The end of the Cold War opened the way to sharper economic confrontations within the West. Heading off a threatening rupture will require both a better understanding of the past and a broader perspective on the future.


The Cold War, with its heavy-handed Soviet threat, kept the United States and most of Western Europe in a tight geopolitical and military alliance for 40 years. Even so, economic relations among Western capitalist countries, and especially monetary relations, were frequently tense and conflicted. The disputes among governments often mirrored academic disagreements among their economists. The linkage is hardly surprising. Leading economists have long been closely involved in shaping and implementing national policies. And while economists are jealous defenders of their intellectual independence, their ideas often commingle with broader views of national interest that dominate policymaking.

The end of the Cold War has intensified the economic differences among Western countries. Current disagreements are frequently over how to respond to the recent financial crisis and recession. These debates usually juxtapose two contending schools: fiscal and monetary conservatives, and neo-Keynesians. Beyond their arguments over the contemporary crisis are more fundamental philosophical differences that amount to distinct world views. These feature bundles of ideas and assumptions deeply implanted in political and economic culture. Each carries its own prejudices. When these are not recognised and debated rationally, they become submerged icebergs threatening fatal collisions.

The conservative camp boasts a distinguished group of economists, academics, civil servants, bankers, journalists and politicians. Many are based on the European continent and most are followers of continental economic giants of the recent past, in particular fiscal and monetary conservatives like Friedrich Hayek or Jacques Rueff. This school has broadly supported the austerity being imposed by the European Central Bank (ECB) on the European Union’s member states, the states of the eurozone in particular. The group believes that durable prosperity is likely to return to Europe only if austerity brings its economies into balance with each other and with the world outside. The group thus rejects neo-Keynesian policies of repeated fiscal and monetary stimulation. It sees these as inevitably inflationary and pandering to the most dangerous domestic vices of modern societies. It tends to ignore the Keynesian warnings about the impossibility of all states having a trade surplus at the same time and the unfortunate consequences of their trying.

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David P. Calleo is University Professor of the Johns Hopkins University, Dean Acheson Professor at its Paul H. Nitze School of Advanced International Studies (SAIS), and a Survival Contributing Editor. The author thanks Luca Sanfilippo and Giacomo Tagiuri for research assistance on this article.

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Survival: Global Politics and Strategy

December 2013–January 2014

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