Not Much Clout for the Euro Without European Sovereignty

Daniel Pinto
The International Herald Tribune

PARIS Nothing is more predictable these days than the European stock markets as they open every morning. All one needs to do is to take a quick look at how Wall Street closed the previous day, get fresh figures on the American consumer confidence index and analyze every word of Alan Greenspan's latest declaration.

The game is simple. Any sign of hope from across the ocean makes European markets rise; the slightest hint of concern makes them fall. In an interesting paradox of globalization, the statements of Wim Duisenberg, president of the European Central Bank, or the prospects of the industrial giant Siemens are almost irrelevant to European financial markets. And they have no impact whatsoever on U.S. markets.

On the eve of Europe's historical leap toward a common currency, the unfortunate conclusion is that financial Europe does not really exist. European markets have become the deforming mirror of U.S. markets and a frighteningly effective transmitter of U.S. economic cycles to Europe.

Political and economic leaders, focusing exclusively on the mere process of implementing monetary unification, remain blind to the two main challenges facing the Continent today: the absence of real executive powers at the top of the European economic edifice, and, at its base, the absence of a broad group of large institutional investors who bring, as they do in America, liquidity to public markets, funding to large corporations and venture money to entrepreneurs.

This double vacuum risks turning the euro into a source of increased dependence on the United States instead of fulfilling its original mission of rebalancing the world's economic and financial landscape.

The political vacuum is the most immediate threat to the euro. When trillions of dollars are exchanged every day at the speed of light between computer systems in every corner of the world, credibility is the main weapon of economic policymakers and central bankers. The cash reserves of any central bank, including the Federal Reserve, are a drop in the bucket of international financial flows, unable to constitute an effective tool to support a currency or a stock market.

In the United States, credibility has been skillfully built on seamless cooperation between the head of the Federal Reserve and the head of the Treasury. Mr. Greenspan and Paul O'Neill are the parents of a single economic and monetary policy. The newborn euro is an orphan in comparison.

Mr. Duisenberg may embody European monetary policy, but he does not have the legitimacy to represent the economic policies pursued by EU member states. In fact, nobody does today. And if no real executive powers exist at the highest level, the credibility gap is bound to continue undermining the euro in the months and years to come. The financial vacuum around the euro is even more serious, as it affects the fabric of European capitalism. In marked contrast to America, most countries in Europe still have state-controlled retirement systems and therefore cannot count on a large base of institutional investors, particularly pension funds.

In Europe, Anglo-Saxon institutions, mostly American, have filled the gap and become a very powerful force, sometimes holding significant stakes in industrial flaghips. More than 40 percent of the main European stock market indices are controlled by Anglo-Saxon investors. This new dominance has broken the old-style, somewhat incestuous mold of European capitalism and unleashed a new entrepreneurial spirit that would have been inconceivable just a few years ago. But this dominance has also dramatically increased the interdependence between European and U.S. financial markets, often to the detriment of European corporations.

During downturns such as the one we are now experiencing, European companies do not have the structural and cultural flexibility of their American competitors, which can react quickly by drastically adjusting the size of the work force. As a result they are unduly penalized. The absence of a powerful domestic investor base in Europe means that global financial markets are no longer a level playing field for European corporations.

This weakness may become a direct threat to the economic sovereignty of the region and possibly a source of serious social problems in the future.

The passage to the euro should enable European leaders to better address this issue, but not through meaningless protectionist slogans. Decision makers should have the political courage to start privatizing ailing retirement systems, and they should use the advent of the euro to give birth to European pension funds.

Strongly anchored within the local corporate world, these new financial titans would have the clout to become an effective counterweight to their American equivalents.

It has been easy to forget that the euro is a means and not an end. Now is precisely the time to avoid the pitfall of creating a euro without a cause. Give the new currency a soul, and use it as a stepping stone toward achieving more ambitious political and economic aims.

The writer is chief executive officer of Chrysalead, the Paris-based venture capital fund, and a former executive director of UBS Warburg, the investment bank. He contributed this comment to the International Herald Tribune.