; i.e. privatization,
industrial restructuring and conversion, currency stabilization and convertibility, banking reform,
multinational trading organizations, international financial institutions, and foreign investment -- to name
but a few." Why is an understanding of economics so important? Afterall, what does economics have to
do with security policy and diplomacy?
THE EURO AND ITS IMPLICATIONS
One of this Century's major events has yet to enter our active consciousness but it will profoundly
transform Europe in ways that we might not see. The marriage of Europe's major currencies into a
common single currency (the Euro) managed by an independent European Central Bank occurred in
January 1999. The potential policy implications for this momentous change are profound. Yet there is
scant mention of what the advent of the Euro means for Europe's traditionally independent nationstate
players. As we focus our efforts East, we must remember that there is a major transformation occurring in
the heart of Europe with profound implications.
France for example has historically masked economic structural weakness by using its national
currency as a buffer. The politically controlled French Central Bank could devalue the Frank and suddenly
French exports which are expensive to produce domestically are cheap enough to compete in the global
economic arena. There is no secret why a dollar buys six French Francs. The French have strenuously
resisted an independent European Central Bank (ECB) which would be run by someone other than a loyal
French bureaucrat. In effect, an independent ECB means that the French would lose their traditional best
economic lever. Therefore, the French response protesting the appointment of a non-Frenchman to be the
first President of the ECB is perfectly understandable from the French perspective. The French have good
reason to fear a strong currency. Suppose that a strong Euro protected by an independent ECB no longer
masks the French economic structural weaknesses. If the underlying structural weaknesses can no longer
be masked by a weak currency, then the weaknesses would inevitably come bubbling to the surface. The
result would be thousands of French workers suddenly out of work which would further inflate the already
high French unemployment rolls. Might this series of events strain the French relationship vis-…-vis
Europe? Germany? The U.S? It would certainly cause not only the French, but the other European
systems which came under duress to reassess their traditional relationships.
What about the Germans? In giving up the D-Mark for Euros, the Germans have surrendered their
most prized possession. After witnessing the total collapse of their currency two times this century,
German Central Bank policy has been dominated by the strong desire to maintain a strong, stable Deutsche
Mark. Since the founding of the Federal Republic at the conclusion of WWII, the very independent,
largely apolitical Bundesbank has consistently achieved this goal. German insistence on an independent
ECB modeled after the Bundesbank goes to the core of their historical experience; maintain a strong
currency at all costs.
What does this all mean? It means that at the core of European economic union we have a fissure
that could break wide open at any time with a political fallout which could be quite severe. The
implications for military policy are also correspondingly profound.
WHAT HAPPENS IF THE EURO IS
WEAK?
If the Euro is weak there will be problems in Germany. Should the Euro drops significantly in value
against the world's other major currencies, then the German citizenry (particularly the older generations)
will probably demand that their government pressure the ECB to take measures to restore the value of the
Euro in order to preserve the value of their life savings. The wrath of the citizenry would either be directed
at the German politicians who allowed a weak Euro to happen, or at the politicians in Brussels who
represent a unified Europe which caused the surrender of the last national symbol -- the Deutsche Mark.
When compared to the rest of Europe, a weak Euro hurts Germans the most -- if not economically, then
psychologically. Despite high labor costs, German industry and the middle class as a group has thrived
with a strong currency. German firms are better able to withstand the global competitive pressures that a
strong currency brings because their operations are truly geocentric. A weaker Euro means that their less
efficient neighbors would be more competitive. The Germans will fight to keep the Euro strong.
WHAT HAPPENS IF THE EURO IS
STRONG?
Should the Euro become a strong currency, then it probably means that the inefficient industries
which dot the European landscape would suffer wrenching global competition (from cheaper imports etc.)
which would correspond to the painful mass layoffs and restructurings which we saw in the U.S. about 10
years ago. It would force social disruptions which the European politicians and body politik are probably
not prepared to accept. Where would the fallout be most severe? The industries and occupations that
quickly come to mind are inefficient government owned operations, small family farms, steel, and the
traditional manufacturing industries. The countries where these industries are most influential therefore
have the most to lose. Take France. A large percentage of the French economy is dominated by
agriculture and government owned industries. What happens if things go horribly wrong? In a country
where so much of the power is centered on the government in Paris, this is a frightening prospect indeed.
Afterall, the masses have a habit of marching on Paris when things don't go well in the outlying areas. The
French will fight to keep the Euro weak.
"EUROPEAN" POLICY IMPLICATIONS OF THE
EURO
As we can see, no matter what the Euro does, someone will get hurt. As such, the governing bodies
in Brussels will come under increasing pressure from within their domain. This Catch-22 predicament
means that there will undoubtedly be clear cut winners and losers with the losers exerting enormous
pressure on both their national governments and the European governing bodies to do something. The
fallout of this is unpredictable, but a plausible assumption would be that protectionist pressures will build
from within the European Economic Community. As time goes by, it will be more difficult for U.S.
government and industry to negotiate separate deals with the individual nation states we are accustomed to
dealing with. A European nationalism is also a possible outcome. For example, it might be a lot harder
politically for individual European countries to buy U.S. manufactured defense products when there is a
large outcry to buy "European" and save jobs. The reality is that the aircraft parts manufacturer in France
supports jobs in Spain and vise versa. There might also be cries for national protectionism which might
fray both the "deepening" and the "widening" equations of European security.
CONCLUSIONS
The preceding is only an example of how the economic environment might influence policy and that
it can be the fulcrum of events. There can be no mistaking that economics and capital flows have risen in
importance for strategic policy as the world evolves through the information age. We as FAOs, the Army's
community of experts on such things, need to reexamine the importance of this non-traditional sphere and
focus our training efforts accordingly. It's our responsibility to examine these issues and figure out how
they're going to impact our Army and our national security interests. Is this a time to divest ourselves of
the Pol-Mil trappings of our past? Certainly not. We are after all military officers, serving our service first
and then the joint and inter-agency community. But the key here is that the importance of these
international economic factors and the impact they have on countries and regions have grown enormously,
while we have largely ignored their effect on the political and military realms in which we typically
operate. Understanding regional economic levers is another significant arrow in the quiver of a FAO.
Beginning with our initial training cycle, especially in graduate school, the study of economics should be
an integral part of our continuing educational process. This does not mean that the FAO has to understand
ad nauseum the intricacies of macro economics, micro economics, and economic theory. Rather, at a
minimum the FAO should possess a keen understanding of cause and effect relationships.
1999, Foreign Area Officer Association
Springfield, Virginia
Maintained by LTC Steve
Gotowicki.
http://www.faoa.org