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Gerard Baker

Washington's unspoken doubts about Europe
The next administration should not be afraid to criticise the headlong dash towards political integration
FT, Gerard Baker, 2000-10-05

American reaction to the result of last week's Danish referendum was predictably muted. Newspaper reports and analysis tended to be of the usual "Quirky Danes defy the tide of history" stuff; politicians of left and right ignored it; neither of the main presidential candidates commented on it. And there was no official comment from the Clinton administration.

A referendum in a small European country was never going to command the attention of the American public. And for policymakers there were both diplomatic and financial reasons why discretion constituted the better part of international stability.

Having intervened a week earlier to help prop up the euro, the US Treasury has a vested interest in seeing that nothing it says can be construed as unhelpful to the ailing currency. At the diplomatic level, US officials continue to observe the protocol that these matters are for Europeans themselves to decide.

Yet some day, perhaps even during the next administration, US complaisance towards Europe's headlong dash to political and economic integration will have to change. And it will do so precisely because of the very flaws in the process the Danish referendum pointed up. As has been widely remarked on in Europe itself, the Danes last week spoke for the majorities in many European countries who are unhappy at the loss of national sovereignty that economic and monetary union represents.

US official support for monetary union is not uncontroversial. You do not need to venture too far into the halls of Congress, or even into the inner sanctums of the Clinton administration, to find those who regard the single currency as at best a flawed project and at worst a dangerous folly.

Americans' doubts about the euro are not, as some Europeans fantasise, because they fear its potential strength. Absurdly inflated claims at the outset that the euro would challenge the dollar as the world's principal reserve currency have proved about as accurate as Nikita Khruschev's promise 40 years ago that communism would "bury" US capitalism.

Their concerns are rather that, without radical reforms, the strains put on disparate economies by a single monetary policy will place intolerable pressure on social and political systems. Without firm popular support for the project itself, these changes become much harder to achieve.

Of course it has long been an axiom of US foreign policy that European integration is good for the US. On the political level, it raised the tantalising prospect that the US would no longer have to negotiate separately with half a dozen governments. On the military level, a united Europe would be better able to "share the burden" of European defence. In economics, US companies had long pressed for a single regulatory and financial regime to smooth their competitive path into Europe.

But, curiously for the country that was born in the liberating spirit of popular self-determination that emerged from the Enlightenment, more curiously still for the country that tore itself apart in a civil war over the proper limits of federalism, the US never seems to have asked whether the ever-moving bicycle of European integration has ever been driven by popular support.

Bill Clinton himself has proved one of the most enthusiastic pro-EU integrationists of all US presidents. In a speech two years ago to the German parliament he heaped embarrassing amounts of praise on Helmut Kohl, the architect of much of the modern European project.

In Mr Clinton's rather fuzzy world view, the longstanding self-interest of the US seems to have been augmented by a personal attachment to a kind of sentimental globalism. You occasionally get the sense that Mr Clinton sees full European union as a step on the road to the world government that the left used to crave in the 1960s.

It is unlikely that Mr Clinton's fervent enthusiasm for European union will survive him. Al Gore seems prey to the same kind of internationalist sentimentality, but he has demonstrated too that he favours a rather less compromising approach to complex foreign policy issues.

George W. Bush, for all his obvious weaknesses in world affairs, is surrounded by advisers who seem likely to take a somewhat more hard-headed and, dare one say it, American view of the New Europe.

In any case, whoever is in the White House, it is proper that the US view should change. The dreams of the European federalists, which often draw on a flawed comparison with the birth of the US itself, should be backed by Americans only insofar as they are clearly supported by the popular will.

Washington should not be afraid to speak out a little more when that does not appear to be so. It would provide a useful signal to those in Europe who have misgivings about the process that they are at least listened to in the world's most successful democracy.

A bit more American scepticism would be in the selfish US national interest, of course. The consequences of a European federalism that drives forward without popular backing are stark. Divisions within the EU would intensify, and popular dissatisfaction with the ruling consensus could threaten instability even within the countries at the driving heart of European integration. That should be of concern to the US for diplomatic and national security reasons.

But more importantly, the US ought to see the higher interest that is at stake. Happily for the world, America, for all its flaws, has proved the most reliable defender, for rather longer than Europe has, of the basic right of free people to choose their national destiny. It should not shrink from reminding its friends that it remains committed to that eminently achievable ideal.

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Det är svårt att se hur EMU skulle kunna lyckas. Samtidigt tillåts inga misslyckanden. Vad som än händer kommer processen att präglas av konflikter mellan Tyskland och Frankrike. Europa kommer nu att drivas mot en federation eller mot upplösning med utbredd vänster- och högerextremism. USA bör förhindra ett sådant sammanbrott. Men det betyder inte att vi bör stödja vilken sorts integration som helst. Det skriver USA:s förre utrikesminister Henry Kissinger.

Destination Europe From The Wall Street Journal Europé 2000-10-05

Europe's illusion about America's weakness
Gerard Baker, FT, 2000-03-28

In spite of the measures adopted by Europe's leaders this weekend aimed at closing the competitive gap with the US economy, they remain ambivalent towards America's runaway growth of the last few years.

On the one hand - as pledges to deregulate telecommunications, liberalise financial markets and kick-start development of information technology industries reveal there is a grudging but strengthening acknowledgement that America has been doing something right. The rhetoric is still couched in mildly disdainful terms that suggests Europe can improve on the US model. European leaders believe it can achieve an elusive synthesis of economic success and social cohesion by refusing to go down the "market society" route of cheap labour and minimal social protection. Yet there is clearly an acknowledgment that there are lessons to be learnt. In their less public assessments of US performance, some continental European officials make no attempt to disguise their belief that US growth is one of the most egregious examples yet of "casino capitalism". They believe the elevated demand growth has been fed not by real growth in productive potential, but by a speculative binge, a national loss of financial self-control.

Even as they seek to emulate the internet explosion, some of them view dotcom market fever as an excess that will result in inevitable collapse. Let's see what people make of this great American model when the downside of social and economic flexibility leads to rapidly rising unemployment, impoverishment and social unrest, they murmur.

This posture - reluctant admiration mediated by anticipated schadenfreude - misses the most important economic lesson of recent years on both sides of the Atlantic. Without action to make European labour markets more like the US - the one thing politicians in Europe rule out - attempts at engineering an innovative, entrepreneurial economic culture will fail.

The emphasis in European criticism of the US on the social costs of a freewheeling economic system equally misses the true Weakness in America's economic resurgence. Ironically, it is also a weakness that European action to make labour markets more flexible could help to address.

One of the abiding features of the US economy in the last 30 years has been a structural balance of payments weakness that acts as a constraint on domestic economic growth. The problem, first identified by the economists H.S. Houthakker and S.P. Magee in 1970, is that the US is much more willing

to import from abroad than are other countries to import from the US. In economists' language, income elasticity of demand for imports in the US is higher than the rest of the world's income elasticity of demand for US exports.

This means that if income in the US and the rest of the world are growing at precisely the same rate, the US current account will steadily deteriorate. And over time, this imbalance will need to be addressed by a steady depreciation in the value of the US dollar, which is a source of potential instability for the world economy.

Since this phenomenon was first identified, the fundamental imbalance it implied has not mattered all that much. Throughout the 1970s, 1980s and the first half of the 1990s, US demand grew at lower average annual rates than the rest of the world's. The pronounced slowdown in US productivity growth that began after 1973 ensured two decades of relatively sluggish income growth that failed to match the European, still less Japanese, performance.

Though it was the cause of much economic soul-searching in the US it had least had one benefit - the gap in income growth kept the US current account in broad balance with the rest of the world. When the US enjoyed brief spurts of growth above the global average - in the mid-1980s for example - the effect on the current account was dramatic and negative. But these were followed by a quick reversion to the longer-term pattern of sub-par US growth and either current account balance or, at worst, small and manageable deficits.

But since 1995, the US has moved into an extended period of siguificantly faster growth than the rest of the world. The downside of the productivity acceleration is clearly evident in the rapid deterioration of the current account - with the deficit now close to 4 per cent of GDP. If this is indeed a new era of more rapid US growth - or even of merely US growth parity with the rest of the world - the structural imbalance at the heart of American demand will loom larger than at any time since it first emerged 30 years ago.

America's critics say the imbalance represents a chronic US inability to save enough to finance its investment. In strictly arithmetical terms, this is of course true, since the savings-investment gap is simply the counterpart of the current account. But a striking feature of the last few years is that the gap has been caused not by dwindling savings but by accelerated investment.

In other words, the structural problem is a global one. The US economic renaissance is simply providing the best opportunities for investors from around the world. The long-term answer to this long-term problem lies not in depressing US growth - though of course that is what the Federal Reserve is forced to do in the short term - but in raising potential elsewhere.

Genuine action by European countries to cut their structural unemployment by eliminating the penalties against hiring workers will raise their domestic demand, increasing the attractiveness of European investment opportunities. For good measure, it would help reduce potentially dangerous global imbalances and foster that greater international economic stability they talk so much about. That really would be something to celebrate.

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