LONDON – Ten years on, the euro is a resounding success. A financial-market heavyweight, it now outperforms the dollar, the yen, and, until recently, the mighty Chinese yuan, while euro-denominated bond trading rivals the US market in size.
But Europe should be doing better. It should act with greater imagination to unleash more genuine economic freedom and competition, stop championing national enterprises, and start giving the European Central Bank more support. Euro-zone policymakers should also seize the initiative in the world’s key economic clubs.
In particular, members of Europe’s economic and monetary union should give up their seats in the G-7 and the International Monetary Fund. There may be some justification for each EMU state to be represented in the G-8, but not in the main economic organizations. If they volunteered to act collectively at these forums, Europe would free up much-needed space for other important countries at the top table of world economic discussions, which would foster greater respect for global policymakers.
Internally, euro-zone “success” can best be measured by the yardstick of economic growth. Many commentators cite the wide disparities between euro-zone members’ growth rates as a sign of failure. But many other single-currency areas, including the US, display similar divergence. It should also be obvious that, in the absence of currency markets to act as a “valve” for economic and financial pressures, economic volatility may increase.
In fact, euro-zone leaders should be less worried about variations in internal growth than about clear evidence of overall economic underperformance. While growth has been reasonably stable since EMU started, per capita GDP – probably the best measure of economic success available – shows that Europe has lagged other regions, even when the figures are adjusted for workforce size. It is also well known that European productivity is falling behind, too, probably due to the same factors that make Europe seem dull, cautious, and lacking in ambition when compared with many of its competitors.
When it comes to internal competition policies, most European countries still think within the national “box.” For the euro to help lift European growth and productivity in any significant way, governments must allow – indeed, encourage – stronger competitive forces across the EMU area.
In terms of external economic policy, European policymakers have done very little in response to the wholesale changes now underway in the world economy – beyond complaining about Chinese imports and Russia’s aggressive use of its commodities, and, most recently, becoming embarrassingly obsessed with so-called Sovereign Wealth Funds.
This is a poor showing for countries that successfully confronted the challenges of creating the EU and monetary union. After all the diplomacy and effort that these epoch-making events required, European policymakers should be able to tackle reform of the IMF, the World Bank, the G-7, and the G-8. Yet all of these institutions still reflect the post-World War II status quo, which serves little purpose in today’s world.
For example, why is there an international economic organization such as the G-7 without China, which is poised to overtake Germany as the world’s third largest economy and since 2000 has contributed almost as much to global economic activity as the entire euro zone? Most global economic issues today cannot be solved without policy steps in China. Indeed, how can the G-7 have the audacity to make repeated public comments about the currency of an outside country and hope for a positive response? It is almost farcical.
Meanwhile, France, Germany, and Italy are all in the G-7, even though they share the same monetary policy and currency. It would be better if the ECB and the EU finance ministers adopted a common position ahead of G-7 meetings, then allowed their joint view to be represented by a single Council representative and the ECB’s president. Because ministers meet before each G-7 meeting, this would be an easy procedure to introduce.
Indeed, a “financial G-6” may today make more sense than the current G-7, but that may no longer hold true tomorrow. In another 10 years, India may be in the top echelon of economic powers. Or Britain might have joined the euro, making its independent role redundant. Can Canada keep its place while Russia and Brazil are excluded? And what other economic giants are waiting in the wings?
Clearly, therefore, we need to devise a system of membership for key international organizations that ensures that their structures are relevant but that is also flexible enough to allow members to come and go. One way forward would be to establish numerical guidelines – along the lines of the Maastricht Treaty – for conferring G-7 membership.
Europe should lead by example – offering the world the benefit of its deep experience of financial diplomacy and volunteering to take the first steps forward. Given that Europe managed to construct EMU, the Maastricht Treaty, and the stability and growth pact that underlines the euro, it should be relatively easy for euro-zone experts to help devise a system for judging G-7 type membership. Unless European countries take the initiative on global financial institutional reform, it will remain a lost cause.