The European project is widely seen to be floundering, politically and economically, in the face of US global dominance.footnote1 While the long depreciation of the euro—from its initial $1.16 in January 1999 to a record low of 82 cents in October 2000—may now have been checked, the underlying market scepticism about European economic prospects that accompanied its fall has not disappeared. The euro’s decline was not, after all, a commercial phenomenon—Euroland was posting big current account surpluses at the start of EMU—but a financial one, the consequence of big capital outflows. Since December 2000, the euro has benefited to a certain extent from investors fleeing the troubled American economy; but whether this rising tide can float such a leaky ship remains to be seen.
The present conjuncture has highlighted two key weaknesses in the design of Europe’s monetary institutions. There is, firstly, the weakness of their external policy: the Council of Ministers has some responsibility but no real power in this sphere. Given the present imbalances in the world economy, this carries the risk that a serious slowdown in the US will not be compensated for by a decisive relaxation of Euroland’s macro stance. Secondly, there is the problem of the ‘policy-mix’—the balance between the monetary and budgetary components of the macroeconomic stance.footnote2 Fiscal policy is both fragmented and uncoordinated. In a situation (undervalued currency, sluggish internal economy) where (now standard) Mundell-Fleming theory would call for a less restrictive fiscal stance, there is no clear mechanism for effective budgetary coordination; nor is it clear how such a relaxation could avoid destabilizing long-run interest rates in the weaker countries.
In this context, the European Central Bank’s sole response to the falling euro—repeatedly raising interest rates towards US levels, while the contradictory statements of Bank officials, EU Commissioners and national political leaders betrayed their growing anxiety—risked being both damaging and self-defeating: damaging, because unemployment is still very high in the core Euroland economies and the recovery fragile; self-defeating, because a slowdown in Western Europe might provoke further capital outflows towards other more rapidly developing economies. The weakness of the euro does not result from inflation—lower in Euroland than in the US—nor is it a mere function of interest-rate differentials, since much of the capital outflow is through FDI and not simply placements in the US banking system.footnote3 Rather, it was fast economic development in the US that gave rise to (real or perceived) investment opportunities, and thus attracted European financial resources.
It might be said that Europe is producing plenty of exports but not enough assets: its capital markets are fragmented and illiquid, compared to their US counterparts. And though Europe’s security markets are now starting to expand and integrate, this involves a long, conflictual move away from its traditional financial institutions, based on various forms of ‘relational’ banking within specific countries and regions. Thus to address the weakness of the euro by simple monetary restriction runs the risk of exacerbating Europe’s financial weaknesses—the underdevelopment of its financial markets, and the survival of obsolete financial structures—which, together, subordinate the European economy to US practices and priorities.
There is still a great deal of scepticism about the extent and the implications of globalized finance for European economic development. A strong statement would be:
So long as governments continue to target their current accounts, retain some sovereignty within their borders (so that at least the threat of government intervention in cross-border capital movements remains) and differentially regulate their financial systems, investors cannot think about domestic and foreign assets in the same way. Different national financial systems are made up of different institutions and arrangements, with different conceptions of the future and assessments of past experience, and thus operate with different modalities of calculation. All these features factor into a continued diversity of expectations and outlooks which cannot all be reduced to a single global marketplace or logic.footnote4
Two arguments, in particular, are advanced to back the sceptics’ case. Firstly, it is often suggested that today’s high levels of financial interaction are not unprecedented—that something very comparable can be found in la belle époque, with the monetary nationalism that broke up the mechanisms of the Atlantic economy and the gold standard being seen as inseparably linked to the revolt of the masses and the assertion of democratic controls over the free market.footnote5 The second objection rests on the prevalence of self-finance: any account of globalized finance as a dominant force in today’s economic life must confront the fact that the majority of investment is financed domestically.