The European Union and the Euro

Euro symbol with 12 EU Stars outside European Central Bank

The view from Asia

Europe plays little strategic role in the Asian region apart from its trade relations. Nevertheless in a globalized world everything is interconnected. Should the euro fail, or the EU break apart, the pain would be felt all over the globe, not least in Asia, where economies are seemingly going from strength to strength.

Interestingly one feature of European politics is very much the envy of many Asian countries: the continent's institutional and procedural framework that allows the countries of Europe to feed their problems, conflicts, and crises into an existing mechanism with established rules to have them fixed. However inefficient and underdeveloped that structure might often seem to Europeans themselves, the fact that Europe has both the EU and NATO is seen as a huge plus. 

 

For Europeans, this view is a big reminder of just how big the achievements of the european integration process really are. To be sure, Europe is flawed in many ways, and the price of being in such a closely-knit union might appear very high at times. But essentially, no one is out there alone. By comparison, in Asia, all existing forums, such as APEC, ASEAN and the like, are more loosely organised with very little binding power. 

 

The loneliness of nations in Asia's un-integrated region, and the insecurity and fear it breeds, should serve as a reminder to Europeans in this crisis of just how valuable the system they have created for themselves is. It should also remind people that underneath the economic narrative that so dominates the European debate at the moment lurks a much deeper story: a story of peace and freedom from fear, and how the European Union was the key to creating both.

What is needed to make the Euro work?

The Euro will not be safe until Europe answers some fundamental questions that it has run away from for many years. At their root is how nations should respond to a world that is rapidlly changing around them. What will it do as globalisation strips Europe and the US of the monopoly over the technologies that have made it rich.

Creditor countries want the thrust to be on national responsibility and penalties for rule breakers. Debtors want mutual solidarity; if not direct transfers from rich to poor then at least Eurobonds to pool debt (the European Commission is currently studying options for this). In short, the eurozone is badly in need of its own "Hamiltonian moment" that is the point when Alexander Hamilton committed the US federal government to assume the debts of the individual states. After the adoption of America’s constitution, Hamilton became treasury secretary. The federal government assumed the war debts of the ex-colonies, issued new national bonds backed by direct taxes and minted its own currency. Hamilton’s new financial system helped transform the young republic from a basket-case into an economic powerhouse.

America in Hamilton’s time was a young, post-revolutionary republic. Its founding fathers had the prestige to refashion the nation to confront military and economic threats. Hamilton’s assumption of state debt was contentious: virtuous states did not think they should pay for lax ones. Allowing speculators to make fortunes from the junk debt they had bought, often from destitute revolutionary warriors, rankled. This all sounds rather familiar. Yet for Hamilton, assuming the debt was a necessary price of liberty. America created political union followed by fiscal union. The reforms of 1789 were followed by a “no-bail-out” policy in 1840 that forced some states into default. The Federal Reserve was set up in 1913 to act as lender of last resort. The 1930s slump led to much-expanded federal spending under Roosevelt. American states are now constrained by balanced-budget rules, but the federal government borrows hugely to bolster demand. But Europe is doing things backwards, creating the euro partly in the hope of fostering political union. So fiscal integration is being pushed not to preserve freedom and a new nation, but to save a failing currency.

The Role of Big European Countries

Restoring Europe to health will take many years. That is because the troubled countries need to control their government deficits and to re-establish sound current accounts by improving their competitiveness. The true test will be in the content of the reforms. Germany will want to replicate its federal system, with more tough fiscal rules and more power for the European Parliament; the French will want a mirror of the Fifth Republic, with joint bonds issued by the euro zone and executive power (and much discretion) left in the hands of leaders.

Interestingly, the German word for debt, Schulden, is the plural of Schuld meaning guilt or default. Germany is firmly opposed to any solution that would imply open-ended transfers to less wealthy southerners; so are several other northern European countries, not least because guaranteeing others may raise their borrowing costs. But the alternative could be the end of the euro. In reality Europe needs to become more like the US which practices seamless fiscal transfers between the rich California-Connecticut-Illinois-New Jersey-New York quintuple and poorer states like Tennessee. If similar, transfers in the form of Medicaid and unemployment insurance were passed on to the weaker peripheral states, the comparable fiscal transfers may look similar to the graphic below:

Whereas the European Union exists – somewhat superficially – as a contractual union, in the United Kingdom, three centuries of shared experience and a common set of values has meant that English voters never questioned why English taxpayers’ money was used to prop up Scottish banks in the recent banking crisis. This essentially is the challenge for the EU to create a similar union in a relatively young Union where nation states remain considerable clout - to create a Union of belonging.

But that still doesn't resolve the big question what does globalisation mean for Europe? Does it mean Europe becoming more like Germany? (Global banking and trade, high productivity, high taxes, high welfare). Or more like say Texas? (Small budget, low pay, poor welfare). Given the shift in relative wealth and cost advantage away from Europe and the US, trying to make France, Spain, Italy and even the UK more like Germany is improbable. Making them like Texas is doable, but at heavy political cost. Austerity seems likely to be with Europe for years to come, on any policy setting. Globalisation alone will not be suffient to increase growth. Strapped as it is Europe embodies liberal and democratic values – respect for persons, a voice for all, some sense of social equity hence maybe the big questions really are: does embracing globalisation mean dropping these tiresome constraints to unfettered economic growth? And can growth alone be counted on to spread and sustain liberal democracy in 21st century?

中国 China in 年 2012 – Challenges ahead in the Year of the Dragon 龙年

Special Postage Stamp issued for Chinese New Year - Year of the Dragon 2012

A new political theory: universalists v exceptionalists

In recent years the battle lines in Chinese politics have become clearer. They appear to be drawn between universalists, who believe China must eventually converge on a new value based political theory, and exceptionalists, who believe that China must preserve and perfect the current "Chinese Model". The context for this debate takes place within the political uncertainty in the build-up to the leadership transition combined with a phobia amongst the Chinese elites of political reform.

Nevertheless the philosophical political debate is more real than ever. On the one hand, the term “universal values” 普世价值 is a new one in Chinese Political debate. Many Chinese scholars believe the debate really took off in 2008 after the earthquake in the Sichuan province 四川省 that killed around 80,000 people. A liberal newspaper in the southern province of Guang dong 广东省published an editorial that praised the government's swift response. It said it had “honoured its commitments to its own people and to the whole world with respect to universal values”. The debate continued in December 2008 when a manifesto was issued in support of universal values known as Charter 08. It said, China faced a choice of maintaining its authoritarian system or recognising 普世价值 "universal values". However there is no real agreement on what the universal values are. Some Chinese scholars prefer to contrast what they see as a Confucian stress on social harmony and moral rectitude with the West's emphasis on individual rights.

Furthermore many Chinese scholars are surprised by the notion that multi-party democracy is the form of government towards which all other systems naturally evolve. Chinese academics do not subscribe to the concept of the nation-state, the basis of modern diplomacy developed in Europe. Rather they have developed a different Chinese theory of International Relations. Much of the Chinese theory is based on the notion of 天下, or in English, “all under heaven”. This dates back to the golden age of classical Chinese philosophy, of Confucius, Mencius, Laozi and the rest in the “warring states” period before China's unification in 221BC under the first Qin emperor. 天下 is widely understood as a unified world dominated by one country to which neighbours and those beyond look for guidance and pay tribute.

The concept of 天下, as advocated by the Beijing philosopher, 赵汀阳 Zhao Tingyang, is a utopian concept of universal harmony, unattainable, he concedes, for 200-300 years, where everyone opts into a system of global government. There is no compulsion to opt in and the system is one of equality. However he stresses 天下 is a voluntary choice. There are echoes of 天下 in the 2008 Beijing Olympics slogan “One World, One Dream”. There are also echos of it in the blockbuster film Hero released in 2002 set in the time period of the Qin unification.

Moreover Chinese scholars criticise the notion of "supposed" equality between nation-states, they note some countries are more equal than others. For example, China is a big country and other countries are smaller countries and that is just a fact. They also perceive that national governments often ignore the interests of those without a vote, such as unborn generations (not a usual consideration of Western Politicians) and foreigners.

On the other side of the debate is the exceptionalist camp. It's main ideas have been recently summed up in a book by 张维为Zhang Wei Wei called “The Rise of a civilisational state".中国震撼:一个"文明型国家"的崛起 In this book, Mr Zhang argues that China is unique as the world's only amalgam of an ancient civilisation and a huge modern state and is increasingly returning to its own norms and standards. Liberal Chinese are worried that the exceptionalist school of thought is also attracting the most ardent nationalist supporters, who often claim that the West is trying to undermine China's achievements and keep the country from its rightful place as a great power. 张维为Zhang Wei Wei, recently wrote that China's evolution was “as if the roman empire had never collapsed and had survived to this day, turning itself into a modern state with a central government and modern economy, combining all sorts of traditional cultures into one body with everyone speaking Latin.”

Consequently the new communist party leaders when they come to power during 2012 and into 2013 face a daunting task, to navigate their way through these two competing political philosophies both vying to win the battle of ideas for the future of Chinese political thought.

Demographic challenges on the horizon too

A further serious challenge is related to China's demography. Over the last three decades, China has had its fertility artificially suppressed by the one-child policy and as a result it is ageing at an unprecedented rate according to statistics from the UN's Population Division. In 1980 China's median age (the point where half the population is older and half younger) was 22 years, a common developing country figure. But UN statistics show a worrying trend, China will be older than the US as early as 2020 and older than Europe by 2030. This will likely bring an end to its cheap-labour manufacturing and its dependency ratio with rise from 38 to 64 by 2050, one of sharpest rises the world has ever seen.

Furthermore China will have the added challenge of sexual imbalances, after a decade of sex-selective abortions, China will have 96.5m men in their 20s in 2025 but only 80.3m young women. Given these alarming figures, demography is set to become another serious looming challenge for the new leaders of the Communist Party in 2012. The diagram below shows the UN statistics of the Chinese population on the left in 2000 and a projection on the right for 2050:

Chinese Population Pyramid Source: UN Population Division