Thinking Global

If the euro is saved, the much-maligned power of global financial markets will deserve much of the credit.

The conventional wisdom among many on the intellectual left is that unbridled financial players threaten to destroy the European Union, one of history’s noblest, war-ending projects. The truth, however, is something else. To be sure, speculators lack noble motives, and global capital is a blunt instrument that tends to overshoot. But markets are forcing European leaders to fix their fatally flawed monetary union, a union that can only last with deeper economic integration and greater political (and democratic) legitimacy.

Last weekend’s agreement by Spain to accept a bank bailout, based on a European aid package of $125 billion, is a dramatic case in point. Senior Obama administration officials, in a series of urgent conversations with their European counterparts, warned that Spain posed the possibility of a “Lehman moment,” with global reverberations that no one could predict. If European leaders didn’t demonstrate to markets that they would pool their resources to address the banking meltdown of Europe’s fourth-largest economy, the contagion could have spread, what remained of U.S. and global growth could have evaporated, and the European Union itself would have been endangered.

In retrospect, it may have been wiser to build Europe without a common currency, one senior Obama administration official told me, given all the historical and national differences. However, now that the euro is used by 17 countries and has become a global reserve currency, the euro zone can’t be dismantled without unacceptable European and global risk. Thus, U.S. officials had been urging European leaders to settle the Spanish bank crisis before the Greek election next Sunday, June 17, and the G-20 meeting June 18-19, to avoid convening on the brink of financial catastrophe.

In the end, however, it wasn’t President Obama who forced a Spain deal through his lobbying with the top three euro country leaders – Chancellor Angela Merkel, French President François Hollande and Italian President Mario Monti. (Side note: One does wonder whether British Prime Minister David Cameron isn’t beginning to feel left out). Instead, it was the unrelenting pressure of European and global creditors and investors, who were withdrawing in droves from Spain, unsure whether a German-led Europe would provide the financial bazooka required.

The simple fact is that Europe some time ago ceased having a true monetary union. Although no country has withdrawn from the euro, markets have quit treating it as a trusted, common currency. As Irish economist Colm McCarthy writes: “Europe’s single financial market has been sundered through deposit flight and nation-by-nation re-matching of assets and liabilities.”

At an event jointly hosted by the Atlantic Council and Germany’s Suddeutsche Zeitung on Friday, IMF chief Christine Lagarde worried about political cycles running behind economic and market cycles, as “a movie we have watched one too many times.”

It looks something like this. Tensions escalate and, out of necessity, policy makers take action. But just enough for the danger to subside. Then the urgency is lost, momentum wanes, then the policy discourse begins to fracture, too focused on their own backyards and not enough on the big picture. And so tensions start to rise again.

But, with the passing of each cycle, we reach a higher and higher level of uncertainty, and the stakes rise. At this point, stability is at stake. Growth is at stake. In the case of Europe, the cycles are now threatening the very existence of the European project.

Markets tell politicians what they don’t want to hear. Economist Jean Pisani-Ferry says bond markets won’t be convinced until they see Europe has a banking union (Europe-wide banking supervision, deposit insurance, and crisis resolution), sufficient tax pooling (so that EU-level institutions can take charge of financial stability), and mutualization of enough of the costs of the crisis to convince markets that their bets against the euro are in vain.

Markets will continue to test Europe’s leaders until they are convinced they are committed to correcting their system’s flaws. And resisting markets is like complaining about the rain, and this one is a deluge. Global markets have a weight that no one anticipated when the Maastricht Treaty created the single currency in 1992.  Since then, global financial stock has quadrupled through 2010 to $212 trillion, from $54 trillion in 1990, according to the McKinsey Global Institute. More stunning yet, Lagarde says the total amount of outstanding OTC derivatives in 2011 was $648 trillion in 2011, compared with just $12.1 trillion in 1992.

Josef Ackermann, former Deutsche Bank chief executive and now chairman of Zurich Insurance Group, said at the Atlantic Council last week that markets have done Europe a favor by forcing upon it financial and structural reforms and greater discipline. “There’s no politician who stood up and said we have to change that – not one,” he said. Without markets shifting credit spreads, he believes Greek profligacy would have gone on for some more years. “We’ve completely changed the discipline of European countries going forward, and that’s a good thing.”

Beyond that, however, he says politicians need to do much more to convince voters of Europe’s value. “A fragmented Europe has no way for self-determination,” he warned. “We will have to accept what the United States, China, India, Brazil and other countries [dictate to] us. This cannot be the future of our children.”

If Europe manages this crisis successfully, Ackermann argues, it will instill a new self-confidence that will express itself globally as Europe jointly conquers a historic challenge. Conversely, it follows that failure could dramatically reduce Europe’s influence and unity for at least a generation to come.

PHOTO: A demonstrator hangs fake Euro notes on her leg during a protest against Spain’s bailout at La Constitucion square in Malaga, southern Spain, June 10, 2012. REUTERS/Jon Nazca

MADRID – What brought me to Spain during the most threatening week of the country’s recent history was an invitation to speak about one of Europe’s darkest hours a half-century ago, pegged to the Spanish-language publication of my book Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth.

One of Spain’s most senior government officials was quick to make the connection between 1961, when Germany’s postwar division was deepened by the Berlin Wall, and the historic moment today, when a reunified Germany, acting from its most powerful European perch since the Third Reich, will determine whether the continent will be newly divided – this time along North-South lines, with Spain outside the euro. But more sharply, this official – who won’t speak for attribution as he must deal daily with German counterparts – believes Germany’s actions (and, more frequently inactions) have put the euro and the European Union project itself at risk.

It is in that context, he said, that Spain has put forward an urgent plan for a European banking union, complete with a pan-European deposit guarantee fund and banking supervisor. The idea has now been endorsed by the European Commission, European Central Bank President Mario Draghi, Italy, Ireland and others. German Chancellor Angela Merkel has not followed suit. Spanish officials are lobbying hard for this idea because they believe it’s urgently needed, but also because they hope to force Germany’s hand in a manner that would move markets and reverse Spain’s downward spiral. So that his purpose couldn’t be missed, Spanish Prime Minister Mariano Rajoy over the weekend surprisingly called for centralized control of national budgets in the euro zone – teeing up a crucial auction of Spanish treasury bonds this Thursday.

Yet Rajoy’s top economic advisers say that whatever they may do themselves, it is beyond them to remain in the euro if markets aren’t more convinced of Germany’s commitment. Although Rajoy’s government has reduced pension burdens, introduced labor market reforms, recapitalized banks, cut deficits and written debt limits into the constitution, markets continue to bet against Spain. Ten-year sovereign bond yields, at more than 6.5 percent, are 550 basis points higher than those in Germany and perilously close to the 7 percent levels at which Portugal, Ireland and Greece required bailouts.

In many respects, Spain has already been forced out of the single market. Most Spanish issuers and companies can no longer access funds from outside Spain, which had long been one of the biggest benefits of the euro zone. The euro’s exchange rate remains strong only because investors are fleeing to Germany as a safe haven, wagering that appreciation could be 40 percent if the Germans leaves the euro.

If global investors were certain Spain would remain in the euro, its assets would look cheap, capital flight could be contained, and new investments would flow. For the moment, however, investors are hedging against a Spanish departure from the euro. Even today’s discounted prices look high, then, as they reckon “the new peseta” would come with a minimum 30 percent depreciation.

One conversation after another in Madrid underscored a growing Spanish resignation that their fate rests in German hands and an escalating frustration that German leaders have been too slow to recognize the economic stakes, the historic moment or what steps could most quickly save the euro project.

Spanish experts list the many things German leaders could have embraced in past months that might have produced a different outcome: euro zone bonds, an expansion of funds available from the European Stability Mechanism (currently 500 billion euros) and the ability of banks to access them directly, a more expansive European monetary policy or a Europe-wide guarantee for the threatened banking system.

The failure of the Germans to act with the urgency and scale other Europeans consider necessary has led markets to believe, along with more than a few Spaniards, that Germans themselves may no longer think the euro was such a good idea and that it may be time to cut their losses. That notion has been dramatically fed by the new publication of former Bundesbank director Thilo Sarrazin’s best-selling book, Europe Doesn’t Need the Euro.

A survey in Germany’s Focus magazine last week, which got wide notice here in Spain, showed that while 45 percent of Germans agree with Chancellor Merkel’s view that a euro failure would lead to a broader European failure, nearly the same number, or 43 percent, embrace Sarrazin’s opposing thesis. (Twelve percent are undecided.) Indeed, a rumor is swirling around Madrid that the Germans are already secretly printing Deutschemarks. Although this has no apparent basis in fact, it does reflect the mood.

This growing distrust of German intentions in Spain – a country that has been among of the most welcoming toward Germans, who vacation here in droves – is worrying and expanding. The increased resentment is captured by a history lesson one Spanish business leader says he would like to give Germans, but he won’t do it on the record for fear it would hurt his German business.

First, he said, national division was the price Germany paid for misery it exacted upon Europe. Second, he continued, giving up the Deutschemark and monetary sovereignty was the price for German reunification after the Cold War. Thus, he said, Germany’s historic responsibility must be above all to save the euro, as its creation marked the ultimate European reconciliation and end to World War Two.

“If Europe blows up [because of the Germans],” he asks provocatively, “are we authorized to say Germany should be divided again?”

Spaniards know the euro zone may have been a flawed construction, so they are eager to change it. And they realize it will take years to unwind their debt binge, leaving them owing foreigners 1 trillion euros, or about 90 percent of GDP (though they remind Germans that Spanish profligacy was fueled by euro interest rates set too low for Spain but just right for Germany’s then-stagnant economy).

Yet the Rajoy government now acts with full knowledge of the moment. If Spain leaves the euro, it would be a setback of historic dimensions. The country would overnight go from being an integral part of the world’s largest economic market – to again being a second-rate European player.

Spaniards are convinced Germany would lose even more, in exports, in global position, and in the many unpredictable reverberations of the euro’s unraveling.

Yet until they see a more convincing German response, Spanish officials brace for the worst even while lobbying Berlin and Brussels with the intensity of the damned.

PHOTO: Spain’s Prime Minister Mariano Rajoy looks at his nails during the XXVIII Meeting of the Economic Circle “Cercle D’economia” in Sitges, near Barcelona June 2, 2012. REUTERS/Gustau Nacarino

CHICAGO — As measured from President Obama’s re-election campaign perspective – the White House’s litmus test for foreign policy issues through November – last weekend’s G-8 and NATO Summits were bell ringers.  Obama campaign strategists couldn’t have scripted their outcomes better – perhaps because they did script them.

Given the potential for dissent, President Obama could be satisfied that his guests adhered (mostly) to the desired story line. At Camp David, President Obama was the jobs-and-growth champion. In hometown Chicago, with leaders of some 60 countries arrayed around him, he was the president who would wind down an unpopular war. (That his Chicago White Sox trounced the Cubs during NATO Night at Wrigley Field, in a game that opened with an honor guard carrying flags from the 50 countries engaged in Afghanistan, was an added benefit.)

The only problem with this pretty picture is that getting the campaign message right is a long way from getting the world right. What really connected the G-8 and NATO meetings was a growing realization that the biggest threat to the alliance – and, for that matter, to Obama’s re-election hopes – is the euro zone crisis. That risk comes at a time when U.S. debt and political dysfunction makes the West far less resilient. So for all the talk in Chicago about common purpose in Afghanistan, NATO’s most existential danger now comes from within, and its root causes are economic.

When NATO strategists weigh the many threats facing them, they tend to focus first on their founding treaty’s Article 5, which requires all members to defend a single ally against an external security threat. Insiders also often discuss Article 4, which allows for a member country like Turkey to seek urgent alliance consultations when it foresees new dangers, as was the case during the Iraq war and is now again the case concerning Syria.

Yet it’s time for NATO to dust off its long-forgotten Article 2, known at the treaty’s writing in 1949 as “the Canadian article,” because of that ally’s early insistence that military strength couldn’t be separated from economic health. It committed all NATO members to “strengthening their free institutions” and “promoting conditions of stability and well-being. They will seek to eliminate conflict in their international economic policies and will encourage economic collaboration between any and all of them.”

That article was put forward by then-Canadian Foreign Minister Lester Pearson, and was enthusiastically supported by the U.S., because both countries feared NATO would become too much of a military assistance program without sufficient economic cooperation or benefit. Under the logic of Article 2, ambitious free trade and investment agreements – of the sort the Obama administration is currently postponing with Europe – are as strategically important as defense programs.

Some have argued that NATO need not consider such matters, since they have become the domain of the European Union. Indeed, as part of NATO’s recent reforms, it got rid of its economic directorate altogether. Yet now that the EU itself is under threat, it’s time for the alliance to consider the security implications of financial and economic shifts – and how they could alter the strategic balance of power.

According to Article 2, it is also a NATO matter whether Greece leaves the euro zone, given its European, transatlantic and global repercussions. How France and Germany settle their dispute over the policies of growth versus austerity, again, is an issue of deepest concern to the alliance. The growing divide that the euro crisis is creating between the north and south of Europe has significant implications for the future solidarity of NATO members that goes far beyond, but also includes, the sharp decline of defense budgets.

The wider implications of the euro crisis go right to the heart of the geopolitical and security issues that concern NATO. The problems stem both from the European Union’s flagging energy for external engagement and its eroding attractiveness to the outside world as the model of prosperity and stability – to be emulated and, when possible, joined.

A weak, introverted Europe and a debt-laden and distracted United States are encouraging Russia to reassert its influence, in part through its new Eurasian Union, which would be far less attractive were it not for the EU’s troubles. In the Balkans, recent Serbian elections that favored a more nationalist candidate, who represents an anti-EU party, were influenced by the euro crisis. Across the Middle East and North Africa, a battle for hearts and minds is under way: Less attractive influences emerge when the U.S. and Europe are no-shows.

“As more crises may develop, the danger is that we will be so introspective we won’t address them,” says Michael Clarke, director general of the Royal United Services Institute in London. “Europe is losing the ability to be an actor even in its own continent, let alone in world politics.”

NATO leaders can rightly congratulate themselves for coming away from Chicago with a good amount of agreement on the three major agenda items: ending combat engagement in Afghanistan by 2014, pooling more defense capabilities in the face of austerity, and deepening relationships with their most capable partners.

Yet they didn’t begin to address this far more fundamental threat. It’s time for the North Atlantic Council of allied leaders to convene, as provided for under Article 2, to address economic issues that have become matters of strategic consequence.

PHOTO: President Barack Obama holds a news conference on the second day of the NATO Summit in Chicago, May 21, 2012. REUTERS/Jim Young

White House reporters can be forgiven their collective shrug when they received the readout from President Obama’s meeting last week with NATO Secretary General Anders Fogh Rasmussen, in advance of the alliance’s Chicago summit this weekend. Laced with the usual, mind-numbing NATO-speak, the dry listing of the summit’s three areas of focus – Afghanistan, defense capabilities, and partnerships – didn’t sound like the stuff of history.

However, beneath the third agenda item – partnerships – lies a potential revolution in how the world’s most important security alliance may operate globally in the future beside other regional organizations – and at the request of the United Nations. At a time of euro zone crisis, U.S. political polarization and global uncertainty, it provides a possible road map for “enlarging the West” and its community of common values and purpose. “NATO is now a hub for a global network of security partners which have served alongside NATO forces in Afghanistan, Libya and Kosovo,” Obama and Rasmussen agreed.

As America’s willingness and capability to act unilaterally declines, any U.S. president will find himself increasingly drawn to NATO as an even more vital tool for foreign and defense policy – against a host of global threats ranging from Syrian upheavals and North Korean nuclear weapons to cyber attacks and piracy. The problem, however, is that NATO members more often than not won’t be located where they are most needed. Or due to lack of political will or inadequate military muscle, many NATO members may not have the capability to intervene. That means regional partners will be increasingly necessary to provide both the credibility and resources for the most likely future operations.

Although many experts, including then-Secretary of Defense Robert Gates, opposed NATO’s 2011 intervention in Libya, the operation’s ultimate success provides something of a model for this sort of future. NATO operated alongside key regional and European non-alliance partners within NATO structures – with the blessing of the Arab League and the United Nations Security Council. The alliance – and by extension the United States – achieved its objectives with no allied casualties, minor collateral damage and limited U.S. engagement. The war lasted seven months and cost the alliance just $1.2 billion, the equivalent of one week of operations in Afghanistan.

Such situations never repeat themselves precisely. Should NATO ultimately be involved in Syria, for example, regional engagement would likely be far greater. In a North Korean scenario, it is hard to imagine any response that wouldn’t be coordinated with America’s Asia-Pacific allies and China. Regarding maritime security, the NATO countries involved and local partners would shift given the threat, whether off the Gulf of Guinea or the Straits of Hormuz. What’s clear is that for the model of NATO at the hub of a global security network, the alliance will need to become more flexible and adaptable – and to build a broader and deeper array of global partnerships.

The expected discussions of NATO leaders this weekend about how best to wind down their decade-long Afghan military operation and about how to maintain sufficient defense capabilities, despite growing budget cuts, risk leaving the impression of an alliance in retrenchment or decline. That’s hardly an inspiring or helpful message for a U.S. president heading home to Chicago at the beginning of his re-election campaign.

By contrast, NATO’s efforts to broaden and deepen cooperation with capable partner nations can be rolled out as a pro-active, forward-looking initiative that has NATO going on offense for a new era. So that no one misses his notion of NATO at the core of a global security network, President Obama and his allies will stage an unprecedented summit meeting with 13 partner nations – from South Korea, Japan, New Zealand and Australia in Asia-Pacific to Jordan, Morocco, Qatar and the United Arab Emirates in the Middle East and North Africa. Also present will be five European states that aren’t members of the alliance but routinely contribute to alliance activities – Austria, Finland, Sweden and Switzerland.

What they’ll be trying to do is give teeth to an agenda for NATO that I first saw discussed in detail by former National Security Adviser Zbigniew Brzezinski in a major Foreign Affairs article in October 2009. He argued against those who wished to expand NATO into a global alliance of democracies. He said that would dilute the crucial importance of the U.S.-European connection, which still accounts for half of the world’s economy, and that none of the world’s rising powers would be likely to accept membership in a global NATO. An ideologically defined democratic alliance would needlessly draw institutional lines between the U.S. and, for example, China.

“NATO, however, has the experience, the institutions, and the means to eventually become the hub of a globe-spanning web of various regional cooperative-security undertakings among states with the growing power to act,” he wrote. “In pursuing that strategic mission, NATO would not only be preserving transatlantic political unity; it would also be responding to the twenty-first century’s novel and increasingly urgent security agenda.”

It would also rescue the alliance from geostrategic irrelevance.

PHOTO: NATO Secretary General Anders Fogh Rasmussen addresses a news conference in Brussels, May 11, 2012. REUTERS/Francois Lenoir

Imagine that an American intelligence agency organizes an “exercise,” as one occasionally does, on how to manage an unwanted but inescapable Washington role in a Chinese leadership struggle. Throw in the following scene-setting facts:

• With the Chinese Communist Party confronting a decisive leadership transition, a provincial police chief takes refuge in a U.S. consulate and spills the beans on a corruption and murder story swirling around Bo Xilai, whose populist, Maoist campaign threatens the establishment.
• Just a week before the visit to Washington of Vice-President Xi Jianping, who is in line to become paramount leader this autumn, President Obama takes sides. Although Bo’s forces are circling the consulate, the U.S. releases the police chief to Beijing’s leaders.
• With that crisis solved and Chinese leaders indebted to Obama, a blind human rights activist dramatically escapes house arrest and takes refuge in the U.S. embassy in Beijing. With Secretary Hillary Clinton arriving for a high-level Sino-U.S. summit, both sides enter crisis management mode.

It’s no wonder that the intellectual salons of Washington have grown a bit bored with the ongoing U.S. election campaign and have shifted their interest instead to Chinese domestic politics. The reasons are obvious: The details are juicier, the drama is more immediate and the historic stakes are considerably more significant.

That’s because any U.S. president, whether named Obama or Romney, will operate within a well-established constitutional framework and democratic habits. While the U.S. has managed 43 peaceful transitions of power over the past 223 years, Communist-led China has managed a smooth handoff only once since its 1949 revolution, and that was in 2002, when Deng Xiaoping engineered the rise of the current premier, Hu Jintao.

Former U.S. National Security Adviser Brent Scowcroft believes China has entered its most decisive domestic political period since the weeks preceding the government crackdown on the Tiananmen Square protests in 1989, which resulted in the arrest and purge of Deng Xiaoping’s presumptive heir, Zhao Ziyang, along with a large-scale removal of other officials sympathetic to the protesters. Tiananmen’s immediate aftermath strengthened the hand of hardliners, until Deng, with difficulty, reasserted himself and market reforms in 1992.

Former U.S. National Security Adviser Stephen Hadley regards the current split within the Chinese leadership to be the most severe since 1971. It was then that Defense Minister Lin Biao, in an apparent attempt to defect to the Soviet Union, died in a plane crash in Mongolia while trying to flee the country after a failed attempt to assassinate Mao Tse Tung. The Communist Party branded him a traitor posthumously.

The global stakes, however, are far greater now than either in 1971 or 1989.

China remains the world’s most important engine for economic growth, it has become the biggest owner of U.S. debt, and it has vastly expanded its global reach through investments and trade. China is likely to surpass the U.S. in the next decade as the world’s largest economy – and its political influence and military capabilities grow apace. Domestic uncertainties now make China the most crucial wild card for the global future.

Beyond that, the country’s leaders in the coming years will face a set of new strains that defy easy solution: Growth will inevitably slow, a rising middle class will make increased political demands, growing wages will make export markets more difficult to win, and the demographics of an aging society and its single-child policy will produce new social and financial pressures.

Thus, the fifth generation of Communist leaders, who will be installed at the 18th Party Congress this autumn, will inherit a China whose unreformed political structure isn’t equipped to manage the demands of its increasingly complex, modern state. They also will face a public angered by widening reports of official corruption amid growing gaps in income.

The seven new individuals who this autumn will be appointed to the nine-member Central Politburo Standing Committee of the Communist Party, the country’s highest decision-making authority, have been bred during the country’s meteoric economic rise. If the current scandal has revealed anything, it is a seething unrest among party leaders over how to manage a country that has moved so far beyond communist ideology.

The conventional wisdom is that the battle lines have been drawn between those who advocate liberal constitutional and political reforms – most prominently represented by Premier Wen Jiabao – that would bring greater pluralism and more powerful rule-of-law, versus those who favor greater state and party controls. Yet lines are far messier and opaque than that: China’s factions, personal rivalries and underlying ideologies defy Western categories.

To sort out the plot, watch closely to see which shoes drop next. That may indicate how much support Bo had at senior leadership levels both for himself and his populist approach, which was laced with Maoist nostalgia and “red culture,” emphasizing large public works, state company ownership and a brutal (if ultimately hypocritical) crime and corruption crackdown.

The standing committee removed Bo, but it’s not yet clear what party disciplinary or criminal actions he will face – or how transparent they will be for the public. In particular, how might party leaders handle the powerful Chinese interior minister Zhou Yangkang, a Bo ally, whose seat on the standing committee is the one Bo had sought? Will military heads roll, as it is rumored that Bo has enjoyed a following as well among uniformed brass.

Most analysts still believe the party congress will produce its forecast personnel outcome: the elevation of Chinese Vice-President Xi Jinping. Indeed, the Bo scandal may have guaranteed that outcome as leaders circle their wagons. But watch as well who takes the other leadership seats, in particular Wang Yang of Guangdong province, the leading next-generation reformist leader, who had been Bo’s predecessor in Chongqing.

China’s leaders seem to agree that the status quo is unsustainable. What’s at stake is who will change it – and in which direction.

For President Obama, this exercise provides just one policy course: Do no harm, avoid providing hardliners a scapegoat, and pray for the best.

PHOTO: China’s former Chongqing Municipality Communist Party Secretary Bo Xilai (L) and former Deputy Mayor of Chongqing Wang Lijun (R) attend a session of the Chinese People’s Political Consultative Conference (CPPCC) of the Chongqing Municipal Committee, in Chongqing municipality, January 7, 2012. REUTERS/Stringer

For all their bitter differences, President Obama and Governor Romney share one overwhelming challenge. Whoever is elected will face the growing reality that the greatest risk to global stability over the next 20 years may be the nature of America itself.

Nothing – not Iranian or North Korean nuclear weapons, not violent extremists or Mideast instability, not climate change or economic imbalances – will shape the world as profoundly as the ability of the United States to remain an effective and confident world player advocating its traditional global purpose of individual rights and open societies.

That was the conclusion of the Global Agenda Council on the United States, a group of experts that was brought together by the World Economic Forum and that I have chaired. Even more intriguing, our group tested our views on, among others, a set of Chinese officials and experts, who worried that we would face a world overwhelmed by chaos if the U.S. – facing resource restraints, leadership fatigue and domestic political dysfunction – disengaged from its global responsibilities.

U.S. leadership, with all its shortcomings and missteps, has been the glue and underwriter of global stability since World War Two – more than any other nation. Even with the world experiencing its greatest shift of economic and political power since the 19th century, no other country is emerging – or looks likely to emerge – that would be as prepared or equipped to exercise leadership on behalf of the global good.

Yet many in the world are questioning the role of U.S. leadership, the governance architecture it helped create and even the values for which the U.S. stands. Weary from a decade of war and strained financially, Americans themselves are rethinking whether they can afford global purpose.

The election campaign is unlikely to shed much light on these issues, yet both candidates face an inescapable truth: How the U.S. evolves over the next 15 to 20 years will be most important single variable (and the greatest uncertainty) hovering over the global future. And the two most important elements that will shape the U.S. course, in the view of the Global Agenda Council on the United States, will be American intentions and the capability to act on them.

In short, will Americans continue to see as part of their identity the championing of values such as individual opportunity and open societies that have contributed so richly to the global commons? Second, can the U.S. sufficiently address its domestic challenges to assure its economic, political and societal strength while the world changes at unprecedented velocity?

Consider this: It took Great Britain 155 years to double its gross domestic product per capita in the 18th and 19th centuries, when it was the world’s leading power. It took the U.S. 50 years to do the same by 1950, when its population was 152 million. Both India and China have achieved the same growth on a scale and at a pace never experienced before. Both countries have more than a hundred times the population of Britain during its heyday, yet they are achieving similar outcomes in a tenth of the time.

Although China will likely surpass the U.S. as the world’s largest economy by 2030, Americans retain distinct advantages that could allow them to remain the pivotal power. Think of Uncle Sam as a poker player sitting at a global table of cohorts, holding better cards than anyone else: a free and vibrant society, a history of technological innovation, an ability to attract capital and generate jobs, and a relatively young and regenerating population.

However, it doesn’t matter how good your cards are if you’re playing them poorly. Put another way, the candidate who wins in November is going to be faced with the reality summed up by the cartoon character Pogo in 1971 as he was trying to make his way through a prickly primeval forest without proper footwear: “We have met the enemy and he is us.”

Imagine two very different scenarios for the world, based on how America rises to its challenges.

The positive scenario would require whoever is elected in November to be a unifier, someone who can rise above our current squabbles and galvanize not only the U.S. but also the world around a greater understanding of this historic moment. He would address the larger U.S. issues of failing infrastructure, falling educational standards, widening deficits and spiraling healthcare costs. He would partner more effectively with rising powers, and China in particular. And he would recognize and act upon the strategic stake the U.S. has in a politically confident, economically healthy Europe.

The doubling of the global middle class by a billion people by 2030 plays into U.S. political and economic strengths, increasing demand for the products and services of information technology where the U.S. excels. Developments that improve the extraction of shale natural gas and oil provide the U.S. and some of its allies disproportionate benefits. Under this positive scenario, the U.S. could log growth rates of 2.7 percent or more each year, compared with 2.5 percent over the past 20 years. Average living standards could rise by 40 percent through 2030, keeping alive the American dream and restoring the global attractiveness of the U.S. model.

The negative scenario results from a U.S. that fails to rise to its current challenges. Great powers decline when they fail to address the problems they recognize. U.S. growth could slow to an average of 1.5 percent per year, if that. The knock-on impact on the world economy could be a half-percent per year. The shift in the perception of the U.S. as a descending power would be more pronounced. This sort of United States would be increasingly incapable of leading and disinclined to try. It is an America that would be more likely to be protectionist and less likely to retool global institutions to make them more effective.

One can already see hints of what such a world would look like.

Middle Eastern diplomats in Washington say the failure of the U.S. to orchestrate a more coherent and generous transatlantic and international response to their region’s upheavals has resulted in a free-for-all for influence that is favoring some of the least enlightened players. Although the U.S. has responded to the euro zone crisis, as a result of its own economic fears, it hasn’t offered a larger vision for the transatlantic future that recognizes its enormous strategic stake in Europe’s future, given global shifts of influence.

The U.S. played a dominant role in reconstructing the post-World War Two international order. The question is whether it will do so again or instead contribute to a dangerous global power vacuum that no one over the next two decades is willing or capable of filling.