ABSTRACT
The birth of the euro in 1999 was expected to create a new power in international monetary relations. Even without the participation of Britain and some other European Union (EU) members, the euro area would constitute one of the largest economic units in the world, rivaling even the United States in terms of output and share of foreign trade. Consequences for the geopolitics of finance promised to be momentous. Europe’s Economic and Monetary Union (EMU) would become a major player on the monetary stage. Europe’s new money, building on the widespread popularity of Germany’s old Deutschmark (DM), would pose a serious threat to the predominance of America’s greenback as an international currency. A decade later, how have matters turned out? The purpose of this essay is
to evaluate the experience of the euro area to date in a broad global context. The central question is: How has the creation of the euro affected the power of participating states to cope with external challenges? International monetary power, as I have suggested elsewhere (Cohen 2006b),
may be understood to have two dimensions, internal and external. The internal dimension has to do with the ability to exercise policy independence-to act freely, insulated from outside pressure. A useful synonym for this meaning of power is autonomy. The external dimension has to do with the ability to shape the actions of others-to exercise leverage or enforce compliance. A common synonym for this meaning of power is influence. Challenges for the euro area encompass both dimensions. With regard to the dimension of autonomy, two key issues are involved.
One is the global macroeconomic environment, including especially the evolution of exchange rates and regional payments imbalances. Though Europe itself has remained relatively close to payments equilibrium in relation to the rest of the world, EMU cannot help but be affected by any stresses created by broader global imbalances or the risk of contagious debt defaults. How well equipped is the euro area to deal with any threat of financial instability? The other issue is the potential competition with the greenback for use as an international currency. Perhaps the greatest benefit of an international currency is the ability to finance external deficits with one’s own money, thus enhancing internal policy flexibility (Cohen 2004). Can the euro compete
effectively with America’s dollar in global markets? With regard to the dimension of influence, the key issue has to do with institutional participation. Does membership in the euro area enable EU governments to play a more authoritative role in the International Monetary Fund (IMF) or other financial forums? Overall, this essay concludes, EMU has failed to live up to expectations.
Though exposure to exchange-rate disturbances has obviously been reduced inside Europe, member states remain vulnerable to fluctuations of the euro’s exchange rate vis-à-vis outside currencies. The euro area is largely a passive participant in global payments developments and, if anything, has become even more exposed to threats of financial instability. Likewise, the euro has failed to mount a significant challenge to the dollar and the bloc continues to punch below its weight in monetary diplomacy. The fundamental problem lies in the mismatch between the domain of EMU and the jurisdictions of its member governments. The euro is a currency without a country-the product of an interstate agreement, not the expression of a single sovereign power. Hence EMU’s power to cope with external challenges is structurally constrained. It is difficult to become a major player when speaking with many voices.
In one key respect, EMU has clearly enhanced the autonomy of its members. With a single joint money replacing a plethora of national currencies, participants no longer have to fear the risk of exchange-rate disturbances inside Europe. For a continent long plagued by currency instability, that is no small accomplishment. But in other respects vulnerability remains considerable, particularly in relation to the world outside Europe. The euro area is largely a passive participant in global payment developments, leaving members critically exposed to fluctuations of the euro’s exchange rate vis-à-vis the U.S. dollar and other major currencies. Moreover, even though European states could hardly expect to be unaffected should a crisis hit the broader financial system, the euro area remains remarkably unprepared to cope with any major disruption in banking or credit markets.
