U.S. dominance may be undone by 'Euroland'

May 21, 1998|By Ronald Steel

IMAGINE that our European NATO partners announced that they would soon fuse their national armies into a single force under the command of a European general staff. Imagine further that they agreed to set up staff headquarters in Germany and chose the new force's commanding officer.

Far-fetched? Not at all. It's the logical next step in Europe's accelerating drive toward unity. For the moment, countries have fused their economies and their currencies, not their military forces. But, where the mark, the franc, the lira, and the guilder are headed, armies, fleets and air squadrons will eventually follow. And, when that happens, all the assumptions on which U.S. policy toward Europe has rested for the past 25 years -- U.S. dominance of NATO, a de facto U.S. nuclear monopoly in the alliance, European acquiescence to Washington's political leadership, the absence of a strong European voice on critical global issues -- may fade into the historical limbo of the Cold War.

European union -- not just a common market but a common currency, a common defense and a common diplomacy -- has been talked about for decades. 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 they have chosen the first president of the European Central Bank (after some bickering over who would get the post) with its headquarters in Germany, the economic powerhouse of the European Union. The currency that it oversees, the euro, will be born in scarcely seven months.

Stiff upper lip

For public consumption, Washington is upbeat about the

prospect. "An integrated Europe is America's natural best partner for the 21st century," President Clinton has said. "If [European monetary union] is good for Europe, it will be good for us," chimes in Lawrence Summers, No. 2 at the Treasury Department. But these feel-good phrases conceal 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. Leave it to Newt Gingrich to dispense with niceties by suggesting that Britain drop out of the European Union and join NAFTA.

Newt's onto something. Farsighted U.S. officials harbored doubts about European union long ago. Henry Kissinger wrote 20 years ago that "divergences on monetary and trade policy were already increasingly apparent" and that "a politically united Europe was more likely to articulate its own conceptions in other areas as well." What was possible then seems increasingly likely now -- particularly because fear of Moscow no longer keeps Europe clinging to the United States for protection.

On the economic front alone, a unified European economic policy, backed by a powerful euro, poses potential problems. First, as Gerard Baker notes in the Financial Times, it challenges the dominance of the dollar as the global currency -- a dominance that allows the United States to finance its external deficit from its own currency. If the United States had to pay off its debt in euros, it would face higher borrowing costs and diminished freedom of action.

Second, monetary union will probably make European economies more efficient and thereby richer and more powerful. Whereas the dollar is now the unchallenged global currency, a strong euro could help build a powerful European economy. Striking a sensitive nerve, the chief economist at the powerful Deutsche Bank recently boasted that "the euro will be to the dollar what Airbus is to Boeing."

Washington foreign policy types, now basking in a self-congratulatory triumphalism, tend to denigrate a "eurosclerosis" marked by low economic growth, high unemployment and social benefits, and "inflexible" labor markets.

Growth trend

But this is changing. Across the European Union, growth is rising to a projected 3 percent average this year, unemployment is beginning to fall, privatization is spreading and both inflation and deficits are under control. This year every EU member except Greece met the criteria for monetary union: limiting the budget deficit to 3 percent of gross domestic product. Inflation is at the same level as in this country.

To be sure, there are plenty of economic barriers to turning the EU into a powerhouse. Growth could stall, unemployment could shoot up as competition stiffens, and deficits could jump. Germany could throw its economic weight around and try to dominate the EU politically. France and Britain could balk or choose sides.

What is striking is that the will for unity has steadily increased. Now, it is fortified by the absence of a serious external threat and by modernizations of the European economy that set the stage for years of growth.

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