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18
F O R E I G N S E R V I C E J O U R N A L / F E B R U A R Y 2 0 1 2
ters. Unless the U.S. can help Eu-
rope resolve the euro crisis and
rekindle growth on both sides of the
Atlantic, U.S. global leadership will
suffer greatly.
Throughout 2011, European
prime ministers seemed to fall like
sparrows from the sky: the govern-
ments of Ireland, Portugal, Greece,
Italy and Spain all experienced turnovers. European lead-
ers met on Dec. 8-9, and agreed in principle to a pact to es-
tablish binding fiscal guidelines enforced by sanctions.
This pact is only an agreement to agree in the future, how-
ever, and as this article is being written, it is not clear
whether European leaders will muster the will and capac-
ity to codify and implement such guidelines.
Like it or not, the European debt saga will linger, and
even appears to be a harbinger of future crises that will
challenge the next generation of American diplomats. To
address these challenges, the State Department will need
to expand its capabilities in international economics and
integrate economics more fully into its foreign policy tool
kit. Only by doing so can it discharge effectively its re-
sponsibilities to the president and the nation. As it en-
hances its capabilities in these areas, the State Department
will need to play a stronger role in international financial
policy — not at the expense of Treasury and the National
Security Council staff, but alongside them.
As well as the State Department and the Foreign Serv-
ice have been performing up to this point, going forward
each will need to raise the caliber of its game. And as they
do so, it will be incumbent on presidents to make full use
of their capabilities.
Original Sin
The creation of the euro at the turn of the 21st century
was a major step in the integration of Europe and the bind-
ing of Germany to a common European future. In the
minds of many Europeans, the rise
in German power that followed the
unification of the country after the
fall of the Berlin Wall made this
step even more imperative. While
Germany gave up its cherished
deutsche mark as part of the bar-
gain, the “sound money” philoso-
phy of the Bundesbank permeated
the conceptual framework of the new European Central
Bank.
After careful preparations, the euro was introduced in
stages between 1999 and 2002. At the time, European
Union officials were consumed by the project. They
looked forward to a day when the euro would rival the U.S.
dollar as a reserve currency.
For their part, many American officials saw the adop-
tion of the euro as a major milestone in the building of a
United States of Europe, an implicit goal of U.S. foreign
policy in the minds of many. Other Americans, however
— though they embraced the political goals surrounding
the euro and hoped for the best — harbored worries that
the European economy was insufficiently integrated for a
common currency.
In contrast to what academic economists describe as
“an optimum currency area,” labor within Europe was not
particularly mobile, especially across national borders.
Once the euro was adopted, economic pressures from
downturns in one nation could no longer be eased by cur-
rency depreciations, and the outward migration of labor
from a depressed country to a booming country would not
likely be sufficiently large to restore economic balance
quickly. Moreover, a monetary policy appropriate for cer-
tain nations in the euro zone often would be inappropriate
for other nations.
In essence, Europe was proposing to form a currency
union without a fiscal union. The very small budget con-
trolled by Brussels could not begin to serve as an “auto-
matic stabilizer” that would take revenues raised in thriving
nations and channel them to spending in depressed na-
tions, as the federal government budget does between dif-
ferent economic regions in the United States. Authorities
in Brussels did not have the right to impose discipline on
the budgets of nations that adopted the euro as their cur-
rency.
Finally, the lack of effective machinery to impose a
common euro zone fiscal policy had implications for mon-
F
OCUS
State has ably responded to
the crisis thus far, but needs
to raise the caliber of its
game going forward.
Alan Larson, a retired career ambassador, is currently sen-
ior international policy adviser at Covington & Burling.
During his 32-year Foreign Service career, he served as
under secretary for economic affairs (1999-2005), assistant
secretary for economic and business affairs (1996-1999)
and ambassador to the Organization for Economic Coop-
eration and Development (1990-1993), among many other
assignments.