Monetary folly: Europe against the Anglo-Saxons.

ONE of George Bush's first acts on replacing Ronald Reagan in the White House in 1989 was to ring Margaret Thatcher to tell her to stop blocking the European single-currency project, then under discussion by a committee of European central bankers presided over by the High Priest of European integration, Jacques Delors. Four months earlier, in Bruges, the British prime minister had excoriated the Delorsian vision of Europe as the attempt to re-create on a European level the socialist, collectivist, corporatist economy and society that she herself had been beating down in Britain.

In Delors's own country, France, the failure of the socialist "experiment" in the early years of the Mitterrand government had made it plain that Socialism in One Country was no longer feasible. The increasing ability of international capital to hotfoot it out of any country whose government, unions, and employers' organizations were conniving in an inadequate rate of return had seen to that. Mitterrand, when he came to power, said that his government would "make a clean break with capital"; instead, capital very nearly made a clean break with France, forcing Delors, who was finance minister at the time, into three franc devaluations in 18 months. Delors concluded first, as suggested above, that a bigger area than France alone would be needed to resist international finance-capitalism; second, that constructing that bigger area would require the support of business interests. Corporatism in One Continent, a/k/a Economic and Monetary Union, was his solution.

For Jacques Delors to espouse such a project was natural enough; for Margaret Thatcher to oppose it equally so. But what on earth was a Republican President of the United States doing in supporting Delors against Thatcher? He was doing, in fact, what postwar American Presidents, Reagan apart, had, under the influence of the foreign-policy establishment, traditionally done: supporting European integration and seeing Britain as Perfidious Albion clinging to the wreckage of post-Imperial pretension. And, like his predecessors, he was failing to show any understanding of the damaging impact that European integration might have not just on America's role as a nation but on the capitalist and democratic philosophy of which America (along with Britain, at least as incarnated by Mrs. Thatcher) is seen as the greatest supporter.

The desire to see political integration in Europe was initially a product of the Cold War. As Federico Romero, writing about the institution of the Marshall Plan, put it, political union was seen as "the way to reconcile Germany's recovery with France's security and build up enough strength to contain the Soviets." (A major influence, by the way, on the United States' European policy was George Kennan, who while interned in Germany during the war had expressed the view in a lecture that the defeat of Germany would mean the end of two thousand years of European civilization.) Moreover, prefiguring the views of such as Delors, "New Deal planners saw a large unit regulated by supranational institutions as the appropriate sphere for growth-oriented economic management."

By 1952, the U.S. Mutual Security Agency (successor to the Economic Cooperation Administration, which had administered Marshall Aid) was even postulating a North Atlantic Federation with considerable supranational powers. Naturally, the U.S. Congress never entertained such an idea, and the new Eisenhower Administration settled on support for the European Coal and Steel Community and the European Defense Community. When the EDC was stillborn in 1954, and as a result West Germany was integrated into NATO, the U.S. saw an economic route to political unification in Europe as all the more essential to disarming French suspicion of Germany.

In 1953 - 54 the State Department successfully opposed British proposals, broadly supported by the U.S. Treasury, for sterling convertibility on the grounds that that would damage the European Payments Union, which provided a proxy for regional convertibility within Europe. The Treasury and the Federal Reserve Board were wary of the EPU, seeing it as a soft-currency bloc discriminating against dollar goods. In April 1954, the political argument for European integration was used to persuade Congress to grant a very substantial loan to the European Coal and Steel Community, over the objections of the American steel industry, which saw the ECSC as likely to develop into a protectionist cartel. By late 1955, discussing the implications of the Messina Conference, which was to lead to the creation of the European Economic Community, President Eisenhower stressed to the National Security Council "the desirability of developing in Western Europe a third great power bloc," while Secretary of State John Foster Dulles accepted some risk of anti-U.S. trade protectionism in the interests of "a genuine United States of Europe."

U.S. attitudes gave little comfort to a United Kingdom that initially stood aloof from the nascent EEC. Britain was worried that the new grouping would be protectionist, would hold back the multilateralization of trade and payments, and, worst of all, would ultimately lead to the re-creation of, to use Harold Macmillan's words, the empire of Charlemagne. But Macmillan eventually decided that Britain could have no chance of remaining a world power if it did not join the EEC. By 1961, Britain had applied for membership, and Macmillan was telling Charles de Gaulle (in secret, of course) that Britain was committed to the preservation, at all costs, of a "European civilization that had endured for three thousand years" but was now "under threat from all sides, from Africans, Asians, and Communists and, in a different way from our Atlantic friends, the North Americans, New Zealanders, and Australians." This -- just a decade and a half after North Americans, South Africans, Indians, New Zealanders, and Australians had fought alongside Britons to liberate de Gaulle's country from an evil system that sought to preserve "European values" as much against the Anglo-Saxon world as against Communism (not to mention Jews and Slavs) -- must rank as one of the most despicable utterances ever to issue from the mouth of a British prime minister.

The point of quoting Macmillan is not to denigrate him and those other British politicians who, like de Gaulle, thought of Europe as a "Third Force," contesting world leadership with the U.S. and the Soviet Union. Rather, it is to illustrate the continuity of thinking among European politicians about the "American problem." Hitler hated the United States. After the war, the fact that America had liberated Western Europe and then protected it militarily against the Soviet threat and nourished it economically through Marshall Aid, trade and capital, and transfers of technology and knowhow did little to change European attitudes. Among the ruling classes in Europe, humiliation rather than gratitude appeared to be the dominant reaction to the establishment of the Pax Americana. From the very beginning, the program of European economic integration took over not only the ambitions and the structures but the very terminology proposed for Europe by Nazi economic theorists. The aim of those theorists, and of the founding fathers of the "European construction," had been to create an economic area that would be more than just a free-trade zone -- an extension of "the Anglo-Saxon world market system," as a Nazi economic blueprint described it --but something that would incorporate specifically "European" economic and social values and mechanisms.

One aspect of American hegemony that particularly rankled with the European elite was the role of the dollar in the postwar world. This perceived problem became more rather than less serious after the breakdown of the Bretton Woods system. Under Bretton Woods, the dollar's role as the world's key currency created a demand for dollars as a reserve and transaction medium. This enabled the U.S. to import more goods with less cost in exports than would otherwise have been the case. In other words, it increased the real income and consumption possibilities of U.S. citizens. But the dollar's central role also meant that, in effect, the U.S. could not devalue it. The abandonment of Bretton Woods allowed President Nixon to do so. By the late 1970s, the financial markets' lack of confidence in the Carter Administration sent the dollar plunging, causing serious problems for the competitiveness of German industry. It was this that in 1978 led Chancellor Helmut Schmidt to propose, along with President Valery Giscard d'Estaing, the creation of the Economic and Monetary System, aimed at limiting exchange-rate fluctuations among EC currencies. Schmidt wanted to ensure that if the dollar fell, other European currencies would, rather than falling with it, remain tied to the Deutschmark instead. Giscard d'Estaing, like just about every French politician before and since, wanted to harness Germany's economic and monetary strength to the pursuit of French monetary diplomacy, chief among whose ambitions was the reduction of American influence.

When Mitterrand replaced Giscard, it did not take long for his finance minister, the Catholic, corporatist/socialist Jacques Delors, to find WASPs under the bed and -- only occasionally taking time out to refer to his German partners as "arrogant and uncomprehending" -- to blame all the woes of the ailing French currency on Anglo-Saxon conspirators. To defeat those conspirators, it seemed, "Europe" had to come together. It is impossible to understand the motivation of the single-currency project without understanding the almost religious hold that corporatism has on the European elites. Individualism, and the atomistic market capitalism that is its economic counterpart, is regarded by many Continental Europeans as the work of the devil. (Thus when the truly diabolical deeds of the Belgian child-kidnapper, rapist, pornographer, torturer, and murderer, Dutroux, came to light last summer, the Belgian prime minister, conscious that his countrymen angrily and almost unanimously believed the affair to be part of a network of political and judicial corruption of the sort that a corporatist political system makes almost inevitable, made the monstrous statement that the crimes were the product of a market capitalist system that treated people's bodies as goods to be bought and sold.) What the European corporatists really mean is that a market society is a fluid society in which established position and privilege count for relatively little and in which "outsiders" can rise to wealth and political prominence. Such a system cannot be tolerated by the European political and bureaucratic elites. If the "Anglo-Saxon" concept of shareholder value, for instance, became established as the leading principle of corporate governance throughout Europe, what would become of the French system of granting top industrial and financial jobs for life to the privileged graduates of the Ecole Nationale d'Administration? And if it supplanted the stakeholder concept hitherto dominant in Germany, what would happen to the power of union bosses in a country where the "social partners" are heavily involved in industrial and governmental decision-making?

NO wonder, then, that even Helmut Kohl has joined Jacques Chirac in mouthing the French mantra that the single currency is necessary for Europe to "stand up to" the United States. This mantra found graphic form in the French referendum campaign on the Maastricht treaty, when the pro-treaty Socialists, conscious that many Frenchmen believed the treaty to be an act of Vichyite surrender to Germany, issued posters depicting the single currency as the only way of wresting economic control of the globe from the hands of smelly American cowboys and gross Japanese Sumo wrestlers. No wonder, either, that Philippe Maystadt, the finance minister of corporatist Belgium, declared last year that the point of the single currency was to "prevent the encroachment of Anglo-Saxon values in Europe." America be warned: the single currency has you in its sights!

Just how is the single currency supposed to achieve the miracle of turning the world economic order upside down? A certain M. Gerard, a member of the policy-making council of the Banque de France, wrote an article in a French magazine last year that spelled it out. The Americans, he said, did not care about the exchange rate of the dollar -- a neglect that seemed almost sacrilegious in French eyes. In more earthly terms, this insouciance meant that other countries found it difficult to bring negotiating threats to bear against the United States: France's dollar reserves, "the monetary equivalent of the [nuclear] force de frappe," as M. Gerard put it, were disarmed. But if the single currency, the euro, were created, it would suck capital out of the United States and into Europe, thus forcing up interest rates in the U.S. and creating unemployment there, leading a chastened and humbled America to the economic negotiating table. This, hard though it may be to believe, was written down in black and white. Its intention is clear: only if Europe is in a position to inflict real and serious pain on ordinary Americans will it be possible to force the United States to agree to a moderation of the "Anglo-Saxon world-market system." And what Gerard says about the monetary strike force is just as true, for Euro-enthusiasts such as Delors, of the real nuclear strike force. There is no doubt, Delors said in a German magazine interview just before Maastricht, that Europe must become an economic, political, and military superpower. And what is the point of constructing a military superpower if it is not to challenge another (more properly, the other) military superpower?

It is in pursuit of aims such as this that functionaries of the European Commission travel the world "selling" the virtues of the euro. Persuading Asian central banks to dump dollars for euros is the first step on the road to creating unemployment in America and forcing the U.S. Government to sue for peace. Or is it? There is a degree of confusion in European thinking. German industry is united with the French bureaucracy in wanting to see the European currencies depreciate against the dollar in order to spur competitiveness in the slow-growth, high-unemployment backwater that much of Continental Europe has become. How can this aim be reconciled with the desire to make euros so attractive that everyone will want to substitute them for dollars in their portfolios? One possibility is that the European currencies should be driven down ahead of the creation of the single currency. Then, once these currencies are converted into the euro, it, rather like the Deutschmark at the beginning of the 1960s or the yen right up until the late 1980s, would be structurally undervalued and ripe for an ascent that would see it replacing the dollar as the premier reserve currency.

This strategy might work if the euro had the underpinnings that made the Deutschmark and the yen successful currencies in their day. Unfortunately for the citizens of Europe, the euro will instead be a Mickey Mouse currency. Aside from the political imperative of somehow "standing up to" the United States, there is absolutely no coherence between French and German views of what a single currency is for, how it should work, and what is necessary to make it work. Indeed, growing recognition in Germany, and in particular in the Bundesbank, of this yawning gulf in attitudes could still prevent the project from going ahead at all.

The crux of the problem concerns the relations between monetary policy and fiscal policy, or, put differently, between the supranational European Central Bank and the national governments. The Bundesbank, in the person of its formidably intelligent president, Hans Tietmeyer, has long recognized that for the single currency to work would require the prior establishment of "the degree of solidarity characteristic of a nation." Germany seems to be ready to extend this degree of solidarity to its monetary satellites, the Benelux countries and Austria; and its foreign-policy establishment wants to be similarly nice to France. But, Kohl apart, few Germans see why they should pick up the tab for the past fiscal irresponsibility and future unreliability of countries such as Italy, Spain, Portugal, and Greece, with which they have no particular political or cultural affinity, and which even Helmut Kohl cannot imagine as a threat to Germany's peace. Furthermore, solidarity will have to be reciprocal. Yet who, looking at France's record in international economic relations over the decades and indeed the centuries, could believe that it would extend its "solidarity" to anyone? Indeed, the French government has recently rejected German insistence on a system of automatic sanctions for any country breaching tough limits on fiscal deficits in EMU. And it has also begun to put pressure on Germany to accept the idea of a "European economic government" to exercise surveillance and even control over the future European Central Bank, whose independence has been regarded in Germany as sacrosanct.

Here France is logically right. In the EMU, governments will lose their sovereign borrower status. That is, they will no longer have the power, individually, to print money to pay off their debts. Hence they must control the ECB, or else they will be subject to default risk and to the fierce financial-market disciplines with which certain U.S. states and local authorities and Canadian provinces have become all too painfully familiar in recent years. But while the political consequences of this are containable within the well-rooted American political union (not least because of equilibrating transfers through the federal budget) -- but to a much lesser extent in linguistically and economically riven Canada --they will be intolerable in a potentially fractious and already economically underperforming Europe. To avoid such financial-market pressures and the need for emergency fiscal retrenchment, EMU governments will have to retain the right to call on the central bank to print money and create "surprise" inflation -- i.e., to cut the real value of government debt. The difference in the EMU is that the incentive to force the ECB to create "surprise" inflation will depend not on the average level of government debt in the whole EMU area but on the highest level of debt of any individual government. With Italy, or even Belgium, involved, this highest level will be more than double the level of Germany's debt ratio. And with France, now again clearly seeking a weak currency, as an influential member, markets will expect the ECB to come under pressure to take the easy way out. Seeking to protect themselves in advance against "surprise" inflation, they will demand risk premiums in the bond yields of all EMU member governments.

IN short, unless the EMU really does convert itself into a nation, there is no choice, if the single currency is established, between politically frightening, economically damaging, and socially devastating fiscal austerity on the one hand and the deliberate signaling that the euro will be a weak and unstable currency on the other. The stark nature of this choice has already dictated that the route of the weak and unstable currency will have to be followed. But the risk premiums this will bring will further hamper the Continental European economies as they struggle with the challenges not only of their own poorly functioning corporatist economic systems but also of integrating Eastern and Central Europe in a stable democratic order and of coping with the new economic powerhouses of Asia. The dream of the mighty euro making America bend before it will not materialize.

However, the American nightmare of a Europe plagued by mass unemployment, politically unstable, turning against the international market economy, and blaming everything on "Anglo-Saxon-Jewish" speculators will come that much closer to reality if the single currency becomes fact. The Treasury's 1950s opinion that "United States interest in an economically unified Europe is ill-considered" will have been proved right -- not so much because narrow U.S. economic interests will be put at risk, but because an unsuccessful single currency will place the economic and political situation of Europe in the severest jeopardy.

Euro-enthusiasts among British politicians are fond of saying that Britain cannot remain unaffected by things going wrong on the Continent. Unfortunately, they draw the wrong conclusions from this undoubted truth. Even more unfortunately, years of pandering to the Continent have reduced to practically nothing Britain's ability to save Europe from itself. Once more, the United States will have to come to the rescue, responding both to self-interest and to altruism. It is time for the U.S. Government to overturn the Cold War shibboleths of Kennan and Dulles and to right the more recent misconceptions of George Bush. Mrs. Thatcher knew what she was trying to do at Bruges. America now needs to march to the drum of cool thinking and plain speaking. The U.S. Government should tell Kohl to stop exacerbating Europe's problems with the dangerous folly of the single currency.