The European Union must urgently expand the Eurozone to the 27 to assert its interests!

The IMF Deputy Director, Gita Gopinath, in a much-publicized speech, indicated that currencies, other than the dollar, would play a more important role in the foreign exchange reserves of nations. I had already drawn attention to this phenomenon in my article of 17 March entitled “Financial sanctions against Russia” to which I refer you.

Ms Gopinath makes a very pertinent distinction between the use of the dollar as a reserve currency, which she sees diminishing significantly in favor of other currencies to allow for diversification of exchange rate risks (in value and freedom of access), and its role as the transaction currency of choice, which is likely to erode much more slowly, as no other currency has the market infrastructure and political and regulatory basis to match it.

It is already a given that globalization has made all states interdependent and that autonomy, both in terms of supplies and production, can only be conceived on a sufficiently large scale whithin an entity, by virtue of its size, population, currency, resources, security and above all its stability, allows it to aggregate, within its area of influence, independent countries endowed with all but a nominal exercise of ‘national sovereignty’. 

At this stage, three countries/areas seem to be able to claim the leadership of such an entity.

Firstly, the United States, which today ticks all the boxes and enjoys the undisputed status of the dominant world power; its monopoly will be challenged by its two potential rivals, in order to gradually share its hegemonic power.

Secondly, China, whose main current weakness is “political”, stemming from the negative perception of its regime as “authoritarian”. This limits confidence in the use of its currency, especially as a reserve, by international operators made suspicious by the state’s interventionism in the financial markets, whether in terms of manipulating the price and availability of its currency, or interventions in sectoral markets (stock market, real estate, industry, etc.). This explains why at present a limited amount of Chinese currency, estimated at around 3%, is included in the total world reserves of other countries and why the Renminbi is not (yet) considered as a transaction currency of choice between third countries. This could change in China’s favor if its lead in introducing a “digital currency” issued by its Central Bank were to materialize.

In third place comes the European Union, whose claim to such a leadership is predicated on the urgent and unavoidable precondition of the extension of the Eurozone to all of its 27 Member States. In parallel, a deeper integration of the EU in defense, foreign policy and common management of various political, economic and social issues (environment, energy, digitalization, immigration, standards, etc.) calls for a thorough reform of the treaties. While the EU benefits from all the characteristics that would allow it to assume its place at the top international table, the incompletion of EMU will simply prolong its status as a vassal of the United States and the dollar.

This new ‘tri-polar’ architecture would lead to a parallel evolution of global governance, affecting NATO and the UN in particular. The emergence of the EU as one of the pillars around which the “new world order” is structured does not necessarily have to change the character of the defensive military alliance that has characterized  NATO since its creation; on the other hand, it should allow for a rebalancing of the powers, currently overwhelmingly dominated by the United States. The EU’s common defense policy should allow its members to jointly claim a weight comparable to that of the USA; to be justified, it will be necessary to speak with a single voice and make comparable financial and logistical contributions, which are only conceivable at Union level. As is the case in the USA, individual members could retain partial control of their armed forces, thus solving advantageously the thorny problem of the control of France’s nuclear deterrent.

More fundamental – but far more difficult to implement – is a reform of the United Nations (that “thingamabob” in de Gaulle’s words) first because of the number of its 192 Members and then because of the privileges granted to the permanent Members of the Security Council which constitute almost insurmountable obstacles. However, the ever-increasing demonstration of the ineffectiveness of the UN, which has led to its growing impotence, makes it necessary either to modify its governance, conceived after the Second World War, or, more realistically, to replace the existing Treaty with a new agreement that integrates the profound changes that have taken place since 1945, the extent of which is still accelerating.

The following considerations are therefore entirely speculative, regardless of the feasibility of their implementation. I will limit myself briefly to two topics: the objectives and the treatment of weapons of mass destruction (nuclear and financial).

The objectives of the new organization can very largely include those of the existing charter, in particular the preservation of peace. However, they will have to take into account the changes that have taken place in the meantime, notably revising the statement of shared values that reflects to excess the “Western” philosophy that was unilaterally imposed after the end of the conflict. Moreover, governance should eliminate any blocking mechanism (veto) that would hinder the achievement of its objectives and ensure that a proper hierarchy between the powers of the General Assembly and those of the Security Council is re-established.

Secondly, recent events have called into question the effectiveness of “deterrence” as a sufficient guarantee to prevent the use of nuclear weapons. A new agreement, its implementation and control are obstacles that some may consider unbridgeable; they need, however, to be weighed against the risk of “mutually assured total destruction” – in other words the end of humanity – which its use would represent.

Finally, the recent financial sanctions against Russia have raised the question of their assimilation to the use of a weapon of mass destruction. The regulation of their use thus becomes a necessity and could give rise to the creation of an “Economic and Financial Security Council”, part of the UN and managed by the IMF or independent and entrusted to the B.I.S. Having observed that the effectiveness of sanctions requires cooperation between a minimum of qualified participants, its membership could be composed of countries whose currencies constitute at least 5% of the world’s foreign currency “reserves” or whose cross-border trade represents at least 10% of world trade. Thus, unilateral sanctions declared by a single country could be more easily circumvented, while non-compliance with sanctions voted by a qualified majority would give rise to the extension of sanctions to violators. The sanctions mechanism should also provide for the seizure of reserves to finance reparations for an aggressor found guilty of abuses or war crimes. 

Conclusion

The above considerations are illustrative of the evolution that will take place one way or another. It will be the consequence of an unprecedented convergence of developments affecting sectors that have become increasingly interdependent; their management can no longer be envisaged in “silos” entrusted to specialists who are often poorly qualified to integrate elements outside their fields of expertise. 

Thus the simultaneous occurrence of the climate crisis, the pandemic, their economic impact on public finances (budgetary balances) and private finances (purchasing power), the consequences of monetary policies which reveal unsustainable long term contradictions between interest rates, inflation, the level of stock markets, solvency (both in the public and private sectors), the consequences of an acceleration in inequalities and the bankruptcy of social protection mechanisms, etc., make in-depth upheavals inevitable. If, as history shows, it is the poorest who will as always be the main victims, it is however the populations of the developed countries who are the least well prepared to undergo these shocks; it is in particular the erosion of the benefits of the welfare State, including insolvent pension and insurance schemes, which will lead to the greatest ravages of resurging inflation and probable social unrest. These outcomes are the result of a long period of financial repression by the (often necessary) interventionism of the Central Banks which have made obsolete the traditional market adjustment mechanisms.

In this context, a recourse to political solutions that put democracy at risk becomes a credible hypothesis. Indeed, already more than half of the world’s population is subject to more or less authoritarian regimes, confirming a significant regression of the humanist values that had gradually spread in the aftermath of the Second World War.

The war in Ukraine has mobilized human consciousness in a dramatic way. It provides an opportunity – which we cannot afford to ignore – to manage rather than suffer the challenges that confront us. It is the pursuit of the common good, the emphasis on the values of freedom and an unwavering commitment to the duty of solidarity that alone can limit the sacrifices that are now inevitable; it is of paramount importance to ensure that their burden is distributed in the fairest way possible.

The European Union has an important and specific contribution to make in the transformation towards a new world order. To influence the future, it must, as a matter of priority, deepen its integration, the most emblematic sign of which would be the urgent extension of the Eurozone to all its members. This is the price we have to pay to bequeath future generations an inhabitable world.

Brussels, 3rd April, 2022