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Harold James: Euro-Jitters a Reflection of International Problems

[Harold James is Professor of History and International Affairs at Princeton University and Marie Curie Professor of History at the European University Institute, Florence. His most recent book is The Creation and Destruction of Value: The Globalisation Cycle.]

It is too simplistic to explain the current wave of concern about the euro in terms of Greece’s problems. Greece has massive fiscal and competitiveness problems, but Greece (2.25% of the population of the European Union) is smaller than California (12% of the population of the United States). And California, too, is suffering massive fiscal difficulties and declining competitiveness in some of the industries in which Californians were once pioneers.

The euro’s current problems are, instead, a reflection of unresolved Europe-wide and global problems. The common currency is the canary in the mine of the global exchange-rate system.

The euro precisely measures international tensions in that it is a bold experiment: a currency that is not linked to a state, but rather follows from international rules and treaties. It is a creature of the intellect rather than a product of power. It is a post-modern or post-sovereign currency. But in the aftermath of a crisis, countries put national interests above their willingness to go along with international rules....

There has always been a close relationship between European monetary integration and global problems. Europeans thought that their close geographic proximity and shared cultural inheritance might enable them to produce answers where global debates had become stalled. When things did not work out globally, a regional solution might be possible....

Today, as in the 1960’s or 1970’s, we face a fundamentally global problem of inconsistent monetary policies. Back then, Europeans complained that low interest rates in America were driving global inflation; now low US interest rates are blamed for driving irresponsible asset-price booms.

Indeed, low US interest rates, though an appropriate domestic response to the financial crisis, have pushed a global carry trade in which people borrow in dollars to fund investments in the apparently less crisis-hit large emerging-market economies. These large transactions are funnelled through the international banking system.

The answers to a global problem of this kind cannot be found on a European level. It will demand global co-ordination of monetary policies, and some form of global economic governance. Europe tried this combination, and found that even in a regional setting it could not be fully realised. Instead, an imperfect answer produced heightened vulnerability. The result is that Europe has made itself into the primary victim of the financial crisis.
Read entire article at Gulf Times (Qatar)