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European Affairs
The Case for a Mr. (or Ms.) Euroland
by Steven Everts
Despite much common ground, relations between the United States and Europe are subject to increasing strains and tensions on trade, defense and foreign policy issues. Some Americans are angrily accusing Europe of "provincialism" - of being concerned only with its immediate vicinity.
But there is one welcome sign of change. The successful introduction of the euro by 11 of the European Union's 15 members is encouraging Europe to become more outward-looking and to develop a more strategic sense of its responsibilities.
Overall, Economic and Monetary Union (EMU) will tend to make the EU a more cohesive and probably more assertive international actor, especially if Britain joins the euro zone and all EU members become part of Euroland.
Even if that does not happen, however, EMU will enable Euroland to sharpen its profile on the global stage. Europe's bargaining strength will increase and its partners, particularly the United States, will have to take European preferences more seriously.
Yet, by the same token, Americans who want to share the burdens of global leadership should welcome EMU, because Euroland is their best partner for that task. The bottom line is that the euro is bad news for the dollar, but good news for America.
Despite its initial weakness against the dollar, the euro is becoming a much larger currency than the sum of its parts, paving the way for a bipolar dollar-euro financial order (the yen coming in a distant third).
After all, the "size" of a currency is mainly a function of the size of the underlying economy, its trade patterns and the development of its capital markets. And the Euroland population of 290m is larger than that of the United States (270m), making the euro the currency of the world's largest group of affluent customers.
Euroland's total merchandise trade with the rest of the world is about 25 percent larger than that of the United States (and more than double Japan's). When more countries enter EMU, and its poorer members catch up economically, the euro-area will have a larger Gross Domestic Product than the United States.
As the euro gradually acquires an international role, the principal consequence for the United States will be a gradual reduction in the asymmetrical advantages that it has enjoyed as a result of the dollar's uniquely dominant role. These benefits include preferential access to "cheap" money from abroad, a partial insulation from the discipline that financial markets put on governments and the possibility to conduct so-called "dollar diplomacy."
For decades, US governments have tried to use the dollar's status and exchange rate as an instrument in the pursuit of other economic objectives such as the trade balance. While the importance of this extra leverage should not be exaggerated, it is true, as the European Commission noted in 1990, that "to some extent, the United States can exploit this asymmetry by making its policy choices in a non-coordinated fashion without suffering much from a similar behaviour of European nations." EMU will largely eliminate this asymmetry and make "dollar diplomacy" harder to pull off.
At the same time, the Europeans can expect political and economic benefits, the biggest of which will be the greater control they will have over their own economies. For instance, the Europeans will no longer have to struggle with the havoc that large swings in the dollar have wrought on European foreign-exchange markets.
In the past these gyrations often sent the German mark in the opposite direction to the Italian lira and the French franc, putting great strains on the Exchange Rate Mechanism (ERM) and the single market. What's more, as a whole, the Euroland economy has become less dollar-sensitive.
Europeans and Americans alike should realize that EMU does not signify the end of US economic strength or the dollar's prominence. But the euro will increasingly constrain and challenge US pre-eminence. The dollar, dollar-denominated assets and the US government will increasingly have to live by the same rules as everybody else. And as the Europeans' dependence on the dollar declines, they will collectively recapture a degree of sovereignty previously lost.
When it comes to analyzing American opinion on EMU, however, the first thing to note is that few American policy-makers have thought about it at all. European diplomats will readily vent their frustration at the lack of interest from their US colleagues, never mind Congress. Some Americans agree with them.
Lawrence Lindsey, former member of the Board of Governors of the US Federal Reserve, has said that "the true American view of the euro is a combination of complete ignorance and total indifference." True, that was in 1997, but the situation has improved only incrementally. State Department and White House officials concede that the euro "does not appear on the radar screen."
The catchphrase one hears at the US Treasury is that "the jury is still out on whether EMU will be successful." Clearly, there is considerable skepticism as to whether EMU can work smoothly, given Europe's limited labor mobility and the absence of large-scale financial transfers to smooth regional inequalities. This is the familiar mantra of the neo-liberal school.
In public, stress is put on the line that what is good for Europe is also good for the United States. Former US Treasury Secretary Robert Rubin has often stated that "a successful economic and monetary union that contributes to a dynamic Europe is clearly in our long-term interests." While welcome, this conditional endorsement actually veils a deep-seated suspicion among US officials that EMU might well not be successful.
Opinion outside the Tre-asury is often more skeptical. For example, in December 1999, Senator Gordon Smith, Chairman of the US Senate Foreign Relations Subcommittee on European Affairs, voiced his reservations: "I, personally, am particularly worried that the drive towards monetary union is first about politics and not about economics. That its ends are about achieving a socialist super-state and not about preserving democratic free enterprise . . . I can tell you that the flagrant anti-Americanism of some continental leaders fuels the suspicion that the EU's real motive is to build a European force . . . in order to counter US influence and to check American power."
But although EMU is partly about European self-assertion, it was never intended as an anti-American move. Instead its origins can be found in intra-European considerations.
Rather than turn a fiction into a self-fulfilling prophecy, the United States should drop its paranoia and welcome Europe as a truly equal partner. On the great strategic issues the Europeans are closer to the United States, and have more diplomatic and economic clout to offer, than any other country or regional bloc.
Of course, EMU will not end the ambiguous blend of cooperation and competition that characterizes US-European relations. Indeed, it is probable a new transatlantic bargain will be preceded by a bumpy ride. But EMU should overall prove a help, not a hindrance, to transatlantic cooperation, for at least three reasons.
By promoting the creation of a European capital market and by boosting the processes of innovation and reform, the euro will strengthen the European economy. A stronger European economy ultimately means a larger market for US exports and investments.
By empowering Euroland, EMU will make the Europeans a potentially more influential global actor. For Americans wanting to share the burden of managing the global economy, Euroland is their logical ally.
By removing the need for "dollar-envy," EMU is eliminating an underlying cause of latent anti-US resentment. The euro will thus help to put US-European relations on a more balanced, healthier and sustainable basis.
It is tempting, from a European perspective, to see the process of coming to terms with EMU's external effects as a task mainly for non-Europeans. This view, however, is complacent and erroneous.
Europeans will only succeed in playing a greater international role if they agree to enact important, sometimes painful, reforms of their policies and institutions. For example, the Europeans will have to realize that power is linked to responsibility; greater power to greater responsibility.
More specifically, the euro-zone needs to rethink its external representation and create the job of a "Mr. (or Ms.) Euroland," an individual who can speak authoritatively for the euro-zone. At the moment, arrangements for European representation at international financial meetings, such as those of the Group of Seven, are cumbersome and contrived, with responsibility split between the Finance Ministers of Italy, France and Germany and the EU rotating presidency and the Commissioner in charge of monetary affairs.
The case for a Mr. Euroland starts from the assessment that the euro is enabling Euroland to raise its stature in global financial diplomacy. After all, EMU's participants now share a single external balance of trade, as well as a single monetary policy. And the rest of the world - increasingly - expects the euro-zone to speak with a single voice.
Following the Asian financial crisis, in which Europe looked hopelessly divided and inward-looking to many Americans, a number of US policy-makers are demanding that the Europeans develop a more strategic view of their wider responsibilities in co-managing the global economy. Quite a few would like to see a single representative who could speak for the euro-zone.
Although US support for such an authoritative EMU spokesperson would, as always, depend on what that voice were saying, the existence of such a person would, on balance, increase the chances of striking broad and sustainable bargains.
Such a figure would, in fact, be a good idea, and not just to satisfy timeless US complaints of European division and provincialism. Many Europeans also now believe that divisions among themselves mean that the United States dominates the global financial game by default. Regardless of recent experience, the benevolence of US leadership cannot always be relied upon.
So who exactly should be the political voice of Euroland? The Commissioner in charge of EMU (currently Pedro Solbes of Spain), according to many euro-enthusiasts. But any commissioner, however brilliant, lacks the necessary political legitimacy.
The larger member states, in particular, would simply not accept a commissioner speaking for the euro-zone. Nor does public opinion seem ready for such a step. Besides, the Commission is meant to speak for the EU as a whole, but four EU members do not yet participate in EMU, and the ranks of the non-participants could swell after the EU expands into Central and Eastern Europe.
Euroland's external representative would have to deal with matters such as exchange rates, financial crises and international financial institutions. These are primarily the competence of the member states, rather than the EU itself. So the Council of Ministers through its rotating presidency, rather than the Commission, should be responsible for Euroland's financial diplomacy. But the revolving nature of the presidency means that it is forever doomed to lack continuity, expertise and political credibility. No matter how able the relevant minister, the fact is that the US Treasury Secretary will not normally accept the Finance Minister of Luxembourg, or even Ireland, as a serious interlocutor.
In sum, the EU needs a finance supremo, a "Mr. Euroland," appointed - by unanimity - on the basis of merit and answerable to the finance ministers of the euro zone. The job would be comparable to the new post of EU High Representative for Foreign and Security Policy "Mr. CFSP," to which Javier Solana of Spain was appointed last year.
The US Treasury Secretary or the Managing Director of the International Monetary Fund could contact Mr. Euroland if, say, Russia defaulted or if they simply wanted to review developments in the global economy. The Euroland representative should be located in the Council secretariat with a small supporting staff to help him with policy development.
To be effective, Mr. Euroland should be given mandates to negotiate formal and informal agreements with other political authorities. Meetings of the Euro-11, not the EU Council of Ministers, should then quickly ratify or reject any negotiated agreement. For the system to work, the Euro-11 should be given the authority to make binding decisions related to the management of EMU, including matters of external policy-making.
In meetings of G-7 Finance Ministers and other international forums, a common position voiced by a single person would bring credibility and strength to European positions, characteristics which they conspicuously lacked during the Asian crisis. Over time, it would also make sense for Mr. Euroland to become the euro-zone's single powerful representative at the IMF.
It is likely that EU members outside Euroland, Britain in particular, would object strongly to the creation of an authoritative spokesperson for the euro area, not least because the outside world would be bound to turn to Mr. Euroland as the voice of "Europe" on international financial questions.
But while the concerns of those outside the euro should be handled carefully, they should not be allowed to block further integration among the members of the euro-zone. Coordination between EMU participants and the other EU member states will have to be intense. But self-exclusion comes at a price. Moreover, an enlarged and diversified EU will have to rely increasingly on operating "flexibly," meaning that not all member states may participate in all EU policies.
Evidently, EU governments are some way away from creating the post of Mr. Euroland. Distinctive national outlooks, shaped by history and habit, not to mention matters of prestige, preclude a rapid agreement. Nonetheless, the Europeans should work towards giving themselves a single voice on international financial questions.
If the EU can speak with one voice in trade matters, despite the sometimes strong disagreements on the merits of free trade, then why can it not on financial matters? Structural forces favor it. Non-Europeans are asking for it. The question who speaks for Euroland must be answered, preferably before the next crisis strikes.