Europe's reputation savaged by euro crisis

LONDON (Reuters) - Whether the euro lives or dies, the chaotic way Europe has tackled the crisis could undermine the region's geopolitical clout for years to come and leave it at a distinct disadvantage in a rapidly changing world.

With an apparently never-ending series of last-minute summits and telephone calls, Europe's leaders and finance ministers have held the bloc together in the face of growing strains between states, a rising political backlash and market alarm.

But with hindsight, outsiders say each measure proved too little, too late. US officials in particular complain European leaders have either failed to grasp the scale of the problem or proved unwilling to countenance the awkward political decisions necessary to fix it.

As a result, they say, what should have been one of the most stable parts of the world has now become one of the most unpredictable.

At one extreme, the euro area might be about to embark on a journey towards further fiscal and political union as an almost totally unitary "super state". At the other, it could unravel and collapse into an unstable mess of regional rivalry.

"From almost every conversation I've had in the last year - with Chinese, with Indians, with just about anybody - the message is always the same," says Fiona Hill, a former senior officer for the US National Intelligence Council and now head of the Europe program at Washington think tank the Brookings Institute. "Europe can no longer be trusted. It seems to be moving from being a source of stability to a driver of instability."

Long-held certainties were being challenged, she said. Even non-euro member Britain suddenly appeared at risk of breaking up, with Scotland due to hold a referendum on independence that experts say could yet go either way.

The slow burning euro zone debt and banking crisis is accelerating. Last weekend brought a decision by euro zone political leaders to bail out Spain's banks. This weekend Greece holds a parliamentary election which many observers fear could spell the end of its euro membership.

Some argue it is too soon to write Europe - or the EU institutions - off altogether. Under foreign policy chief Catherine Ashton, some credit Europe with making real progress in talks with Iran and other powers over the future of its disputed nuclear program. But their energy for anything beyond their immediate problems is seen decidedly limited.

"The Europeans are completely consumed with a battle to save the euro zone," says Ian Bremmer, president of political risk consultancy Eurasia Group. "It's a deep and ongoing crisis bigger than any they've experienced in decades... it's an environment where European leaders could hardly be expected to prioritize anything else."

That could leave the continent being increasingly sidelined as emerging powers - not just the BRIC powers of Brazil, Russia, India and China but other states such as Turkey, Indonesia and South Africa - grow in importance.

At the very least, it could undermine the ability of the continent's leaders to persuade the rest of the world to take them seriously on a range of issues, from trade to the importance of democracy and human rights.

"Europe probably isn't going to stop preaching to the rest of the world," says Nikolas Gvosdev, professor of national security studies at the US Naval War College. "But it's much less likely that others are going to be inclined to listen."

EUROPE AT CROSSROADS

At the Copenhagen climate summit in 2009, European states suffered the indignity of being outside the room when the final deal was struck between the United States and emerging powers. In the aftermath of the euro zone crisis, it's a position European leaders may simply have to get used to.

But for the rest of the world, it's not just the continent itself that is rapidly losing its shine. The whole European political model - generous welfare systems, democratic decision-making, closer regional integration and the idea of a currency union as a stabilizing factor - no longer seems nearly as appealing to other, still growing regions.

"Europe is at a crossroads, with the very future of the EU at stake," says Brahma Chellaney, professor of strategic studies at New Delhi think tank the Centre for Policy Research. "If the euro dies, it will mark the end of the European experiment in forging closer financial and political integration. But it will also have wider international implications."

Not everyone agrees what those will be, however. Chellaney argues the demise of the euro might help secure the primacy of the dollar - and therefore perhaps of the United States itself - for years to come.

But others believe a European collapse would be a sign of things to come for the US as well. Bharat Karnad, a colleague of Chellaney at the Centre for Policy Research, argues that whatever happens powers such as China are on the rise and that the West will be increasingly challenged regardless of what happens to the euro.

"The health of the euro or the EU, for that matter, will have a marginal impact on gold and power that is tending any way towards Asia, especially China," he said.

Washington takes the potential threat of Europe's unraveling very seriously. In the short-term, the Obama administration is clearly concerned over the electoral fallout should the crisis in Europe cross the Atlantic before November's presidential election.

But in the longer term, whether the euro survives or not US planners are beginning to face up to the fact that the continent will likely be poorer and rather more self-centered than Washington had hoped.

Washington has long been pushing European powers to take more responsibility for their own immediate neighborhood. While Britain and France took the political lead in Libya last year, US Defense Secretary Robert Gates complained European NATO forces were in fact almost entirely dependent on US munitions, logistics and other backup.

But the change in European thinking and the additional defense spending Washington called for now looks all but impossible in this time of austerity.

WASHINGTON WORRIED

"It's doubtful any future US Defense Secretary is even going to bother to make that kind of pitch," says Gvosdev at the US Naval War College. "We'd hoped Europe could take the lead in some parts of North Africa as well as the Balkans and Eastern Europe. That now looks very unlikely."

US planners were also waking up to the fact that European states were no longer likely to match US donor pledges when it came to humanitarian or financial aid for war zones and troublespots, he said. Then, there were longer term strategic concerns.

Washington's military "pivot " towards Asia, he said, had been based in part on the assumption that Europe would remain stable and wealthy and the US now had little or nothing to worry about on its North Atlantic flank. A weakened Europe could make US planners much less confident of that, particularly if China extends its influence.

Beijing has upped its investments in Europe in recent years, including major port projects in Greece and Italy.

Some political analysts contend the weaknesses and drivers behind the euro zone crisis go much further and can be found in most western economies - including the United States itself.

"The jettison involves essentially the ballast which used to provide stability to the vessel of post-war society," Jin Liqun, chairman of the supervisory board for China's sovereign wealth fund the China Investment Corporation, wrote on May 21 in Communist Party-run newspaper the People's Daily, making it clear he saw similar problems in the US.

Some waning of Europe's international influence was always likely, experts say, with an ageing population chewing up ever more resources and emerging economies inevitably growing faster. But the current crisis could supercharge its decline. Whether the continent's leaders realize that, however, is another matter.

"Europe's main source of influence (should) be the success of its political and economic model in providing high living standards and democratic freedoms," says Jack Goldstone, professor of international affairs at George Mason University near Washington DC "If the current crisis undermines both of those as well, Europe will look like a rather weak, badly run system of ageing and economically stagnant states. Irrelevance awaits."

(Editing by Janet McBride)

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