Wall Street looks the other way

Europe is far from being a major concern for American financiers - and we should learn from this

New York - It is always good, in Robbie Burns's phrase, to see ourselves as others see us and one of the delights of spending a couple of days talking to Wall Street bankers is to catch a feel for the priorities of the US financial community. "We know," said a colleague a few days ago, "that the Americans are not interested in Britain. But what do they think about Europe? Have they given up on Europe, too?"

Certainly Europe occupies a small space of mind in American finance, despite the fact that it still has greater economic output than either of the other two main economic zones, North America or East Asia. You can catch this in the way European news is reported. Big political stories are reported, but analysis is limited. We are much more interested, for obvious reasons, in Colin Powell's decision not to run for president, than they are in a French cabinet reshuffle.

Why the lack of interest? I put the question to the senior management of one of the US's largest banks at a lunch high above Wall Street. The answer came in three main parts. The first was that in present trading terms Europe was no longer that important to the US. Of course it was still a large and rich market, but if you looked at the numbers, trade with Canada and Mexico was much greater.

Second and more important, Western Europe did not, looking ahead, appear an exciting market. It did not have the vigour of the rapidly growing economies of East Asia, nor the potential of Latin America. Within Europe the most interesting markets were places such as Poland, and maybe, for the very brave, Russia. They are not the members of the EU.

Third, there was surprise and concern that the EU had allowed itself to become so bogged down in plans for monetary union. The ordinary people did not want it, and the whole project was far too early. To try to impose a currency union before there was economic convergence was simply not sensible.

Why, I was asked, did not Britain make the reasoned and responsible case against this rush to EMU, speaking as a candid friend, instead of its present hostile (and ineffective) opposition? I suppose the answer is that we would not be listened to, whatever we said and however we said it. But understand the import of the question: in the eyes of Europe's thoughtful friends on Wall Street, the EU has embarked on a course of action that will end in tears, and that diverts it from much more pressing issues of economic and social policy. And the less successful we, in Europe, appear, the less attention America will pay. There are better fish to fry.

Does that matter? Well yes, it matters desperately. A weak or ill-tempered relationship between Europe and North America is damaging in purely economic terms, given the mutual interdependence of the two most mature economic zones, but the potential damage goes far beyond that. The danger is that the gulf between America and Europe becomes so wide that they cease to co-operate in providing political and economic stability to the world.

By coincidence some of those dangers will be spelt out today in a speech in Vienna by the prominent New York financier Felix Rohatyn, who warns of growing isolationism within America.

Mr Rohatyn, managing director of Lazard Freres, but best known for his role in saving New York from bankruptcy in the late 1970s, is a Democrat. So naturally he would be concerned at the right-wing social agenda of the Republicans since the landslide victories of a year ago. The gist of his argument is that this revolution goes far beyond Reaganism and Thatcherism in the 1980s and will have a profound impact on Western European democracies. Faced with much greater international competitive pressures, the reaction of Republican politicians has been to hack back the role of the state at home, and to start to step back from international commitments, too.

The impact of a truly global market economy will put just as great pressures on European countries as it has on the US, maybe greater because they carry the costs of more extensive welfare systems. The same sort of political forces that led to the Republican landslide will show themselves across Europe, which may well react in a similar manner. The world becomes much more dangerous if Europe and America both withdraw into themselves.

So what is to be done? There is no magic wand, but to understand why American finance has become less interested in Europe is a point at which dialogue can continue. If the politicians won't talk to each other, at least the markets can.

Financial markets are utterly international, and the signals they give deserve attention. If, for example, the bond market distrusts the securities issued by major European governments and pushes up interest rates on these, that is a signal that policies are probably misguided. If the markets signal that it is too early for a single European currency, then that deserves attention, too.

Leave aside the grand political threat of isolationism on both sides of the Atlantic and note the economic threat of a slow-growing, rigid, unsuccessful Europe. What worries me about America's lack of interest in Europe is less that it is a sign of growing isolationism, more that it is justified. You would not expect US politicians to be particularly worried about slow growth in Europe, for it is not their problem if we grow so slowly that our living standards hardly rise for a generation. We should be concerned if US finance loses interest, for it is a signal that this might indeed happen.

Maybe the message for Europe from New York is more useful than the message from Washington. The restructuring of American industry of the past decade - the cutbacks in manufacturing but also the development of whole new service industries, particularly in software, and the explosive growth of others, particularly in entertainment - has been very painful in human terms. The new jobs are not necessarily in the same places, or for the same people, as the old.

But there is no doubt that US Inc has lifted its game. Everyone here talks of it. The old industries are much more competitive; the new out on their own, unmatched by Japan, the country that many people five years ago saw as the world-beater. Above all, it is an economy that creates new jobs, including many highly paid ones, something at which Europe continues to be spectacularly unsuccessful.