European Union creates the headless monster: EMU

By Gwynne Dyer

LONDON (JP): Eleven countries of the European Union committed over the weekend to a single currency -- European Monetary Union (EMU) -- starting next January. The 'euro' will be a headless monster at first, for it is a money without a country. But that's all right, because the secret agenda of its great advocate, German Chancellor Helmut Kohl, is to create a European state that matches the currency.

"History is the sum total of all the things that could have been avoided," as Germany's first post-war chancellor, Konrad Adenauer, used to say. Helmut Kohl often quotes Adenauer's remark, and the EMU is his attempt to guarantee that the calamitous European history he grew up with will never recur.

The 'euro' is the Trojan horse in which Kohl plans to smuggle a federal European state past the jealous guardians of national sovereignty in fifteen existing EU members and another dozen candidate states. The German leader remembers the Europe of two world wars that killed over 40 million people, and a Cold War that could have killed everybody if it went nuclear. He reckons any sacrifice of sovereignty is worth it to bury that past forever.

Other European leaders also remember that Europe of paranoid nationalisms and rabid ideologies, and some share Kohl's concerns (though politics prevents them from admitting it in public). The pro-EMU leaders of Europe are not fools or pawns: they let Kohl's Trojan horse through the gates because they see the 'euro' as a way of maneuvering their reluctant fellow-citizens into a position where further steps toward political union are inevitable.

That's not to say that the 'euro' won't have huge economic effects too. Its creation is the biggest financial event of the decade, dwarfing even the Asian crash or the collapse of the Soviet bloc. Not only does it replace historic national currencies like the French franc, the German mark, and the Italian lira (they will co-exist with the 'euro' until January 2002, then vanish), but it creates a new international currency to rival the U.S. dollar.

A more convenient one, too, since it comes in bigger denominations. This is very important to drug dealers and other workers in the black economy who now have to lug around heavy suitcases full of greenbacks (the highest U.S. denomination is $100). The 'euro' will come in notes of up to E500 ($550), which will certainly make it popular in those quarters -- but it has implications for whole national economies as well.

Internationally, the biggest loser will be the United States, which profits greatly from the fact that the dollar is currently the only true 'reserve' currency. The United States accounts for only 27 percent of the world's Gross Domestic Product, but 48 percent of the world's exports are invoiced in dollars, and 56 percent of foreign exchange reserves are held in dollars.

The dominance of the dollar gives Washington extra leverage in the world's monetary institutions, in financial markets, even in international politics. It is a hidden subsidy for the U.S. economy, since much of America's trade deficit is covered by just printing more dollars (which foreigners hold on to rather than demanding payment in their own currencies). And U.S. interest rates never have to be hiked to fend off speculative attacks on the dollar.

But all these advantages may be coming to an end, for the 'euro' will be an equally strong currency, backed by an economy -- that of the European 'single market' -- that is actually bigger than that of the United States.

Only 20 percent of the world's foreign exchange reserves are now held in the various European Union currencies, even though the EU has 31 percent of world GDP. But give the EU one strong currency, and watch how fast the Brazilians, the Japanese and everybody else diversify their holdings. Then watch as the U.S. government, for the first time in fifty years, learns to worry about the exchange rate of the dollar.

But there is a down-side for Europeans, too. By locking themselves into the 'euro', the eleven pioneers (Germany, France, Italy, Spain, Portugal, Belgium, the Netherlands, Luxembourg, Ireland, Finland and Austria) are giving up the two most powerful tools a government has over its economy: changing the interest rate, and changing the foreign exchange value of its money.

For the eleven, the exchange rate against the 'euro' that was fixed for each currency at the Cardiff summit over the weekend (ironically chaired by British Prime Minister Tony Blair, though Britain is the only big EU member to stay out) will be the exchange rate forever. Henceforward, Germany, France, and Spain will have no more freedom to change interest or foreign exchange rates than state governments in the United States.

The 'euro' is like opening a joint bank account: you may not have decided on marriage yet, but you have just taken the one step that really matters. And that is exactly what Helmut Kohl intended.

Having a common currency forces you to have many other things in common: the deficit in your national budget cannot stray too far from the norm, nor your labor policy, nor even your tax policy, or you get hammered by the market. So all these things must be coordinated -- and in Europe, unlike true federal states, no bodies exist to do that job.

The 'euro' truly is a headless monster as it stands, a recipe for frustration and chaos. But that is precisely Kohl's strategy: to land Europe in a situation where it must develop common institutions to manage its common currency -- federalism by the back door. He is even willing to court defeat in this autumn's German election in order to get it all in place before he goes.

Some time in the past few years, Helmut Kohl seems to have realized that he could be the man of whom the history books say: 'First he united Germany, and then he united Europe'. And you know what? He may be right.