Joe Biden has made restoring America to its pre-Trump normalcy the animating force of his campaign and presidency. One of the planks at the core of his agenda is the promise to get the proverbial band of highly developed democratic nations back together.
America’s relations with its traditional 20th-century allies in Europe had suffered following Trump’s blustery go-it-alone foreign policy and decades of unease over issues like the Iraq War and the 2008 financial crisis. Biden would get back on board with internationalist priorities like meeting the climate crisis, increasing energy security, repairing supply chains fractured by Covid, and strengthening defense ties between democracies.
National Security Adviser Jake Sullivan crystalized the administration’s thinking in a speech this spring at the Brookings Institution, dubbing the investment-heavy approach a “new Washington consensus.”
Yet something happened on the way to Biden’s restoration of America’s pre-Trump internationalism: Many of the US’s allies like Japan, Canada, and especially the European Union have not been all-in. They see the Biden administration’s signature accomplishments — such as the Inflation Reduction Act (IRA) — less as long-awaited efforts to finally make good on promises of climate action and more as a threat to the ability of places like Europe to attract investment themselves.
At the moment Biden wanted the transatlantic democratic alliance to come together for a common purpose and approach, wonks on either side of the ocean are sniping at each other.
The brewing row between longtime allies is “mutually assured sanctimoniousness,” says macroeconomics commentator and self-described “globalization defender” Karthik Sankaran.
After decades of pleading with America to finally take action on issues such as climate, why are our closest partners so annoyed at us now that we’re actually doing what they asked?
The Biden administration’s “new Washington consensus” flies in the face of the market orthodoxy of the old “Washington Consensus” — something that was perhaps stronger in Europe than it ever was in America. European political and economic institutions aren’t set up to foster national investment booms and tech drives. In fact, the continent’s supranational governing structures were set up to restrain member countries from exactly the kind of national one-upmanship in which Biden and his team are cajoling allies to engage.
The family feud within the Atlantic alliance shows that debates over how to implement a green transition are also about negotiating the global balance of economic power. In an era of more openly competitive international economic relations, obeying the rules in the European mold risks getting left behind, but playing to unique advantages as Biden wants America to do risks alienating allies. Even though Biden’s administration has promised to use green investment to create a “new consensus” domestically and internationally, it’s not yet clear many strategic partners are willing or indeed able to follow suit.
The rise of the old Washington Consensus, explained
“Washington Consensus” is one of those jargony terms like “neoliberalism” or “polycrisis” that gets tossed around a lot by academics and wags on the international conference circuit. Unlike those other buzzwords, though, the Washington Consensus refers to a very specific thing: a set of 10 policy principles for economic development first enumerated in 1989 by economist John Williamson.
The 10 bullet points of Williamson’s Washington Consensus will sound familiar to any student of a mainstream Econ 101 class:
- Keep government spending and fiscal deficits in check
- Avoid subsidizing or protecting local industry to focus on health and education
- Moderate taxes
- Let the market set interest rates
- Keep exchange rates steady through independent monetary policy
- Allow free trade
- Encourage foreign direct investment from private sources of capital
- Privatize publicly owned assets
- Deregulate the economy as much as possible
- And ensure rock-solid private property rights.
The principles were initially supposed to be guides for newly industrializing and developing markets, and were pioneered in places such as Latin America by local experts and bureaucrats, rather than in DC itself.
From the 1980s to the 2000s the Washington Consensus came to be more or less unquestioned economic common sense both in many peripheral developing nations and within the United States and Europe.
At the height of the Washington Consensus’s prestige, ostensibly left-leaning elected officials such as Bill Clinton in America and Tony Blair in Britain eagerly sold off public assets, encouraged the ever-freer flow of capital and goods across borders, and generally deferred to market actors when shaping the economy. Leaders who tried to turn the policy tide back toward more direct state intervention, like Francois Mitterrand, France’s Socialist Party president through the 1980s and first half of the 1990s, were swiftly disciplined by market forces and reversed course.
At an international level, the old consensus was enforced by bodies like the International Monetary Fund, which made compliance with the principles a condition of financial aid to struggling countries, and the World Trade Organization, which resolved trade disputes and penalized countries whose governments tried to give domestic firms extra boosts.
The European Union, created by the 1993 Maastricht Treaty, was a product of the era of the Washington Consensus. The EU was the fruit of decades of effort after World War II to bind together European economies (and especially perennial continental antagonists Germany and France) through ever-freer and denser trade connections, while cooling down national competition that for centuries had routinely escalated into cataclysmic war.
Notably, the EU constrained member states’ fiscal policy to prevent local governments from trying to give their firms a leg up over competitors elsewhere in the EU, restricted deficit spending, forbade the issuing of common government debt, and — with the launch of the Euro — totally eliminated Eurozone members’ ability to manage their currency as a means of boosting exports.
The fall of the Washington Consensus
But by the end of the 21st century’s first decade, the Washington Consensus appeared to be badly faltering.
Many of the Latin American countries that first adopted the Consensus’s policy portfolio saw massive disruption but not necessarily great economic outcomes. Increased free trade provided much cheaper consumer goods, but at the cost of good manufacturing jobs in old industrial core regions like the Upper Midwest that were outsourced to lower-wage countries. In Washington itself, the George W. Bush administration dispensed with deficit reduction in favor of massive tax cuts and a huge increase in military spending.
Crucially, the country with the most successful economy of the 21st century — China — largely threw Washington Consensus policies out the window. Even as China joined international bodies such as the World Trade Organization that were supposed to enforce Washington Consensus rules, China did not really abide by those rules: It subsidized key industries and protected domestic firms from foreign competition.
Not only did China succeed in the world trading system without playing by its rules, it also successfully resisted the pull toward political liberalization and closer strategic alignment with a hegemonic United States that free trade and economic growth were supposed to facilitate. As Chinese demand surged, it became a geopolitical rival for influence in crucial commodity-producing regions of the world like the Middle East and South America.
Moreover, once-developing smaller nations such as South Korea and Taiwan leap-frogged to the top of the global value chain in areas including semiconductor manufacturing, shipbuilding, and even entertainment through intensive industrial policy — subsidies, coordination, and active government planning in certain sectors deemed strategically important. These countries’ historic success undermined the Washington Consensus dogma that industrial policy was a mistake.
At least in the immediate aftermath of the 2008 financial crisis, economic policymakers in the United States in both parties largely eschewed Washington Consensus recommendations: They approved the biggest fiscal stimulus in American history up to that point, used extraordinary central bank measures to hold interest rates close to zero and intervene in capital markets, and bailed out the privileged American auto industry.
But in many ways, Europe stuck to the script. When the 2008 financial crisis spread to countries in the European periphery like Spain, Italy, Greece, Hungary, and Latvia, the EU imposed punishing Washington Consensus style reforms on some of the most recent additions to the union: Instead of offering stimulus, the EU compelled austerity, far beyond what the IMF itself recommended. Some scholars called this the “EU rescue of the Washington Consensus.”
The results were abysmal. Europe emerged from the 2008 crisis poorer than the US, with much slower growth. Austerity badly damaged popular trust in the European Union. Peripheral countries like Latvia and Estonia saw some of the worst levels of unemployment in the world, leading to massive levels of emigration that arguably contributed to the rise of far-right xenophobic and EU-skeptical politics around the continent.
European “core” economies such as Germany couldn’t count on selling to stagnant peripheral nations in the Union and became increasingly dependent on demand from China as an export market for high-value-add manufactured goods like cars or machine tools. That’s a decision that now looks risky as China’s state-incubated electric vehicle industry has emerged as an export powerhouse in its own right, threatening to capture the international and possibly even domestic market that European national champions like Volkswagen had assumed would be theirs.
The EU could have a hard time making the turn from old to new consensus
Biden and his supply-side progressives draw a direct line from the austerity of Washington Consensus policies to the rise of the far-right nativist politics and international tension. The administration broke with economic orthodoxy and passed interventionist measures like the IRA to restore political calm.
When Jake Sullivan laid out his vision of a new Washington consensus for the world, based on legislation such as the IRA and CHIPS Act, with ample industrial subsidies, he said these policies would provide the foundation for a “fairer, more durable economic order.”
In contrast to the height of the old Washington Consensus years when DC-aligned development institutions preached the neoclassical economic gospel to restrain local industrial development efforts, Sullivan and other senior Biden administration officials have invited their allies to put serious effort into boosting their own local green manufacturing sectors.
But many in Europe are still pretty attached to the old way of doing economic policy, and feel threatened by Biden and company’s cajoling. Emmanuel Macron called the IRA “super aggressive” last year. The Europeans have good reason to take issue with Americans informing them that they have to change their entire approach to economics and trade: after all, the EU’s economy is much more enmeshed in global trade than America’s, with the continent’s exports accounting for half its GDP compared to just 11 percent of America’s GDP. Europeans can’t afford to be so cavalier about changing up the program, as painful as their recent economic experience has been.
The IRA does a number of things that would be difficult for Europe to stomach. While the EU has pursued carbon pricing for decades to penalize emissions, Biden’s bill takes an “all carrot, no sticks” approach to inducing green investment through open-ended tax credits rather than penalties on polluting behavior: Tim Sahay of the Green New Deal Network, one of the leading advocates informing the IRA’s drafting, has compared the bill to a “bottomless mimosas” brunch special.
While the EU’s climate trade policy, the Carbon Border Adjustment Mechanism, at least in theory would not privilege domestic products over imports from countries with equally muscular emission reduction policies, the IRA is nakedly protectionist. Its Buy American provisions are aimed more at jumpstarting a green energy and electric vehicle sector within the US than completing a green transition as quickly as possible with cheap imported components from existing firms in Europe or Asia. The IRA’s generosity rests on America’s uniquely enormous fiscal power as the issuer of the world’s most important reserve asset, the US Treasury; whereas Europe has been loath to issue common bonds beyond a Covid one-off.
The bill also follows in the long federal tradition of transferring money and resources from high-income areas to low-income ones with few strings attached, whereas attempts to do so in Europe are much more fraught: The post-2008 bailout of Greece nearly tore the Union apart as rich nations balked at helping their poorer fellow EU members, and the strings that come with more routine funds for newer members like Poland and Hungary have become tripwires for debates over rule of law and local autonomy.
Many in the EU fear that the European Union lacks the legal ability to offer incentives to firms as sweet or geographically focused as the IRA or CHIPS Act, and they believe firms will cancel European investments to instead put new facilities in North America. Indeed, these fears may be playing out already: Volkswagen recently paused planned battery factories in Eastern Europe for lack of subsidies. (It eventually settled on a Canadian location after receiving even more generous subsidies than the IRA affords.) Americans often complain about gridlock in Congress stalling most meaningful legislation, but the European Union would have to revise its basic founding treaties to enact policy that matches the firehose of money unleashed by the IRA, an even more difficult process.
Policies like the IRA aren’t settling arguments among allies as much as they are provoking them. But Europe cannot wish its way back to a pre-2008 reality of unquestioned faith in economic orthodoxy and globalization, either. So even as Biden and his advisers seek to forge a “new Washington consensus,” the actual agreement at the heart of said consensus can be hard to see right now.
