Europe as such does not exist politically. The first reason is the incompletion of the euro. Europe will only have political influence if institutional developments are implemented. A European constitutional order, legitimating political power at community level, is a precondition for articulating a European goal for the world.
But that is not enough. This ambition must also be relevant, offering answers to the problems humanity will face in this century. As I have recalled, after the Second World War such an ambition existed. It was to establish peace and offer the world the most advanced model of social progress. In our era, inclusive, sustainable growth should be the goal.
This poses a serious problem, because that ambition is not expressed in influential political circles in Europe, other than in campaign speeches or media posturing. It is not adopted by governments in their domestic policy, whose alpha and omega is fiscal austerity. How could it be projected externally? But there is a deeper ideological problem. For more than thirty years, Europe has abandoned the social-market economy for market fundamentalism. The logical consequence has been unilateral political alignment with the United States, the sole exception being France and Germany’s non-participation in the disaster of the second Iraq War. Enlargement of the European Union was conducted in line exclusively with Anglo-American attitudes, a constant of which is hostility to Russia. The political disruptions in 2016 and 2017 have changed that landscape. On the other hand, Brexit, the election of Donald Trump and his rebuttal of the US hegemonic world order have been wake-up calls for the EU to assert itself as a political power in world politics. Meanwhile the rise to power of enormous continental nations in Asia, which are not in the Western orbit and are not wedded to market fundamentalism, should give us pause for thought about the possibility and meaning of pursuing radical financial globalization in a space of nations with contradictory interests in the absence of global governance.
Let there be no misunderstanding of the true significance of the string of financial crises from the mid 1990s to the general crisis of 2007–08. It means that general market multilateralism cannot exist in the absence of the production of general public goods capable of constituting global regulation. In current conditions, globalization can only recede, as it has done several times in the history of capitalism: in the seventeenth century, following the Renaissance expansion; in the first decades of the nineteenth century, after the age of the Enlightenment and the collapse of Napoleonic imperialism; in the years 1914–58, following the major financial expansion of the 1873–1913 period. A multilateralism that is limited in order to be viable is a reasonable prospect for the post-crisis period we are now in.
However, a new phenomenon confronts every nation in this century. The ebbs and flows of world capitalism have revealed the impossibility of self-regulation exclusively by market logic. The essence of capitalism is boundless expansion, spreading inequality and conflict. It comes into collision with the fragmentation of national spaces. The contradiction was overcome by the assertion of a military and monetary hegemony which, for a time, organized capital accumulation, leading to growth that was shared to some degree. Furthermore, hegemony did not elude the Western world in the lands ploughed up by capitalism during its geographical expansion. But hegemony always ends up declining, smothered by the costs it entails. Trump’s rhetoric continuously emphasizes those costs to retreat from international responsibilities to ‘make America great again’.
A hypothesis worth exploring is that the twenty-first century will not accord with past developments. Asian capitalism is not a pupil of market fundamentalism. Chinese economic power has become a fact of life. It is the structural pole of trade in East Asia. The political aim is to make China the focal point of an integrated regional space, to project its enterprises to absorb technology, to secure access routes to resources and multiply long-term partnership agreements with states on the African and South American continents. This is a conception of international relationships that is not multilateral from the outset in and through a world market. It advocates organizing regional spaces and multilateralism through a form of governance constructed out of the need to collaborate in producing general public goods.
Forming a space that would be consolidated by the euro’s completion by 2020, and which would have a power of attraction over neighbouring North Africa and the Middle East, Europe could be a mediator in establishing such governance, if it can recover a desire for political autonomy.
The two kinds of general public goods for which global governance should be negotiated are climate change and the international monetary system. Moreover, they are linked, since establishing a notional value for carbon and monetary financing of carbon assets, the necessity of which must be accessible to all countries.
International Climate Negotiations
The major problem rendering climate negotiations so difficult is that man-made climate change is a general threat to the whole of humanity, but responsibility for it and the potential consequences are, and will remain, unequal. Climate change represents a general externality. Its historical causes are very unequally distributed between countries, depending on when they joined in the industrial revolution, and especially on their massive utilization of carbon energies. It is also a general externality whose effects are regionally differentiated, on account of the geographical characteristics peculiar to climate change and the characteristics peculiar to the economies that do and will endure it, and whose resilience to this kind of shock varies greatly. The first victims of the effects of climate change will be the least advanced countries, island states, and the disadvantaged populations of emerging countries. Finally, this general externality has significant effects on future generations, by dint of the time constants specific to the physical laws of accumulation of carbon sinks and the particularly long lifespan of certain GHGs.
Europe – and especially France, which was due to organize the Paris Conference in December 2015 – had the opportunity to give things a decisive boost. But Europe did not propose the mechanism of monetary financing and take charge of it. Nonetheless, in 2017 the Stiglitz–Stern commission, under the auspices of the World Bank, proposed establishing a notional carbon price, intended to create the carbon assets associated with the monetary financing of low-carbon investment projects validated by independent agencies. There is more to do in actually securing financing of the Green Climate Fund. Europe should propose that governments capitalize the Green Fund by injecting reserve assets deriving from allocations of surplus or unused special drawing rights (SDR). Shares should be determined in proportion to countries’ IMF quotas. In return, contributing countries would receive capital shares in the Green Fund. On a solid capital base of $100 billion, the Fund could issue green bonds to institutional investors throughout the world, achieving leverage of up to ten, with a resulting financing capacity of $1 trillion.
In this way, the financing of climate policy would be linked to the need to advance international monetary governance by boosting the monetary role of SDR, the other area where greater symmetry is needed in a world becoming more polycentric. In both areas – climate and monetary – it will be possible to collaborate with China, which is in the process of making a major switch in antipollution policy, and which has already declared in favour of SDR as an ultimate reserve asset.
In Search of International Monetary Governance
If it becomes a full currency in the zone where it is supposed to be sovereign, the euro potentially has a unified government securities market of a size, depth and liquidity equivalent to that of the dollar. The euro could become the key currency in international transactions of a vast region, well beyond the eurozone proper. The problem is wholly and exclusively political. Either the eurozone advances towards a political union conferring sovereignty on the currency, or the euro will remain a secondary international currency.
I have indicated the reforms required to make the euro a full currency: banking union and fiscal union. Banking union will make it possible to unify the European financial area; fiscal union will make it possible to issue eurobonds competing with US Treasury Bonds, and thus to create the liquid market indispensable to a leading
Notwithstanding the endogenous pressures that exist for greater international stature for currencies competing with the dollar, the coexistence of currencies must still form a system. Can a multi-currency system enjoy stability? This general question prompts two further questions by way of response: What is it about the nature of money that makes competition between currencies for international monetary functions inefficient? How are we to conceive international monetary regimes as an organization of monetary relations between states achieving permanent cooperation, as opposed to circumstantial agreements that are short-lived and rapidly violated?
An international monetary system is a public good in that it must be conceived, and must be capable of operating, to resolve two connected problems: on the one hand, supplying a form of liquidity accepted by all users and regulated in such a way that supply adapts to the demand created by the requirements of financing international trade; on, the other hand, making adjustments in prices and trade flows so that disequilibria in balances of payments do not accumulate and do not create vulnerabilities in the international financial system.
The key currency system anchored to the dollar has failed to deliver these benefits, while proving capable of surviving and creating a latent instability, punctuated by crises. It has lasted by default in the absence of currencies competing to assume its general regulatory functions. The possibility between now and 2020 of the completion of the euro and the convertibility of the yuan could change the situation and expose the flaws in the international monetary system.
It is up to Europe to play a major role in making the IMF the instance of international monetary coordination that it has had to abandon since the end of the Bretton Woods system. Given that the multi-currency system is structured regionally, the individual representation of eurozone countries must be abolished in favour of the eurozone as a single entity. This reform will put an end to a grotesque anomaly. Currently, a group of countries that no longer possess national currencies sits separately in the general assembly of the IMF, while the second international currency has no representative to speak in its name. As a result, the Europeans have no capacity for official initiatives in the debate over how best to develop the international monetary system. There must therefore be a merger of shares and associated voting rights. This will have two advantages. First, merger will give the eurozone considerable aggregate weight. Second, merger does not mean summation. It will free up a substantial proportion of shares, which can be reassigned to the rest of the world and facilitate the intended redeployment.
This common-sense reform will have a knock-on effect on completion of the euro. It will reinforce the need for a common executive capable of promoting an aggregate economic policy, resulting in the formulation of an external monetary policy.
Such are the long-term developments that Europe should help foster as an extension of its own political self-assertion, and to bolster it in a multipolar world.
Michel Aglietta is Emeritus Professor at the Université Paris-Ouest, where he is a scholarly advisor to the CEPII and France Stratégie. His previous books include A Theory of Capitalist Regulation and Money: 5,000 Years of Debt and Power.[book-strip index="1" style="buy"]