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The creation of a single European currency will be the most important development in the evolution of the international monetary system since the widespread adoption of flexible exchange rates in the early 1970s. In practical speaking, Euro is the first real competitor to the Dollar since it surpassed sterling as the world’s dominant money during the interwar period.
At the initial period of circulation, as much as $1 trillion of international investment shifted from Dollars into Euros. The political impact of the Euro is at least as large as these economic effects. A bipolar currency regime dominated by Europe and the United States, with Japan as a junior partner, actually replaced the Dollar-centered system that has prevailed for most of this century.
According to the World Bank and International Monetary Fund data, the global economic roles of the European Union and United States are virtually identical. The EU accounts for about 31 percent of world output and 20 percent of world trade excluding intra-EU transactions. The United States provides about 27 percent of global production and 18 percent of world trade. The dollar, however, maintains a share of world finance that far exceeds the economic weight of the United States.
From a German standpoint, the Euro has a number of attractions. It prevents, for example, Germany’s principal trading partners from making their products more competitive against German ones by devaluing their currencies against the Euro like they were able to do in the time before the introduction of the Euro. Germany has been among the biggest economic beneficiaries of the Euro creation in 1999.
The neo-mercantilist view of Germany in the Eurozone generally attributes far too much importance to the role of exchange rates in external competitiveness and export performance, while ignoring equally important microeconomic effects of domestic structural economic reforms and the ongoing corporate restructuring in the German manufacturing sector. At this point, the most important issue worth a through explanation is how Germany and the United States, two reluctant, yet pivotal powers adjust to a pluralistic and less Western world order.
Globalization in all its broad implications has reinforced tendencies for a separation of American and German economic and financial policies. Networks are replacing alliances in this new “Zero Sum World,” in which competition for markets, technology and natural resources has accelerated.
On global financial issues, the United States and Germany have diverged in important ways. There is a concern in the United States that Germany continues to benefit from an undervalued currency, the euro, and pursues policies meant to keep the euro undervalued at the expense of both the United States and Germany’s euro zone partners.
According to financial analysts, this is part of a larger international financial struggle between export giants such as Japan, China, South Korea and Germany, which want to maintain currency stability, and countries like France, the southern euro zone, and the United States which are pushing for more stimulus and a revaluing of currencies to bring adjustments to their current accounts.
Given the longstanding and nonpartisan support in Germany for stability, low inflation, and responsible fiscal policies, German governments continue to turn a deaf ear to both European and American calls for stimulating demand. Also in the area of information technology and internet governance, Germany and the United States are becoming rivals. The harsh critique in Germany of the United States high tech companies in the wake of the Snowden NSA revelations have resulted in calls to create a European or German cloud, which can threaten the lucrative European market for companies like Apple, Facebook and Google.
As “Financial Times” in last August well explained it, these firms have lobbied intensely in the United States to limit the damage from the NSA scandal and are a factor in the Obama administration’s attempts to heal the rift with Berlin over cyber. German calls for a digital dialogue have still not been addressed by United States. The United States has a tendency to look to its imposing military instruments in dealing with foreign policy while Germany, being an economic juggernaut, tends to see economics as a main instrument in dealing with global and regional problems.
According to John Ryan, senior Fellow at the Public Affairs Networking of the European Union, this has resulted in a major gap between a more military-oriented global power like the United States and an economic global power like Germany. Rather than a contrast between Mars and Venus, it is one between Mars and Mercury, the Roman god of Commerce.
A key question for the future is whether the foreign policy of Germany will be one of Germany, Inc., with few allies but many customers and suppliers. Developments in Russia and the Eastern neighbourhood have begun to force Germany to weigh its economic interests against larger strategic ones concerning the security order of Europe. However, this is not the case in regard to Germany’s geo-economic approach outside of Europe.
As explained on the 14 October 2014 edition of “Telegraph” newspaper, with the United States ceding leadership to Berlin on the Ukraine crisis and the willingness of Chancellor Angela Merkel to impose sanctions on Russia, Germany is clearly at a decisive point in its international strategy. Its risk-averse approach in a more risk-prone world may not work and Germany is already being forced to take on a larger strategic role beyond a purely economic one. The decline of American power and leadership and the decline of France and Britain as reliable partners have increased pressures on Germany to play a more strategic leadership role.
As Josef Janning, the Mercator Fellow of the Alfred von Oppenheim Center for European Policy Studies has observed, “Berlin’s foreign policy machine works best when it can support, encourage, help and reward. It struggles when it has to employ dissuasion, sanctions, or red lines.” Both Berlin and Washington will now have to redefine their relationship in this rapidly changing context.