The Perils of Europe's Promised Union

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European union—not just a common market but a common currency, a common defense, and a common diplomacy—has been talked about for decades," Ronald Steel, author of Walter Lippmann and the American Century (1980), notes in the New Republic (June 1, 1998). "In fact, the talk lasted so long that union came to resemble the kingdom of heaven: something to be devoutly desired but deferred into the indefinitely receding future. Many, myself included, doubted that European countries would ever scrap that essential attribute of sovereignty—their currencies—as the price of unity." But now, 11 European nations are doing just that.

Mere months from now, on January 1, 1999, if all goes according to plan, France, Germany, and the other nine countries in the European Monetary Union (EMU) will freeze their exchange rates, establishing, in effect, a single currency. People and companies will be able to write checks, use credit cards, and keep bank accounts in euros. Responsibility for monetary policy will shift from Germany’s Bundesbank and the other national central banks to the new European Central Bank. On January 1, 2002, eurodenominated notes and coins will be introduced, and six months later, the deutsche mark, the franc, and the lira will be history.

While Washington is upbeat about all this in public, Steel says it "fears that a Europe moving toward real economic integration may be a less reliable and less predictable partner for the United States—or perhaps not even a partner at all."

After World War II, American liberal internationalists were all for European unification. But now that the long-cherished dream is moving dramatically closer to reality, it is not just liberal neo-isolationists such as Steel who are making gloomy prognostications. Harvard University economist Martin Feldstein, writing in Foreign Affairs (Nov.–Dec. 1997) and the Journal of Economic Perspectives (Fall 1997), warns that monetary union "will change the political character of Europe in ways that could lead to conflicts in Europe and confrontations with the United States."

The one-size-fits-all monetary policy, Feldstein argues, is likely to provoke great discord among the European nations, especially when some of them experience severe unemployment and find the new central bank unwilling to cut interest rates. He predicts that the adverse effects of a single currency on unemployment and inflation will outweigh any gains that it will produce by facilitating trade and the flow of capital among the EMU members.

Economist Milton Friedman, now with the Hoover Institution, at Stanford University, agrees. In the United States, where there is a common language, a strong national government, and free movement of goods, capital, and people from one part of the country to another, a common currency makes sense, he points out in New Perspectives Quarterly (Fall 1997). But in Europe, where those conditions do not obtain to the same extent, it doesn’t, he contends. There, flexible exchange rates have provided a better way for individual nations to adjust to the ups and downs of the business cycle. "If one country is affected by negative shocks that call for, say, lower wages relative to other countries, that can be achieved by a change in one price, the exchange rate, rather than by requiring changes in thousands on thousands of separate wage rates or the emigration of labor." Come January, however, that will no longer be possible for the 11 EMU nations. The "real rationale" for monetary union is not economic, Feldstein writes, but political: the formation of a political union, "a European federal state with responsibility for a Europe-wide foreign and security policy as well as for what are now domestic economic and social policies." But once the countries are in EMU, and unable to get out, he argues, "conflicts over economic policies and interference with national sovereignty could reinforce longstanding animosities based on history, nationality, and religion." Even another European war is possible, he maintains. "Germany’s assertion that it needs to be contained in a larger European political entity is itself a warning. Would such a structure contain Germany, or tempt it to exercise hegemonic leadership?"

"Could Feldstein be right?" wonders Isabel Hilton, a columnist for the Guardian in London, writing in the New Yorker (Apr. 27 & May 4, 1998). "Is it possible that the euro could bring the whole edifice of Europe—with its new grand buildings, its thousands of bureaucrats, and its volumes of law—crashing down upon our heads? The idea is one that some European voters—who haven’t yet bought their leaders’ party line— seem to share. Most, in fact, have responded to the idea of a single currency with suspicion." Hilton visited finance ministers in France, Italy, and Britain (which has elected to stay out of the EMU for the time being), and she found that none of them "believed in Feldstein’s prophecy of doom, but each of them knew that monetary union was a leap into the unknown."

That is because Europe is reversing the usual process of creating a state, argues Michael Portillo, who served in British prime minister John Major’s Conservative cabinet during 1992–97. "Normally, a new state establishes its institutions of government first, and then goes on to create its policies and its currency. In this case, the common European policies and the currency are being created first," he observes in the National Interest (Spring 1998).

What is missing, Portillo says, is "a single European people.... The peoples of Europe are too different from one another, their histories, cultures, languages, and values are too diverse, for them to be brought together into one state." Forcing individual nation-states, which are democratic, into the European Union, which in itself is not, is a grave mistake, he believes. "The traditional danger in Europe has come from extremist nationalism," Portillo contends. "Political union seems likely to rekindle it, as national interests are ignored by policymakers who are both remote and irremovable."

The "forced march to unity" is endangering what has already been achieved in much of western and southern Europe, namely, "a new model of liberal order," argues Timothy Garton Ash, a Fellow at Oxford University, writing in Foreign Affairs (Mar.–Apr. 1998). "What we should be doing now is rather to consolidate this liberal order and to spread it across the continent. Liberal order, not unity, is the right strategic goal for European policy in our time." In Europe, "enlargement" is the theme of many critics of rapid unification.

But unity is the goal that most European nations are now pursuing. "It is difficult to see how the European Monetary Union can succeed," writes former secretary of state Henry Kissinger on the op-ed page of the Washington Post (May 12, 1998). "It is even more difficult to imagine that it will be permitted to fail."