Podium: The euro will not replace the dollar

Deepak Lal

From a lecture by the Professor of Development, University of California, Los Angeles to Politeia, in London

IF A Rip van Winkle had gone to sleep at the end of about 1870 and woken up in the last few years, he would find that little has changed in the world economy. He would note the various technological advances in transportation and communications (airlines, telephones and the computer) which have further reduced the costs of international trade and commerce and led to the progressive integration of the world economy which was well under way - after the first Great Age of Reform - when he went to sleep.

He would not be surprised to see the world on a dollar standard as it is the currency of the dominant world power. He would be surprised by the attempt to create an alternative world money in the euro, particularly as it is the single currency of what still remains a politically disunited union.

He would recognise that the euro represents an unprecedented attempt to use economic means to achieve a political end - to recreate a new Holy Roman Empire. He would remember the failed attempt to create one under French arms during his lifetime, and would have read of the two failed attempts by the Germans to do the same while he was asleep. He would wonder if Germany had now found a cunning method - through EMU - of achieving this end, and if it would be any more successful than past attempts.

For a monetary union to work it is important either that there is wage and price flexibility to deal with the unemployment that asymmetric shocks to different regions in the currency area could cause, or else there should be easy migration possible - as in the US - between regions with deficient and excess demand for labour. Neither attribute exists in Europe.

Its labour markets are inflexible, and the major differences in customs and, above all, language make labour - except at the very top - largely immobile. This, coupled with the "stability" pact, means that countries in Euroland which suffer unemployment will be unable to deal with unemployment either via the exchange rate or expansionary fiscal policy. Nor, as in the genuine federal polity - the US - are fiscal transfers on a requisite scale likely to be forthcoming to offset regional unemployment - a serious source of political tensions.

The point is that Euroland is likely to be riven by inter- regional political tensions, because of monetary union. These could inflame those very nationalist passions which the creation of Euroland was aimed to suppress.

The drive for European political unity is not helped by the fact that it is a project which has tried to suppress normal politics in the member countries. It is a project borne out of the respective weaknesses of the participants. The French, despite their bravado and pride, are a defeated nation. They see the Anglo-Saxons, not least in their language and culture, triumphing world wide. The French elite has seen the EU as its only hope of global influence in a Europe in which they would jointly exercise hegemony with the Germans - on their model of the French rider riding a German horse - in a new Holy Roman Empire.

Germany, because of its World War trauma, has gone along with this illusion, and used the clever ploy of promoting an economic union leading to political union to tie down German nationalism. Italy has gone along because it wishes to unload the burden of subsidising the Mezzogiorno to a larger body of European taxpayers, while the rest of the Mediterranean countries and Ireland have looked upon the subsidies they have obtained, as a drunk given free access to a liquor store. And Britain? In search of a post- Imperial role, a part of its elite, particularly in the Foreign Office, has come to the defeatist conclusion that the only role left for Britain is as part of "Europe".

As the successful city states of the Far East have shown, size does not matter for prosperity in a globalised economy. Except for politicians, whose sense of self-importance may be fed by the size of country they claim to represent, the welfare of ordinary citizens is dependent less on where and what particular goods and services are produced than on the highest return they can get for their labour, capital and enterprise and the cheapest price they can obtain for the goods they consume.

For the euro to successfully challenge the dollar, not only would all the processes of globalisation need to be accepted in Euroland but there will also be a need to create a genuine nation state with a true European identity. I remain a sceptic. In this process of globalising Euroland, the euro is as much the problem as the solution.