Year XXXIV, 1992, Number 1 - Page 44
Europe and the New World Economic Order
DARIOVELO
Possible scenarios.
The fall of the Berlin Wall has made the end of the world order established at Yalta clear to everyone. The politico-economic order which emerged after the Second World War had already begun a serious decline in 1968, as a result of the success of the European Common Market; the inconvertibility of the dollar, the energy crisis and serious difficulties over the GATT were the most important crises which accompanied this process of disintegration.
At the beginning of the 1990’s the world is at a turning point. The collapse of the old international order means that a new, more evolutionary order has to be constructed. The alternative would be to fall back into nationalism, anarchy, economic crisis and increasingly dramatic conflicts.
There are two alternative scenarios within an evolutionary perspective. On the one hand, the collapse of bipolarism opens up the possibility of moving towards closer integration on a world level. On the other hand, it is possible to move towards a new multipolar order based on cooperation between regulated areas, each area being partly closed to international competition, hence postponing till a later stage the construction of a single world market. In order to understand which direction is the more realistic for the world today, and to evaluate the opportunities and risks implied by the two alternatives, there are certain considerations which may be taken as initial points of reference to assist our analysis.
The GATT crisis.
The economic order which emerged from the Second World War was based on two principal agreements: the Bretton Woods system and GATT. The former guaranteed the convertibility of currencies, thanks to the role of the dollar as the principal currency of reserve and payment, while the latter allowed international trade to develop gradually and progressively, by limiting the various types of protectionist measures in force. Both agreements were imposed by the United States, which took on the task of governing the world economy through a long developmental cycle.
The United States emerged from the Second World War as a single economic pole: its supremacy remained unquestioned for twenty years, until the success of European integration, the beginning of the great Japanese boom, and the appearance of an increasing number of rapidly developing Third World countries on the world scene, combined to begin to change the balance of the world distribution of wealth.
In 1945 the United States represented 75 per cent of world GDP: its share dropped to 50 per cent in the 1960’s; at present it is around 23 per cent. This simple fact reveals the diminution of the real basis for United States’ leadership.
In August 1971, the declaration of the inconvertibility of the dollar sanctioned the end of the Bretton Woods system, which was only able to survive in a unipolar world economic system. The outcome was a decade of crisis, until Europe and Japan began to take on their due responsibilities in the monetary field.
Today we face the necessity of re-establishing GATT, in order to defend the very same objectives for which it was established. GATT must be re-established not because it has failed, but because it has been successful. Success, like failure, demands institutional change: such change is more difficult in the case of success than in that of failure, in that the need for change is less obvious. Yet the urgency of reform is in reality no less.
In the unipolar world the United States had three fundamental functions at the world level: promoter of development, absorption market and governor of the world economy.
The U.S. promoted world development thanks to its capacity to produce a surplus in the balance of trade, and to simultaneously finance world development. In other words, it offered the international economy the goods and services which were necessary for the modernization of economies, and at the same time offered the financial means to buy these goods and services; in this way they supported development and integration at a world level. The greatest example of this capacity was the Marshall Plan.
The United States continued to exert this influence long after economic supremacy was diminished. In effect, the central role of the dollar allowed the United States to become increasingly indebted, thus obliging richer countries to support America’s role as a promoter of development, a role which none of these countries could fulfil on their own.
These conditions have been reduced today. The United States has acquired a permanent trade deficit; furthermore, it represents at present by far the most indebted country, with a net international debt which exceeds $800,000 million. The richest country in the world thus syphons off goods, services and financial resources from the rest of the world; in these conditions it is unthinkable that it could fulfil its function as a promoter of development. The chief objective of the United States today is simply that of restoring the balance of its own deficit in relation to the rest of the world.
The second function fulfilled by the United States was that of an absorption market for developing countries. Such a role is usually undervalued, but in reality has strategic importance.
The U.S. promoted international development, absorbed the exports of countries which were beneficiaries of the original boost, thus further sustaining development, and in this way freed exportable resources to support the modernization of the world economy; and so on, in a virtuous circle of cumulative development.
In the postwar period all countries with a market economy have registered positive development, and for many of them this development has been very great. If a country wants to develop, it has to have a market where it can sell its produce and manufactures. The United States traditionally represented that market. That was true for Europe, in the period immediately after the war; then for Japan, in the 1960’s and 70’s; then for Korea, Singapore, Hong Kong and Taiwan in the 1980’s; and today for the developing countries of the Third World. 63 per cent of all products manufactured in all Third World countries are currently exported to the United States; Europe absorbs only 21 per cent, although the European GDP is by now greater than that of the United States.
This function, traditionally fulfilled by the U.S., is about to go into crisis. It is becoming increasingly difficult to keep the American market open, since the U.S. system carries progressively less weight in the world economy, and shows a growing deterioration in its foreign accounts.
The third function fulfilled by the United States was that of guaranteeing the management of the world economy. This function actually includes the two functions mentioned above, for which it constitutes the framework. The leading role played by the United States in the postwar period allowed the birth of a world economy which could not have come about without some form of government. The fundamental reason for the great Depression of the 1930’s was that Great Britain gave up directing the world economy, in a situation in which the United States was not yet ready to take on this task. The current failure of the Uruguay Round is a worrying symptom of an international situation which seems increasingly similar to that of the 1930’s. The GATT crisis is the product of that structural, and increasingly serious, breakdown in the United States’ capacity to govern the international economy.
In the past, GATT negotiations were concluded successfully, because the United States always supported them with concessions greater (on average) than those offered by the other countries; furthermore the U.S. was able to impose on GATT’s more developed partners a discipline in keeping with its leading role. The Uruguay Round signals a turning point, in that for the first time the United States came asking for help, rather than offering it; moreover it emerged clearly how difficult it was for the U.S. to influence the behaviour of its more developed allies. The rest of the world as a whole was not able to compensate for the diminution of the United States’ traditional leading role; and no individual country, including Japan and the EEC, is presently able to take on the role formerly assumed by the United States.
The situation is aggravated by the fact that GATT, in order to strengthen itself, now requires to exercise greater control over the world economy than in the past, when free-trade measures were essentially adequate. The Uruguay Round began to negotiate agricultural problems and the liberalization of services, both of which are highly regulated and protected sectors. Similar conclusions may be drawn from the necessity of opening GATT to the ex-communist countries, for which a simple free trade approach is not adequate.
Thus there is a growing demand for government on a world level, while at the same time there is an increasingly serious breakdown in the leadership capacity of the country which provided it in the past. Thus the need for a new international order is of the greatest urgency.
The development of Europe.
In the 1970’s, Europe was hindered by its own division from supporting the United States in assuming the equal share of world level responsibilities which were its due. In the 1980’s, the progressive realization of the pre-federal European Union allowed Europe to play a stabilizing role, but not yet an innovative role.
The overcoming of the division of Europe, with the prospect of Monetary Union and European Union, offers the EEC the possibility of becoming a driving force in modifying the international economic order.
The reconversion of the economies of the East requires massive investment, which only the EEC is able to offer; in this way the possibility exists of a long cycle of development based on the complementary relationship between Eastern and Western Europe.
This prospect is, in reality, only valid in the long term; it will take at least a decade to reconstruct the very basis of the economy, which has been devastated in the countries of the East by the tragic experience of national communism. The same is true for the amount of time necessary to stabilize the systems of the East, and for reassuring western investors about the risks of possible new crises.
In the short term however there may be strong economic expansion in the EEC, which could blend into the medium and long term prospects offered by the integration of the East European economies.
In the 1980’s, the pre-federal European Union did not in fact lead to greater development (which was potentially attainable) because the economy was squeezed by the shortage of labour. This was particularly true for Germany. In the 1980’s West Germany deliberately pursued the policy of a restricted growth rate, slowing down the development of the entire continent, so as to avoid the necessity of massive immigration. With a negative demographic factor, the German labour force shrank during the 1980’s; sustained economic growth would inevitably have meant the immigration of millions of workers from developing countries. German reunification has reversed that situation. Today Germany no longer faces a shortage of local workers, but rather the necessity of providing work for eight to ten million unemployed or pseudo-employed people, which need to be brought to productivity levels and hence income levels approaching those of the western regions. Already Germany is destined soon to act as a driving force in European economic development, guiding all European countries in the same direction. This scenario is all the more likely to take place, because some European countries suffer from the problem of unemployment and yet have not been able to embark on expansionist policies because of the constraint of European economic and monetary discipline.
In the 1990’s, Germany will presumably adopt a policy similar to that applied in the United States by the Reagan administration in the 1980s, and based on a mixture of fiscal incentives and restrictive monetary policy, to guarantee growth without inflation. This policy is coherent with the objective of the European Monetary Union; it will make Germany a net importing country and the epicentre of European development. The growing role which Europe will play on the world level as principal financial centre (once it has attained monetary unity) will make it even easier to pursue these objectives. In structural terms Europe will attract capital from all over the world, and acquire a growing capacity to recycle it in the form of productive long term investments.
Europe and the new world economic order.
In the context that is emerging today, Europe has both the possibility and the responsibility to sustain growth in a new world economic order. As outlined above in an evolutionary view and not taking into consideration protectionist regressions, there are two fundamental alternative scenarios.
The first alternative is that of moving towards the construction of a single world market. To this end, Europe should promote a new Bretton Woods conference and a renegotiation of GATT. The problem is the creation of new supranational institutions capable of governing economic problems in an increasingly unitary and democratic way. This could lead to a European initiative for the strengthening of the UN through democratization and the extension of its competences and powers.
Faced with this possibility, the problem to be clarified is whether Europe – or any other state – currently has the authority to support initiatives of this importance; alternatively we have to ask ourselves whether the convergence among the principal countries of the world is already so deep as to constitute a power base for the strengthening of the process of unification at the world level.
A second alternative is the construction of a new multipolar international economic order, based on co-operation between regulated areas which would be partly closed to international competition. To this end, Europe would have to take on specific responsibilities with respect to its closest neighbours, integrating them more and more into its own economy, and keeping itself open to international co-operation.
Any consideration of these two alternative scenarios should include an assessment of the forces which favour one or the other, initially in the old continent, since it can be used to guide the development of international relations.
There are certain considerations which make it reasonable to predict that Europe will tend towards the second scenario, thus contributing decisively to guiding the other principal economic areas at world level in the same direction.
First, there are considerations of a historical nature. Europe is in the process of unification, and therefore needs to create closer links between the countries of the Community. Any rapid evolution towards the globalization of the world economy would have a disintegrative impact on the Community, or at least an influence unfavourable to unification. Raison d’Etat will spur the Community to take action to strengthen itself, and the same is true for countries which have an interest in strengthening the Community. To be more specific, it is foreseeable that Great Britain will support the choice of economic globalization at world level, while the six founder-members of the Community will support a multipolar cooperative world order.
The United States itself, once it had begun its federal union, was initially compelled to opt for protectionism, and not only for economic motives. The US War of Secession has its roots here.
This does not mean that Europe will follow a protectionist policy. One need simply ask whether European unification will make it more likely that the Community emerges as a regulated area which is not entirely open to the world market.
Secondly, there are considerations connected to the EEC’s opening up to the countries of Eastern Europe. It is realistic to foresee that the Community will welcome as associate members Poland, Czechoslovakia and Hungary; the number of regions can be increased further.
The association of these countries has the greatest importance not only from a political and economic point of view, but also from the point of view of European security, in that their association would be intended to add to the stability of international and interregional relations and to the reduction of the destabilizing impact of micro-nationalisms.
It is reasonable therefore that the Community should accept the membership of these countries, even if there are doubts as to the lawfulness of this on the basis of GATT regulations. The latter are more likely to be modified than are the aims and intentions of the Community. It has not escaped general notice that developments in the Community show a powerful tendency towards the creation of a regulated area, one which would be partly closed to the world market. If the aim is for these countries to be able to export within the EEC, it will be necessary, at least for a long transitional period, to block exports (for example) from the South-East Asian countries. It is realistic to anticipate that Taiwan will remain more competitive than Poland for a long time.
Thirdly, there is the problem of emigration. If Europe wants to avoid being invaded by poverty-stricken millions, it will have to support the development of neighbouring countries, primarily those of Eastern Europe and North Africa. The concession of privileges to these countries will inflict damage on the countries of South America and Asia, which will inevitably be discriminated against. Europe will however be unable to discriminating against the countries of the Third World in favour of its own neighbours. The recent tragic events involving the Albanian refugees in Italy have demonstrated how the establishment of privileged relations with these areas is inevitable and beyond any moral judgement.
The extension of these special relations to neighbouring countries, in an increasingly co-ordinated fashion, will make Europe a more and more regulated area. Nor is it thinkable for Europe to extend such special relations indiscriminately to all Third World countries; and it is hard to imagine that Europe will succeed in ensuring that corresponding measures be adopted in the short term by all industrialized areas of the world that can constitute possible outlets for migratory flows.
Fourthly, there is the agricultural problem. To liberalize agriculture raises the issue of the loss of an exceedingly high number of jobs in Europe and the lost value of enormous areas of agricultural land which would have to be abandoned. This is true even if the problems relating to the balance of payments, which could be more easily managed, are not taken into consideration.
Finally and fundamentally, there is the social problem. Europe will want to defend the rights its workers have acquired and will be opposed to any reduction in their salaries. This implies a partial closure to international trade, particularly with respect to Third World countries.
The experience of the United States provides significant insight in this context: when European firms came up against their Japanese competitors in the US market, where neither of the two contenders could take advantage of factors connected to market control, the European enterprises were the losers. This indicates that there is a discrepancy on the level of economic systems, rather than at the level of individual companies.
The United States Labour Department provides statistics on bands of workers, in particular identifying the group of ‘non-supervisory workers’. These are less qualified workers, who do not exercise any commanding role in the production process; they represent about two-thirds of the United States workforce. From 1973-1990 the U.S. economy grew in real terms by 30 per cent; in the same period the real wages of these workers fell by 12 percent. This phenomenon is explained by the fact that these workers found themselves exposed to competition with Third World workers to a greater extent than any other American economic group. In the United States there is a social system capable of absorbing tensions of this nature; it is legitimate to doubt that the European social system is prepared to expose its own workers to wages competition from the Third World.
These last considerations reveal a very broad band of agreement which supports the reinforcement of Europe as a regulated area that is not totally exposed to the forces of international competition.
A gradual transition to the world market.
These considerations, however approximative they may be, support the prediction that Europe will start to take on the aspect of a regulated area, favouring the birth of a new, multipolar, international economic order which is based on co-operation between areas that are partly closed to competition.
This process can be conceived of as the construction by stages of a real integrated world economy.
Prudence could be used as an argument in favour of this choice: for fear that a strategy of globalization implemented immediately would be too ambitious, for wherever it failed, it would inevitably encourage dangerous protectionist reversals.
The creation of regulated areas can, on the other hand, take on the value of an evolutionary strategy, which is capable of preparing the conditions for subsequent progress towards the single world market.
The significance and impact of such regulated areas will depend, obviously, on the precise characteristics which they have. The European case is emblematic in this sense. The realization of Monetary Union and European Union can underpin the birth of a regulated European area which will be more open to international co-operation than the Community is today. Co-operation between regulated areas itself poses institutional problems of the greatest importance: how democratically these are solved will depend on how democratic the institutional solutions adopted at the level of the individual regulated area are. This point has the greatest importance in that the institutional solution given to the co-operation between areas is capable of directly influencing subsequent developments towards the single world market.
Europe has indicated to the world, with its own community decisions, the way to overcome a history of division. With the fruition of the institutional choices of Monetary Union and European Union, Europe will be able to give the world a model of international democracy that is valid for other areas and for the world as a whole. This is the long term process which will, on occasion, have to be supported by precise choices that exert an evolutionary influence on the forces in the field.
