Goldman Sachs’ research chief Jim O’Neill says that while the euro’s financial performance has been good, monetary union hasn’t fulfilled its economic promise. It is time for Europe to act more boldly, both inside the eurozone and on the world stage
It’s nearly ten years since the euro first flashed across the world’s trading screens. Today, the European currency is a financial market heavyweight, performing well against the US dollar, the Japanese yen and even (until recently) the almighty Chinese yuan. Euro-dominated bond trading now rivals the US market in size. Economically, however, the eurozone is a disappointment. Given its size and population, Europe’s economy could and should be doing better − and so should Europe’s leaders. It is high time that they acted with greater imagination to unleash more genuine economic freedom and competition. They should stop championing national enterprises and start giving the European Central Bank more support. Eurozone 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 separate seats at the G-7 and the International Monetary Fund. There may be some justification for each EMU state to be represented at the G-8, but not in the main economic organisations. If they volunteered to act collectively at these forums, Europe would free up much-needed space for other important nations to have a place at the top table of world economic discussions and, thereby, foster greater respect for global policymakers.
On the internal front, eurozone “success” can best be measure by the yardstick of economic growth. Many commentators cite the wide disparities between the growth rates of eurozone members as a sign of failure, but this view lacks any strong theoretical foundation. Many other regions display similar divergence, including the US. 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.
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MATTERS OF OPINION |
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How optimistic are Europeans about jobs
Europeans are almost evenly split between those who believe the jobs outlook in their country will improve during 2008 and those who expect it to worsen. A Eurobarometer poll towards the end of last year showed 26% of respondents optimistic, and 25% pessimistic. The largest section of opinion was the 43% of people polled who believed the situation would stay much the same.
Optimism also varied wildly between EU member states; it was the highest in Lithuania, Poland, Sweden and the Netherlands, and the lowest in Hungary, Cyprus, Portugal and Ireland. The Autumn 2007 poll did, though, show a considerable fall in optimism in many countries since the spring of last year, most notably in Germany, which witnessed a 21
point fall in optimism between Spring and Autumn.
http://www.gallupworldpoll.com/ |
In fact, eurozone leaders should be less worried about variations in internal growth than clear evidence that overall economic performance has underperformed rates in comparable areas since 1999. While growth has been reasonably stable since EMU started, Gross Domestic Product per capita – probably the best measure of economic success available – shows that Europe has lagged other regions, (although with the latest data available, against the US, from 1999 through 2007, GDP per capita has increased slightly more than the US) even when the figures are adjusted for working population deficiencies. 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 to lift European growth and productivity in any significant way, governments must allow – indeed encourage – stronger competitive forces across the EMU area. For example, it would be a real sign of change in Italy if the national airline, Alitalia, were allowed to fold or be sold. And why should France think that only another French bank would be a suitable buyer for Societe Generale following the recent trading scandal? This could be an opportunity to encourage the development of a truly pan-European bank. It is almost idiotic that there has been no notable French-German banking merger. How can EMU be taken seriously until there is? These examples come from just two business sectors; I am sure that a similar situation arises in numerous others.
A study by the European think tank, Bruegel, recently found that in a knowledge economy corporate development requires a wider financial environment than one based purely on bank lending. Bruegel argued that methods to support corporate growth should have a higher priority within the EU, where internal policy is largely pre-occupied with financial integration and stability. It found that action was needed in the areas of competition among financial intermediaries, securities regulation, insolvency legislation, taxation and prudential rules. Such reports should be taken more seriously by Europe’s policymakers.
In terms of external economic policy, Europe also has a great deal more to accomplish. European countries and multinational companies benefit from growth in Brazil, Russia, India and China, largely through the export opportunities opened up by these giant markets. Yet European policymakers do very little in response to the wholesale changes which are 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.
It’s a very poor show for a group of countries that have dealt with the incredibly complex challenges of creating the EU and monetary union. After all the diplomacy and effort that these epoch-making events required, you would think that European policymakers would be in an excellent position to tackle the necessary reforms of the IMF, the World Bank, the G-7 and the G-8. Yet all of these “institutions” still effectively reflect the post-World War II status quo, which serves little purpose in today’s changed and globalised world.
For example, why is there an international economic organisation such as the G-7 without China being a member? China is poised to overtake Germany as the world’s 3rd largest economy and its contribution to global economic activity since 2000 is close to that of the entire eurozone. Most of the global economic issues of our time cannot be solved without policy steps in China. The list includes high oil prices, depleted energy resources, environmental challenges, global warming and global imbalances. How can the G-7 have the audacity to make repeated public comments about the currency of a country that is outside their ‘network’ 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 far 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 president of the ECB. The ministers meet before each G-7 meeting anyway, so it would be an easy procedure to introduce. Such a voluntary step by EMU members could lead to a G-6 of the US, Japan, Canada, Britain, the eurozone and China. It could also pave the way for a break-through in the interminable discussions about IMF representation and voting shares.
The IMF certainly needs to turn itself into a more modern and relevant global institution. It should, for example, undertake regular and well-publicised surveillance of appropriate exchange rate levels, provide independent and credible data on cross border capital flows and be responsible for maintaining an international policy framework that is adaptable to the changing needs of the world economy. This would help to avoid future ossification within key economic institutions. For instance, a “financial G-6” may at the moment 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 organisations which both ensures their structures are relevant today but which is also flexible enough to allow members to come and go in future. One way forwards would be to establish numerical guidelines – along the lines of the Maastricht Treaty – which would confer G-7 membership. Perhaps it could be a rolling average of the level of GDP over five years, plus the level of GDP per capita plus some kind of productivity scorecard. The IMF could devise, implement and maintain such a system as part of its new functions.
As for Europe, it 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 monetary union, it should be relatively easy for eurozone experts to help devise a system for judging G-7 type membership. Indeed, unless leading European countries take the initiative on global financial institutional reform, it would seem to be a lost cause. If Europe’s policymakers want EMU to be a genuine economic success, now is the time to act boldly, both internally and externally.