preceded by a political one. But it is hardly representative. Prussia
was the regional bully and never shied away from enforcing strict
compliance on the other members of the Federation.
It understood the paramount importance of a stable currency and sought
to preserve it by introducing various consistent metallic standards.
Politically motivated inflation and devaluation were ruled out, for the
first time. Modern monetary management was born.
Another, perhaps equally successful, and still on-going union - is the
CFA franc Zone.
The CFA (stands for French African Community in French) franc has been
in use in the French colonies of West and Central Africa (and,
curiously, in one formerly Spanish colony) since 1945. It is pegged to
the French franc. The French Treasury explicitly guarantees its
conversion to the French franc (65% of the reserves of the member
states are kept in the safes of the French Central Bank). France often
openly imposes monetary discipline (that it sometimes lacks at home!)
directly and through its generous financial assistance. Foreign
reserves must always equal 20% of short term deposits in commercial
banks. All this made the CFA an attractive option in the colonies even
after they attained independence.
The CFA franc zone is remarkably diverse ethnically, lingually,
culturally, politically, and economically. The currency survived
devaluations (as large as 100% vis a vis the French Franc), changes of
regimes (from colonial to independent), the existence of two groups of
members, each with its own central bank (the West African Economic and
Monetary Union and the Central African Economic and Monetary
Community), controls of trade and capital flows - not to mention a host
of natural and man made catastrophes.
The euro has indirectly affected the CFA as well. "The Economist"
reported recently a shortage of small denomination CFA franc notes.
"Recently the printer (of CFA francs) has been too busy producing euros
for the market back home" - complained the West African central bank in
Dakar. But this is the minor problem. The CFA franc is at risk due to
internal imbalances among the economies of the zone. Their growth rates
differ markedly. There are mounting pressures by some members to
devalue the common currency. Others sternly resist it.
"The Economist" reports that the Economic Community of West African
States (ECOWAS) - eight CFA countries plus Nigeria, Ghana, Guinea, the
Gambia, Cape Verde, Sierra Leone, and Liberia - is considering its own
monetary union. Many of the prospective members of this union fancy the
CFA franc even less than the EU fancies their capricious and
graft-ridden economies. But an ECOWAS monetary union could constitute a
serious - and more economically coherent - alternative to the CFA franc
zone.
A neglected monetary union is the one between Belgium and Luxembourg.
Both maintain their idiosyncratic currencies - but these are at parity
and serve as legal tender in both countries since 1921. The monetary
policy of both countries is dictated by the Belgian Central Bank and
exchange regulations are overseen by a joint agency. The two were close
to dismantling the union at least twice (in 1982 and 1993) - but
relented.
II. The Lessons
Europe has had more than its share of botched and of successful
currency unions. The Snake, the EMS, the ERM, on the one hand - and the
British Pound, the Deutschmark, and the ECU, on the other.
The currency unions which made it have all survived because they relied
on a single monetary authority for managing the currency.
Counter-intuitively, single currencies are often associated with
complex political entities which occupy vast swathes of land and
incorporate previously distinct -and often politically, socially, and
economically disparate - units. The USA is a monetary union, as was the
late USSR.
All single currencies encountered opposition on both ideological and
pragmatic grounds when they were first introduced.
The American constitution, for instance, did not provide for a central
bank. Many of the Founding Fathers (e.g., Madison and Jefferson)
refused to countenance one. It took the nascent USA two decades to come
up with a semblance of a central monetary institution in 1791. It was
modeled after the successful Bank of England. When Madison became
President, he purposefully let its concession expire in 1811. In the
forthcoming half century, it revived (for instance, in 1816) and
expired a few times.
The United States became a monetary union only following its traumatic
Civil War. Similarly, Europe's monetary union is a belated outcome of
two European civil wars (the two World Wars). America instituted bank
regulation and supervision only in 1863 and, for the first time, banks
were classified as either national or state-level.
This classification was necessary because by the end of the Civil War,
notes - legal and illegal tender - were being issued by no less than
1562 private banks - up from only 25 in 1800. A similar process
occurred in the principalities which were later to constitute Germany.
In the decade between 1847 and 1857, twenty five private banks were
established there for the express purpose of printing banknotes to
circulate as legal tender. Seventy (!) different types of currency
(mostly foreign) were being used in the Rhineland alone in 1816.
The Federal Reserve System was founded only following a tidal wave of
banking crises in 1908. Not until 1960 did it gain a full monopoly of
nation-wide money printing. The monetary union in the USA - the US
dollar as a single legal tender printed exclusively by a central
monetary authority - is, therefore, a fairly recent thing, not much
older than the euro.
It is common to confuse the logistics of a monetary union with its
underpinnings. European bigwigs gloated over the smooth introduction of
the physical notes and coins of their new currency. But having a single
currency with free and guaranteed convertibility is only the
manifestation of a monetary union - not one of its economic pillars.
History teaches us that for a monetary union to succeed, the exchange
rate of the single currency must be realistic (for instance, reflect
the purchasing power parity) and, thus, not susceptible to speculative
attacks. Additionally, the members of the union must adhere to one
monetary policy.
Surprisingly, history demonstrates that a monetary union is not
necessarily predicated on the existence of a single currency. A
monetary union could incorporate "several currencies, fully and
permanently convertible into one another at irrevocably fixed exchange
rates". This would be like having a single currency with various
denominations, each printed by another member of the Union.
What really matters are the economic inter-relationships and power
plays among union members and between the union and other currency
zones and currencies (as expressed through the exchange rate).
Usually the single currency of the Union is convertible at given
(though floating) exchange rates subject to a uniform exchange rate
policy. This applies to all the territory of the single currency. It is
intended to prevent arbitrage (buying the single currency in one place
and selling it in another). Rampant arbitrage - ask anyone in Asia -
often leads to the need to impose exchange controls, thus eliminating
convertibility and inducing panic.
Monetary unions in the past failed because they allowed variable
exchange rates, (often depending on where - in which part of the
monetary union - the conversion took place).
A uniform exchange rate policy is only one of the concessions members
of a monetary union must make. Joining always means giving up
independent monetary policy and, with it, a sizeable slice of national
sovereignty. Members relegate the regulation of their money supply,
inflation, interest rates, and foreign exchange rates to a central
monetary authority (e.g., the European Central Bank in the eurozone).
The need for central monetary management arises because, in economic
theory, a currency is never just a currency. It is thought of as a
transmission mechanism of economic signals (information) and
expectations (often through monetary policy and its outcomes).
It is often argued that a single fiscal policy is not only unnecessary,
but potentially harmful. A monetary union means the surrender of
sovereign monetary policy instruments. It may be advisable to let the
members of the union apply fiscal policy instruments autonomously in
order to counter the business cycle, or cope with asymmetric shocks,
goes the argument. As long as there is no implicit or explicit
guarantee of the whole union for the indebtedness of its members -
profligate individual states are likely to be punished by the market,
discriminately.
But, in a monetary union with mutual guarantees among the members (even
if it is only implicit as is the case in the eurozone), fiscal
profligacy, even of one or two large players, may force the central
monetary authority to raise interest rates in order to pre-empt
inflationary pressures.
Interest rates have to be raised because the effects of one member's
fiscal decisions are communicated to other members through the common
currency. The currency is the medium of exchange of information
regarding the present and future health of the economies involved.
Hence the notorious "EU Stability Pact", recently so flagrantly
abandoned in the face of German budget deficits.
Monetary unions which did not follow the path of fiscal rectitude are
no longer with us.
In an article I published in 1997 ("The History of Previous European
Currency Unions"), I identified five paramount lessons from the short
and brutish life of previous - now invariably defunct - monetary unions:
(A) To prevail, a monetary union must be founded by one or two
economically dominant countries ("economic locomotives"). Such driving
forces must be geopolitically important, maintain political solidarity
with other members, be willing to exercise their clout, and be
economically involved in (or even dependent on) the economies of the
other members.
(B) Central institutions must be set up to monitor and enforce
monetary, fiscal, and other economic policies, to coordinate activities
of the member states, to implement political and technical decisions,
to control the money aggregates and seigniorage (i.e., rents accruing
due to money printing), to determine the legal tender and the rules
governing the issuance of money.
(C) It is better if a monetary union is preceded by a political one
(consider the examples of the USA, the USSR, the UK, and Germany).
(D) Wage and price flexibility are sine qua non. Their absence is a
threat to the continued existence of any union. Unilateral transfers
from rich areas to poor are a partial and short-lived remedy. Transfers
also call for a clear and consistent fiscal policy regarding taxation
and expenditures. Problems like unemployment and collapses in demand
often plague rigid monetary unions. The works of Mundell and McKinnon
(optimal currency areas) prove it decisively (and separately).
(E) Clear convergence criteria and monetary convergence targets.
The current European Monetary Union is far from heeding the lessons of
its ill fated predecessors. Europe's labour and capital markets, though
recently marginally liberalized, are still more rigid than 150 years
ago. The euro was not preceded by an "ever closer (political or
constitutional) union". It relies too heavily on fiscal redistribution
without the benefit of either a coherent monetary or a consistent
fiscal area-wide policy. The euro is not built to cope either with
asymmetrical economic shocks (affecting only some members, but not
others), or with the vicissitudes of the business cycle.
This does not bode well. This union might well become yet another
footnote in the annals of economic history.
The Concert of Europe, Interrupted
By: Dr. Sam Vaknin
"(Plan for establishing) an economic organization ... through mutual
customs agreements ... including France, Belgium, Holland, Denmark,
Austria, Poland, and perhaps Italy, Sweden, and Norway".
The German "September Plan" to impose an economic union on the
vanquished nations of Europe following a military victory, 1914
Europe spent the first half of the 19th century (following the 1815
Congress of Vienna) containing France. The trauma of the Napoleonic
wars was the last in a medley of conflicts with an increasingly
menacing France stretching back to the times of Louis XIV. The Concert
of Europe was specifically designed to reflect the interests of the Big
Powers, establish their borders of expansion in Europe, and create a
continental "balance of deterrence". For a few decades it proved to be
a success.
The rise of a unified, industrially mighty and narcissistic Germany
erased most of these achievements. By closely monitoring France, the
Big Powers were fighting the last war - instead of the three next ones.
Following two ineffably ruinous world wars, Europe now shifted its
geopolitical sights from France to Germany. In an effort to prevent a
repeat of Hitler, the Big Powers of the West, led by France,
established an "ever closer" European Union. Germany was
(inadvertently) split and sandwiched and, thus, restrained.
To its East, it faced a military-economic union (the Warsaw Pact) cum
eastern empire (the late USSR). To its West, it was surrounded by a
military union (NATO) cum emerging Western economic supranational
structure (the EU). The Cold War was fought all over the world - but in
Europe it was about Germany.
The collapse of the eastern flank (the Soviet - "evil" - Empire) of
this implicit anti-German containment geo-strategy led to the
re-emergence of a united Germany. Furthermore, Germany is in the
process of obtaining hegemony over the EU by applying the political
weight commensurate with its economic and demographic might. It is a
natural and historical leader of central Europe - the EU's and NATO's
future lebensraum and the target of their expansionary predilections
("integration"). Thus, virtually overnight, Germany came to dominate
the Western component of the anti-German containment master plan -
while the Eastern component has chaotically disintegrated.
The EU - notably France - is reacting by trying to assume the role
formerly played by the USSR. EU integration is an attempt to assimilate
former Soviet satellites and dilute Germany's power by re-jigging rules
of voting and representation. If successful, this strategy will prevent
Germany from bidding yet again for a position of hegemony in Europe by
establishing a "German Union" separate from the EU. It is all still the
same tiresome and antiquated game of continental Big Powers. Even
Britain maintains its Victorian position of "splendid isolation".
The exclusion of both Turkey and Russia from these re-alignments is
also a direct descendant of the politics of the last two centuries.
Both are likely to gradually drift away from European (and Western)
structures and seek their fortunes in the geopolitical twilight zones
of the world. The USA is unlikely to be of much help to Europe as it
reasserts the Monroe doctrine and attends to its growing Pacific
preoccupations. It will assist the EU to cope with Russian (and to a
lesser extent, Turkish) designs in the tremulously tectonic regions of
the Caucasus, oil-rich and China-bordering Central Asia, and the Middle
East. But it will not do so in Central Europe, in the Baltic, and in
the Balkan.
Of these three spots, the Balkan is by far the most ominous. Russia -
as it has proved in 1877-8 - has historical claims there which it is
willing to back militarily. Many of the nations of the Balkan are far
closer to Russia than to the West and tend to regard the latter with
suspicion and hostility. Turkey, if it so chooses, can easily assume
the role of the protector of Balkan Moslems - sure to provoke Greek
ire. A military conflict among two NATO members will constitute a body
blow to the credibility and prestige of this alliance in search of an
enemy. Moreover, Turkey is the prefect staging ground for operations in
the Middle East, Central Asia and China. It constitutes a vital
American interest and the pivot of NATO's southern flank. But it is
derided by the EU, its NATO membership notwithstanding.
It is here, in the Balkan, that the New World Order and the End of
History hypothesis are being tested. A new European balance of the Big
Powers will emerge here. But hitherto, alas, this particular concert of
Europe has been quite a cacophony.
The Eastern Question Revisited
A lecture organized by the daily "Politiken"
in Copenhagen, Denmark
June 25, 2001
By: Dr. Sam Vaknin
When the USSR disintegrated virtually overnight, in 1989, its demise
was often compared to that of the Ottoman Empire's. This was a very
lacking comparison. Turkey's death throes lasted centuries and its
decomposition was taken to be so certain that its division and
partition (the "Eastern Question") animated European geopolitics for
the better part of two centuries. Yet, both left a power vacuum in the
Balkan in their sorry wake.
The Big Powers of the time - Russia, Great Britain, France,
Austria-Hungary, and the emerging Germany and Italy - possessed
conflicting interests and sentiments. But, at this stage or another,
most of them (with the exception of Austria-Hungary) supported the
nationalist solution. It was Russia's favourite discussion topic,
France espoused it under Napoleon III, everyone supported the Greeks
and, to a lesser extent, the Serbs against the weakening Ottomans.
The nationalist solution encouraged the denizens of the Balkan to adopt
national identities, to develop national myths, to invent a national
history, and to aspire to establish modern nation-states.
The examples of Germany and, especially, Greece and Italy were often
evoked. For a detailed treatment of this theme - see "Herzl's Butlers".
The competing solution was reform. The two Balkan empires - the
Ottomans and Austria-Hungary - endlessly, tediously, and
inefficaciously tinkered with their systems or overhauled them. But, to
no avail. The half-hearted reforms often failed to address core issues
and always failed to assuage the growing nationalist sentiment. It was
a doomed approach.
Nationalist solutions were inherently self-destructive. They were
mutually exclusive and strived to achieve ethnically homogeneous
lebensraums by all means, fair and foul. The nation's genuine and
natural ("historic") territory always overlapped with another nation's
no less historic claims. This led to recurrent conflicts and to a
growing sense of deprivation and loss as actual territories never
tallied with national myths disguised as national histories. It also
prevented the emergence of what du Bois calls "Double Consciousness" -
the mental capacity to contentedly belong to more than one social or
national grouping ("Afro-American", "Latino-American", "American Jew").
Thus, the Big Powers proffered a nationalist solution when a regional
one was called for. Following two devastating Balkan Wars (1912 and
1913) and a World War (1914-1918), regional groupings began to emerge
(example: Yugoslavia). The regional solution stabilized the Balkan for
almost 7 decades (excluding external shocks, such as the combined
invasions of Nazi Germany and fascist Italy).
Yet, the regional solution was dependent on both the existence of real
or perceived outside threats (the USSR, the USA, Great Britain) - and
on the leadership of charismatic figures such as Tito and Hoxha. When
the latter died and the USSR evaporated, the region imploded.
The last two decades of the 20th century witnessed a resurgence of
narrow geographical-political identities (a "Europe of Regions").
Countries - from the USSR to Italy to Belgium to Canada to Yugoslavia -
were gradually reduced to geopolitical atoms: provinces, districts,
regions, resurrected political units. Faced with the Yugoslav wars of
succession, the Big Powers again chose wrongly.
Instead of acknowledging the legitimate needs, concerns, and demands of
nations in the Balkan - they proclaimed two untenable principles:
borders must not change and populations must stay put. They dangled the
carrot of European Union membership as an inducement to peace. In other
words, even as virulent nationalism was erupting throughout the Balkan,
they promoted a REGIONAL set of principles and a REGIONAL inducement
(EU) instead of a nationalist orientated one. Yet, as opposed to the
past, the remaining Big Powers were unwilling to actively intervene to
enforce these principles. When they did intervene feebly, it was either
too late (Bosnia-Herzegovina, 1995), too one-sidedly (Kosovo, 1999), or
too hesitantly (Macedonia, 2001). They clearly lacked commitment and
conviction, or even the military ability to become the guardians of
this new order.
The Big Powers (really, the West) would have done well to leave the
Balkan to its own devices. Clearly its inhabitants were intent on
re-drawing borders and securing ethnic homogeneity. Serbs, Croats,
Bosniaks, Kosovars - were all busy altering maps and ethnically
cleansing minorities. The clumsy and uninformed intervention of the
West (led by the USA) served only to prolong these inevitable
conflicts. By choosing sides, labelling, providing military and
diplomatic succour, arming, intervening, cajoling, and imposing
ill-concocted "solutions", the West internationalized local crises and
prevented attrition and equilibrium - the prerequisites to peace. The
West's artificial arrangements, served on the bayonets of SFOR and KFOR
are unlikely to outlast SFOR and KFOR. Moreover, humanitarian military
interventions have proven to be the most pernicious kind of
humanitarian disasters. More people - Kosovars included - died in
Operation Allied Force than in all the years of Serb repression
combined. The Balkan is simply frozen in geopolitical time. It will
re-erupt and revert to old form when Western presence is reduced and
perhaps even before that.
The West should have ignored the Yugoslav wars of succession. But it
would have done well to offer the combatants - Serbs, Croats, Albanians
- a disinterested diplomatic venue (a benign, voluntary Berlin Congress
or Dayton) to iron out their differences, even as they are fighting.
The agenda of such a Congress should have included minorities and
borders. There is no doubt that sporadic fighting would have punctuated
the deliberations of such a congregation. It is certain that walk-outs,
crises, threats, and break-ups would have occurred regularly.
But the participants could have aired grievances, settle disputes,
discuss differences, judge reasonableness, form coalitions, help each
other to multilateral give and take, and establish confidence building
measures. With the West keeping all cards close to its chest, such a
venue was and is sorely lacking.
With the exception of Imperial Russia, "stability in the Balkan" has
always been the mantra. But stability is never achieved diplomatically.
If there are lessons to be learned from history they are that diplomacy
is futile, peacekeeping meaningless, imposed agreements ephemeral. War
is the ultimate and only arbiter of national interest. Parties resort
to peace only when they are convinced that all military or coercive
options have been exhausted. When nothing further is to be gained by
means of force and its application - peace prevails. But peace (as
opposed to a protracted ceasefire) is impossible even a second before
the combatants are struck by this realization. Equilibrium is never the
result of honed negotiating skills - and always the outcome of forces
matched in battle. Attrition, fatigue, a yearning for stability, a
willingness to compromise - are all provoked and enhanced to the
acutest level by bloodshed and atrocities. It is an inevitable phase.
The road to peace is bloodied.