South China Morning Post

  Friday  January 8  1999

Problems of euro power


The launch of Europe's single currency has been accompanied by a torrent of meaningless elite euro-phoria and euro-babble. Politicians have spoken grandly but vacuously of how the euro will increase economic growth, just as growth is stalling. They have hob-nobbed at champagne parties while the average European remains unmoved.

In fact, the launch of the euro is only the most ambitious example of Europe's elite taking its population to new places without a democratic debate about the political implications. It is therefore not surprising that the world outside insular Europe remains bemused by the euro. But if European leaders were more honest with their population about the meaning of the euro, the world outside would also understand what the euro really does mean for them.

The most obvious impact of the creation of a single European currency is on the world's leading economic power, the United States - after all the idea of the euro was born out of a deep desire to curtail the American power to dictate the shape of the global economy. It is therefore frustrating to euro-zealots that the Americans officially remain cool and calm supporters of the euro - welcoming the prospect of more stable financial markets and a greater prospect of trans-Atlantic management of the global economy.

Although Americans rightly see, on balance, the economic benefits from the euro, they are quietly concerned about the un-stated European political agenda. If the European Union creates an effective federal political authority that sets out to challenge US leadership in international economic institutions and on global trade, then the Americans will have cause for concern. Even Nato will be at risk if Europeans can actually achieve some international leadership that even vaguely approximates its new international economic power.

In the regions closest to Europe - the Middle East and Africa - there is even less attention paid to the advent of the euro . . . and rightly so. If all that happens is that there is a large new currency replacing several small ones, the impact will be marginal on these tiny economies. But if, as the Americans fear, Europe really is on the path to creating a closer federal political union needed to manage a single currency, then the Middle East and Africa will see a range of other effects.

Consider the question of the prospects for independent military action by Europeans in the Gulf if there is a more effective common European foreign and security policy. Assuming that the United Kingdom - being an island of pragmatic shopkeepers - finally does join the euro, then it will be harder for Britain to stand with the US against the likes of Saddam Hussein. As Europe grows more federal it will see crises in the Gulf as potential asymmetric shocks to the economy and therefore demand a common foreign policy position. A UK unable to support the US will make it more likely that the US will become isolationist and leave rogue powers free to make their mischief.

Looking further afield from Europe, it has been a surprise to many euro-phorics that the main international interest in the euro has come from Asia. But on closer inspection, Asians have their own intrinsic reasons for studying the euro, and the risk is that they will take it too seriously as an economic phenomenon without fully understanding its political base.

To be sure, there are good economic reasons for Asians to welcome a strong euro: the ability to diversify currency reserves will help avoid major financial shocks. But in the more ambitious Asian discussions of the euro, two fundamentally flawed assumptions are often made.

First, it is argued that the creation of a rival to the dollar will reduce American economic hegemony and, in a re-run of the current economic crisis in Asia, the US would be unable to orchestrate International Monetary Fund policy and dictate national policies.

Perhaps, but a great deal more needs to happen within Europe before there are real prospects of diluting American power.

The risk is that, as at the moment, Europe will have enormous power through its single currency, but a dangerous inability to make decisions on international issues.

There is no mechanism for a single EU voice in the IMF or even in the G-7. Thus we have a risky case of European power without responsibility or a sense of its international obligations. Asians may find themselves dealing with a weaker US that is still being asked to carry the burdens of leadership.

The second Asian misconception about the euro concerns the prospect of Asians learning to create their own single currency. Officials from Hong Kong have been in the vanguard of the argument that Asians can protect themselves from the powerful winds of the global financial system by creating a single currency. But this argument fundamentally misunderstands the political basis of the euro.

While Asians are attracted to a single currency because it would supposedly help safeguard national sovereignty, Europeans know that a single currency means the inevitable elimination of major parts of state sovereignty.

The European experiment is about federalism, not nationalism.

Are Chinese seriously contemplating allowing officials from the Japanese Ministry of Finance (the would-be-equivalent of German Bundesbank bureaucrats) to set their interest rates? Would Singapore's prudent civil servants trust their fiscal policies to their less effective Asean colleagues - an inevitable process that is beginning in Europe as the fiscal links to financial policies are fully grasped? Do Asians seriously see the value in harmonising tax policies in Hong Kong and Vietnam or even Korea and Japan?

The problem for Europeans is that even they have not thought through these issues, and they certainly have not debated them democratically.

Say what you will about British or Scandinavian slowness in joining the euro, but at least they have had serious debates about the political underpinnings of effective monetary union.

Unless the EU comes up with effective answers about how to make decision-making democratic, decentralised and effective, then the creation of the euro will have only created bigger problems both at home and abroad.

Gerald Segal is Director of Studies at the International Institute for Strategic Studies in London.


Although Americans rightly see the economic benefits from the euro, they are quietly concerned about the un-stated European political agenda


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