Year XLVII, 2005, Number 1, Page 37



1. The Emerging Forces of the World Economy.
The importance that Europe has had over the last few centuries in the promotion of economic development, the contributions it has made to the emancipation of humanity from poverty and from subsistence-level living conditions, the successes it has achieved in terms of a model of social protection that is unparalleled anywhere in the world, and in terms of economic and monetary integration in an area covered by many states, cannot and must not allow us to lose sight of the fact that new more dynamic and powerful subjects are emerging at the international level. We can all plainly see that the new reality of our period, over the next few decades, risks being not the creation of a European economic, monetary and political pole, but the rise of two Asian giants: China and India. If the economic growth of these two States remains at recent rates, within a few decades we will witness the definitive surmounting of almost five centuries of European and colonial domination in Asia. This is not only a trend discernible from the appearance and opening up of the enormous demographic potential of these two countries to the opportunities offered by international trade and technological innovation, but it is also and above all, especially for China, the progressive manifestation of the puissance, through conscious political choices, of two large subcontinents on the world stage.
China and India, after having gained their independence halfway through the last century, began their slow game of catch-up with the Western world. In the mid-Seventies of the last century the per-capita GDP of the Chinese and Indians was about one twentieth of that of the Americans. At the beginning of the Twentieth Century the per-capita income of China was 15 per cent of that of the USA and the Indian one was half of the Chinese. If both these great Asian States have done a lot to close the gap in terms of well being, productive capacity and technological innovation with respect to the USA and Europe, then China has undoubtedly been the better performer of the two. Between 1980 and 2003 the Chinese economy grew at an average rate of 9.5 per cent a year (against 5.7 per cent in India), while over the same period the Chinese per-capita income grew by 300 per cent (against 125 per cent of the one in India). These are phenomena that have already occurred in the past in a few Asian countries that, within a generation, have been able to bridge the enormous gaps between them and the Western economies. The growth of China from 1978 to today is comparable to that experienced by Japan between 1950 and 1970, to that of Taiwan between 1958 and the end of the Eighties, and to that of South Korea between 1960 and the early Nineties.
The fact that the per-capita product in China compared to that in the USA today is comparable to that of South Korea in 1972, of Taiwan in 1966, and of Japan in 1950, is a proof on the one hand of the enormous efforts made by that country to raise the well-being of its citizens beginning from a lower level of development than its Asian neighbours, and on the other it must make us reflect on the enormous productive, economic and commercial potential that it may yet generate. Under these indicators India is still way back compared to China, its per-capita income compared to the USA being equal to that reached by China in the mid-Eighties (and in absolute terms equal to that of China at the start of the Nineties). In terms of time this is a delay of about a decade or slightly more, which counts for something in the bilateral relations between India and China, but it does not detract from the weight that both these countries are bringing to bear internationally. It is no coincidence that various projections of the growth of the GDP of these two countries show that they are both on the verge of surpassing the GDP of individual European countries by 2015 and of reaching that of the European Union and the USA by the middle of this century. Already in 2003 China was the fourth largest general exporter in the world and the ninth in the commercial services sector (in the same year India held the thirty-first and the twenty-first spot respectively). In this race the Chinese State was shown to be more effective and ready to invest in human resources (in 2000 China counted a 6 per cent illiteracy rate, against India’s 35 per cent), in channelling and encouraging domestic savings (which represent 44 per cent of GDP, against 22 per cent in India), in domestic investments (in absolute terms China invests eight times more than India in internal infrastructure, corresponding to three times more in terms of GDP percentage terms). But the leap forward made by China, that allowed it to link up with the industrial economies, is better represented by another statistic: the population of Chinese employed in agriculture went from 68 per cent of the total in 1981 to 45 per cent in 2001 (compared to a shift from 67 per cent to 59 per cent over the same period in India).
What this meant and still means, not only for the Chinese economy but also for the entire world economy, will be analysed schematically shortly. For the time being these facts suffice to show that the entry of these two new entities into the world market and the global balance of power cannot be ignored when we consider the future of the European economy and the problem of how it can be governed.
2. The Unstable Dollar-Renminbi Balance.
Until about twenty years ago the peripheral countries and the emerging Asian markets (except Japan) carried little weight at the world level. Today not only have they become very important, but in so far as they are of truly continental proportions, in the case of China and India, they represent forces capable of producing great imbalances in international trade and the movement of capital. What are the material bases of this change?
In the first place regions that until twenty years ago were isolated worlds all to themselves — the world of the rich regions of Europe, the USA and Japan on the one hand and that of the Communist Chinese-Soviet world on the other — due to the sudden collapse of the USSR and the strategic choice made by China to stimulate its own development by basing itself on the promotion of exports — especially towards the USA at first — began to interact in a single global market. This choice paved the way for the policies adopted by the other Asian countries. The alternative strategy could have consisted in attracting capital from the richest and most industrialised regions in order to promote domestic demand and the absorption of excess labour thanks to a consumption revolution. But for various reasons this path was not chosen. On the one hand the Chinese government itself has had difficulties in promoting economic and financial policies, the success of which would in any case have depended largely on outside help, suited to the magnitude of the problems that needed to be solved. On the other hand the detachment from the political and economic protection of the former-USSR first and the start of the regional confrontation with America later, strongly conditioned the Beijing government’s choices in terms of production. Finally the state of political and financial impotence Europeans found themselves in had left China without any credible Western interlocutors at the financial, commercial and military level other than the USA.
Having chosen the path towards development, and thus the way out of the pre-industrial stage, it was a matter of life or death for China to be able to re-employ the labour that would progressively be made available following the abandonment of agriculture, in productive industrial activity. The imbalances in the exchange rates that we see today between dollar/euro and the other currencies of the most industrialised countries, countered by the relative stability in the exchange rates between dollar/renminbi and the other Asian currencies, is therefore the reflection of a material imbalance that has come about internationally, due to the enormous size of the labour force that the Asian region is introducing into the global industrial production circuit.[1] To get an idea of the size of this excess, and referring only to China, we need to bear in mind that in order to survive, the Chinese economic and political system must in the near future address the problem of how, over the next two decades, it is going to employ at least two hundred million people in industry and the service sector, of whom at least a quarter will contribute to sustaining exports. We are talking about an additional labour force equivalent to that already employed in Europe and in North America and well over that employed in Japan. It will therefore be the speed and the capacity of absorption into the Chinese labour market of this new force (to which we can add the labour reserves currently being created in the other Asian countries and in India especially) that determines the international trade and monetary balances and imbalances of the next few years. But the speed and the capacity of absorption of the Chinese labour force will inevitably depend, as well as from the choices that the Chinese government is going carry out, on the policies of trade and economic cooperation or conflict that the other world actors, particularly the USA, will decide to pursue.
For the time being, notwithstanding the facade of protest, the USA benefit from this situation, being the holders of the currency of reference for the so-called new Asian Bretton Woods area that has established itself by now around the dollar-renminbi relationship: it is precisely thanks to the flow of Asian investments into America — especially in the form of purchased US Treasury Bonds — that the USA have been able to afford to fund their colossal trade deficit and the upkeep of their military apparatus. At the same time, precisely because the USA are well aware of the potential of Chinese development and of the fact that China represents a competing pole of power at both the regional and global levels, they have no interest in developing a sincere policy of cooperation with the Chinese government, and they do not miss the chance to try to contain its technological and military expansion. Just as the Russian-American conflict of the last century was characterised by the equilibrium of nuclear fear, today the head-to-head between America and China is manifested in the form of a new precarious “balance of financial fear”. On the one hand the Chinese Central Bank tries to avoid a sudden devaluation of the dollar that would translate into a colossal loss of the value of its enormous reserves and investments in the US currency: it has been calculated that a revaluation of the renminbi against the dollar of 30 per cent would mean China losing capital equivalent to 10 per cent of its GDP. On the other hand, the US Treasury is counting on the possibility of continuing to sell its bonds to the Asian countries, to be able to cover the American worrying and growing twin deficit — that is a federal budget deficit with a simultaneous current account deficit — without having to resort to unpopular and draconian measures.
Europe, not having any continent-wide strategy and certainly not being able to carry out a foreign policy towards the Asian world based simply on the expansion of the European Union, is destined to remain at the mercy of the result of the contest between the USA and China. One only needs to consider that if the Chinese government continues its strategy of diluting, over a twenty or so year period, the absorption into industrial production of the labour currently underemployed mainly in the countryside, this will allow the entry into the labour market every two years of a new labour force as large as that already employed in countries like France or Italy. This is a process of unprecedented scale, but whose nature, it seems, should be well-known to Europeans, since something similar allowed them to pursue post-war reconstruction and development under the umbrella of the dollar.
In the Sixties, Jacques Rueff, former deputy governor of the Bank of France, thus summarised the financial relations between Europeans and Americans: “When a country with a key currency has a deficit in its balance of payment — that is to say, the United States, for example — it pays the creditor country dollars, which end up with its central bank. But the dollars are of no use in Bonn, or in Tokyo, or in Paris. The very same day, they are all re-lent to the New York money market, so that they return to their place of origin… If I had an agreement with my tailor that whatever money I pay him he returns to me the very same day as a loan, I would have no objection at all to ordering more suits from him.”[2] In short this is what is happening now between the USA and Asia. In the Sixties Rueff, General de Gaulle’s economic adviser, not being able to see any way out at the European level, and wishing to maintain French national sovereignty, proposed an unrealistic return to the gold standard as a way of releasing the European economies from the dollar. Today Europeans do have an instrument and, according to some, this is already in operation. The Euro is in fact increasing its weight in the reserves of central banks, and Russia is prepared to have its oil paid for in Euros. Nevertheless the timid rise of the Euro does not depend on its force and credibility as a reserve currency, but on the fact that the enormous reserves of dollars accumulated by the Asian central banks (estimated to be about 1800 billion dollars in 2004, of which almost a third are held by the Chinese Central Bank) are beginning to be a source of growing preoccupation in view of a feared devaluation of the dollar. This is how the decision taken by the Chinese Central Bank last year to reduce its reserves in dollars from 80 to 75 per cent should be interpreted, as it diversified the remainder into euros, Swiss francs, pounds and yen. In any case the set up of the so-called Bretton Woods 2 centred on the dollar-renminbi relationship, will not be influenced by the Euro because there is no power behind the European currency. Everyone is waiting for a rupture of the fragile monetary balance that has been established between the dollar and the renminbi, either due to the explosion of uncontrollable social and economic demands triggered by the tumultuous and contradictory domestic development that are forcing the Beijing government to change its international policy, or due to a crisis of trust towards the dollar and American policy.[3] At the same time everyone is hoping that the next monetary crisis will have a soft landing as well as hoping for spontaneous and coordinated international policies to be implemented to set more secure and stable exchange rate relations between the currencies.
But in this framework the European Union does not seem to have any power of influence over the course of events, and can only watch and wait. This is the result of the lack of a credible European monetary and economic government.
3. How Can we Make Europe a Player Once Again?
What credibility does a monetary union have without a State? How long can it last? Can we limit ourselves to governing what we have, asking for the budget of the Union to be increased a little and trying to appeal to the application of strategies born around the cooperation of a few States (like that of the Delors plan and the Growth and Stability Pact of the Nineties, or like the Lisbon strategy in this millennium)? Is it possible to transform the European Commission into a true European government through a simple reform of the Treaties? Or should we still be trying to tackle and resolve the issue of creating a new framework of power from which to govern the budget, fiscal policies, development plans and the setting of regulations?
Ostensibly these are questions that up to now Eurosceptic and anti-federalists have been most serious about asking, but which people who demand more Europe should also begin to seriously ask themselves.
One only needs to make a rapid analysis of the state of European economic and monetary union to understand that its survival hangs by a thread. Moreover, the only known example of a successful monetary union – ironically recalled in the report by the British Treasury drawn up in 2003 to provide an opinion on the existence or otherwise of conditions for Britain’s entry into the euro — is the one initiated and consolidated in the United States of America.[4] It is not a case of drawing a mechanical parallel between the evolution time of the monetary and economic institutions of the USA and those of Europe. It is difficult to give a precise date for the start of monetary union in the USA by referring purely to descriptions of individual institutions and policies. Many of the features of the current European Monetary Union were not even present in America before the reform of the Federal Reserve in 1935. But nobody can say America did not have a monetary, fiscal and economic policy prior to that year. Granted that the evolution of the instruments of monetary, fiscal and economic policy management (i.e. the government of the economy) in North America, happened gradually and in response to specific requirements and crises, but it was born and developed within a continental federal state framework that allowed the formation and expression of a political will adapted to first establishing, then consolidating and then projecting all the instruments for governing monetary and economic union to the rest of the world over the course of the last century. And the secret of this success ultimately lies in the fact that, thanks to the federal system, the action of such a government started out and remained directly linked to the citizens and not to the member states of the Federation. The dollar, the Federal Reserve, the fiscal and budget policy, development and innovation policies, for better and for worse, are still perceived as being the expression of the will of the American citizens and not of the member states of the American Federation.
Such a framework of power and a direct link between continental federal government and citizens is quite far from being a reality in Europe.
All this should lead us to reflect on the impossibility of separating the issue of creating a continental federal government of the economy from that of creating a European Federal State: more specifically we cannot establish the former without first having created the latter.
Building the European Federal State is therefore the first aim for all those Europeans that on the one hand are becoming aware of the great changes underway as a result of the entry into world history of the forces unleashed by Asia, and that on the other are becoming increasingly aware of the need to create a more balanced and just multipolar world. But in order to set off along this road, they must firstly decide as soon as possible why (i.e. to promote which values), and with whom (i.e. between which countries of the European Union) they must begin to build it.
Franco Spoltore

[1] See the studies by Dooley, Folkerts-Landau, Garber, documented in An Essay on the Revived Bretton Woods System, National Bureau of Economic Research, Working Paper, September 2003, Cambridge MA 02138. The same authors subsequently updated their analysis in The revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates and Exchange Rates in Center Countries, National Bureau of Economic Research, Working Paper 10332, March 2004, Cambridge MA.
[2] Jacques Rueff, Fred Hirsch, The Role and the Rule of Gold: An Argument, Princeton UP, 1965.
[3] See both the intervention of the former US Treasury Secretary, Lawrence H. Summers, The U. S. Current Account Deficit and the Global Economy, Peer Jacobsson Lecture, 3 October 2004, Washington, DC and of Roubini, Setser, Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a Hard Landing in 2005-2006, National Bureau of Economic Research, Working Paper, First Draft, February 2005, Cambridge MA.
[4] See the study carried out by the British Treasury on The United States as a Monetary Union, Stationery Office, Norwich, 2003.

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