Outside View: U.S. fails to understand EU

VICTORIA, British Columbia, Jan. 28 (UPI) -- Defense Secretary, Donald Rumsfeld reflects yesterday's mental model toward an emerging European Union. This inside the box thinking is evident in his recent offensive statements toward NATO allies France and Germany. He is of the opinion that France and Germany are part of "old Europe" and "a problem" in their opposition to military action in Iraq.

Rumsfeld's impromptu remarks, "You're thinking of Europe as Germany and France. I don't," .... "I think that's old Europe. If you look at the entire NATO Europe today, the center of gravity is shifting to the east and there are a lot of new members."

The secretary's comments did not just set off a firestorm within the corridors of power but contributed to the growing polarization between the two solitudes of the old and new worlds. Equally importantly, they disclosed the lack of depth of America's global hegemony.

There is of course evidence to support the defense secretary's pessimistic view of the possibility of an emerging strong Euroland. Among other criteria for membership, member countries must achieve low inflation rates, align long-term interest rates, maintain a stable exchange rate, limit the public debt to no more than 60 percent of gross domestic product, and ensure that budget deficits do not exceed more than 3 percent of GDP.

Germany, the economic engine for Euroland, is sputtering, as is France.

Germany's budget deficit is expected to breach the pact's target -- estimates by Barclays Capital range between 3 percent and 4 percent of GDP -- and public spending continues to be high. The issue is political as well as economic.

Schroeder's unpopularity leaves little room to maneuver to prevent another recession. But, to his credit, he is trying find a solution. France, being France, claims the pact's targets are unreasonable given the current economic conditions.

However, the reality is that the economic and monetary union is well underway in the European Union. Turbulent times? You betcha. As international business practitioners we are paid to constantly undertake environmental scanning of our ecosystem. The terrorist attack of Sept. 11, 2001, will attest to that. Consider the ripples from that incident. Hardly an industry was not affected by the event. Reflect for a moment on your industry. How was it and how is it continuing to be impacted by this political-economic terrorist event?

Another event of a different nature but just as defining is the EU regionalization. The wide varieties of ripples are very much in evidence. Consider the formation of a European Standing Army (issue: impact on NATO / USA hegemony in the region); removal of border barriers that will permit the flow of labor unimpeded from state to state (issue: budget priced workers threatening local employment); the rise of a European Union government and its supporting bodies (issue: threat to national sovereignty), and note 12 countries adopted a single currency last year -- the euro.

What will this mean for the world and the U.S. dollar? Canada is directly dependant upon the America's economy as 85 percent of our goods are exported to the United States. What will be the economic fallout for Canada? Andrew Reding, a senior fellow of the World Policy Institute in New York, claims that Washington doesn't seem to understand the full implication of a unified continent across the Atlantic. I, too, adopt that position. Like our cousins to the south, we, in Canada, seem to focus superficially on the surface events... in this case, the adoption of a common currency by most of Europe. But the implications run deep and are profound for both America and Canada.

With the successful adoption of the euro by 12 European countries many share the belief that Europe is gradually emerging as the world's new superpower. The facts speak for themselves. By 2030 the EU will equal -- if not surpass -- the United States as the dominant economic force on the world stage.

Facts. About 290 million Americans use the U.S. dollar. In addition, many other nations have adopted formally or informally as their working currency the American greenbacks. Why? The answer is clear, "What are the options?" What other safe convertible currency had worldwide acceptance? Certainly not the battered "loonie"! But fissures are showing and a clear choice is emerging -- the euro!

Three hundred and seventy-five million Europeans, with comparable levels of prosperity to the Americans now use the euro. Others, outside the European Union, have indicated their preference to be paid in euros. They no longer wish to accept American currency. Several Middle Eastern countries as well as Russia express this view with increasing frequency. Proponents of Adam Smith and others who understand the supply-demand curve, recognize that the demand for the dollar is waning and with that will come serious repercussions for the American economy, and by association, the Canadian economy. Recall, Canada is 85 percent dependant for its well being on U.S. trade.

One only has to reflect on a falling dollar and the impact it will have on the American's balance of payment and current accounts to understand the reason for this growing concern.

Recently, 10 more European countries were proposed for membership in the EU in 2004. Their accession will bring the total population to approximately 475 million citizens in 25 states. When remaining EU members Britain, Sweden, and Denmark join the euro zone, as now seems inevitable, that number will rise to 560 million. Indeed, I think many will agree that the market forces will leave Switzerland little choice but to also join the "club."

The cover story of the Economist's Dec. 7, 2002 issue proclaims... "Turkey Belongs in Europe." In due course Turkey, already in a customs union with the EU, the Balkans and I expect Russia all will soon participate in the new "EU nation." Collectively, this represents a trading zone of almost 950 million consumers, approaching the population of India or China within a decade or so.

But the impact is not just numbers. The EU is significantly more prosperous and technologically advanced than the other two-populous nations. Four of the G-7 economic powers Germany, Britain, France and Italy anchor this union.

Geopolitical: What Hitler attempted to do has been accomplished without much notice. The implications are mind-boggling. Never before has Europe been united through peaceful means. The result will be a new nation stretching from the Atlantic across Eurasia to the Bering Sea. A union without question more formidable than the United States.

So why do Canadians and Americans adopt their myopic view? Several reasons. Consider the Canadian and to a greater extent the American ethnocentric view of the world. Many have little interest in or knowledge of what transpires beyond our respective borders. Those that do consider the potential of the EU playing a role on a bipolar stage take comfort in the conclusion that cultural and language barriers will prevent such an outcome.

Zbigniew Brzezinski, a one time U.S. national security adviser adopts this view in his book, "The Grand Chessboard, American Primacy and Its Geostrategic Imperatives." (Basic Books, 1997).

Let me assure the reader that having been in Europe and visited institutions like the World Trade Organization in Geneva a month or so ago the message was "crystal." Europeans are confident that the euro will pave the way to even greater integration, and the political leadership is determined to overcome these obstacles.

On the question of culture, perform this test: Ask the next under 30 year-old European you meet (German or other nationality), if they consider themselves "German", or "European." You will find most will state with pride they are European first and German second. The language issue is no longer a deal breaker. Reluctantly but firmly, working languages have been selected by EU's institutions and are being adopted in their day-to-day communication.

Border checks have vanished, so that crossing from one country to another is about as eventful as crossing a state line in the United States, save and except Switzerland. The EU already has a functioning parliament, courts, capital city, flag, license plates, passports and now a common currency. An interesting sidebar; on my last trip to France, I left Victoria with a few "loonies" and plastic. No trip to the bank to get American dollars for me!

My confidence was immediately validated when I located the ATM machine in the Frankfurt airport before connecting to Lyon, no problems ... euros. So ask the question, ...what does this obscure event indicate on a larger scale regarding the demand for the U.S. dollar?

Nay sayers might gleefully ask, using the North American mental model: "Where is the European president?" "The current executive has 15 heads is growing, how do you expect consensus?" To which I reply, for the EU the universe is still unfolding, but unfold it will!

Another indication of government consolidation is the EU current constitutional convention chaired by former French President Valery Giscard d'Estaing to consider a possible federal structure with an elected president to complement the existing directly elected parliament. The British, French and Germans are suggesting a strong council of ministers that might evolve into an upper house similar to Germany's Bundestag to enhance a strong central government.

Cynics will say that even so, Europe will never match the vitality and the commitment to freedom and free enterprise that has made the United States the world's greatest-ever economic and technological powerhouse.

To which I respond, Europe has its own bill of rights, and a court in Strasbourg to enforce it. Tariff barriers are vanishing all across the continent, as are the national monopolies. Many of these that stifled competition in the past are now deregulated. With a single currency, reduced telecommunications and transport costs and a market larger than the United States, new opportunities are opening up for a free EU.

There is a new vitality in Europe. State of the art rail lines are spreading across the continent, whisking intercity passengers at 175 mph. Convergence and cell phones are more ubiquitous than in the United States. Americans are now flying in Airbuses instead of Boeings. Interestingly, United Airlines is one of Europe's Airbus major customers. Recent financial papers report dismal earnings for both United Airlines and Boeing -- two proud American icons. Both are feeling and can attest to the increased competition from this emerging economic powerhouse.

The sense of self reliance and a strong will increasingly will become apparent as European leaders no longer feel weighed down by the past. Instead, they feel free to choose new courses. Incidents like Schroeder "milking" the anti-war mood to get elected and referring to President Bush's contemplating war with Iraq as "adventurism", are indices that he and other EU leaders expect they have a right to be heard.

Are there precedents... proudly yes? The EU's adoption of a common parliament, bill of rights, rule of law and currency by 12 nations with as many different languages need to look no further for successful models than to North America. The union of four British colonies in 1867 as well as, south of the 49th parallel, the union of 13 English-speaking colonies in 1776 validate that these current obstacles are surmountable for the EU.

Terrance Power, a Wharton Fellow is professor of International Business and Strategic Management at the School of Business, Royal Roads University in Victoria, Canada.

"Outside View" commentaries are written for UPI by outside writers who specialize in a variety of important global issues