In 1980 the Soviet Union appeared to be stealing a march on a demoralized Western alliance through its arms buildup, occupation of Afghanistan, and influence with African and Central American revolutionaries, while the United States had been expelled from Iran and was suffering from inflation and recession at home. Eight years later the Reagan administration had rebuilt American defenses, presided over the longest peacetime economic expansion in 60 years, and regained the initiative in superpower relations. Because the “Reagan Revolution” in foreign and domestic policy was purchased through limits on new taxes even as military and domestic spending increased, the result was annual federal deficits measured in the hundreds of billions of dollars and financed only by the influx of foreign capital. Once the world’s creditor, the United States became the world’s biggest debtor. Moreover, American economic competitiveness declined to the point that U.S. trade deficits surpassed $100,000,000,000 per year, owing mostly to American imports of oil and of Japanese and German manufactured goods.

The sudden collapse of prices on the New York Stock Exchange in October 1987 compelled the White House and Congress alike to address the issue of American “decline.” In 1988 Paul Kennedy, a Yale professor of British origin, published the best-seller The Rise and Fall of the Great Powers. He developed the thesis that a great state tends to overextend itself in foreign and defense policy during its heyday and thereby acquires vital interests abroad that soon become a drain on its domestic economy. Over time, new economic competitors unburdened by imperial responsibilities rise to challenge and eventually replace the old hegemonic power. It certainly seemed that the United States was such a power in decline: Its share of gross world production had fallen from almost 50 percent in the late 1940s to less than 25 percent, while Japan and West Germany had completed their postwar economic miracles and were still growing at a faster rate than the United States, even during the Reagan prosperity. New light industries, such as microelectronics, and even old heavy industries like steel and automobiles had spread to countries with skilled but relatively low-paid labour, such as South Korea, Taiwan, Hong Kong, and Singapore. Financial power had fled to new global banking centres in Europe and East Asia. In the 1960s, 9 of the 10 biggest banks in the world were American; by 1987 none were American, and most were Japanese. These trends were in part natural, as other industrial regions recovered from their devastation in World War II and new ones arose. Whether natural or not, however, they seemed to indicate that the United States could no longer afford to uphold either the liberal trade environment it had founded after World War II or the worldwide responsibilities that devolved upon the “leader of the free world.”

European growth, led as always by the dynamic West German economy, also signalled a change in the global distribution of power. Yet, even as the European Community expanded in terms of both production and size (Greece became its 10th member in 1981), it failed to demonstrate unity and political leverage commensurate with its economic might. For years EC officials, the so-called Eurocrats, had quarreled with member governments and among themselves over whether and how Europe should seek deeper as well as broader integration. Finally, in 1985, Jacques Delors, president of the European Commission, steered through the European Parliament in Strasbourg the Single European Act, which set 1992 as the target date for a complete economic merger of the EC countries, for a single European currency, and for common EC foreign and domestic policies: in short, a United States of Europe.

The immediate result was a seemingly endless round of haggling among European cabinets about this or that point of the 1992 plan. Was the abolition of the venerable pound sterling, the French franc, and the deutsche mark in favour of the ecu (European currency unit) really necessary? Could all member states coordinate their labour and welfare policies, or be willing to countenance the free movement of peoples across national borders? Would national governments in fact prove willing to relinquish part of their sovereignty in matters of justice, defense, and foreign policy? The moderate governments of the Christian Democrat Helmut Kohl in West Germany and Socialist President François Mitterrand in France, as well as those of Italy and the smaller countries, remained committed to “1992.” Only Thatcher of the United Kingdom voiced doubts about merging Britain into a continental superstate. The alternative, however, would seem to leave Britain out in the cold, and so, despite Thatcher’s opposition, plans for European unity went ahead. (In 1990, members of Thatcher’s own party forced her resignation over the issue.)

Why did Europe resume the long-stalled drive for a more perfect union only in the mid-1980s? Some of the reasons are surely internal, having to do with the activities of the Eurocrats and the proclivities of the member governments. External factors also must have been important, including the debate over whether to base American missiles in Europe; the whole question of arms control, which affected Europe most directly but over which it had limited influence; widespread disaffection in Europe with Carter and (for different reasons) Reagan and hence a desire for a stronger European voice in world politics; and, last but not least, the Europeans’ concern over the influx of Japanese manufactures. The world appeared by the late 1980s to be moving away from the ideals of national sovereignty and universal free trade and toward a contradictory reality in which international dependence increased at the same time that regional and increasingly competitive economic blocs coalesced.

To many analysts it seemed that the Cold War was simply becoming obsolete, that military power was giving way to economic power in world politics, and that the bipolar system was fast becoming a multipolar one including Japan, a united Europe, and China. Indeed, China, though starting from a low base, demonstrated the most rapid economic growth of all in the 1980s under the market-oriented reforms of the chairman Deng Xiaoping and Premier Li Peng. Paul Kennedy and many other analysts concluded that the United States could simply no longer afford the Cold War and would have to end it just to maintain itself against the commercial and technological competition of its own allies. For the U.S.S.R., the Cold War had to end if it was to maintain itself as a Great Power at all.