The Euro Risk

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More generally, the EMU and the emerging political union will bring new conflicts over the sharing of political power in Europe. The French see political union as a way of limiting Germany's economic power and extending the influence of French foreign policy. The recently unified Germany, with its larger population, stronger economy and position in the center of an expanded Europe, sees itself as the Continent's natural leader. The French desire for equality with Germany in economic policy and for leadership in foreign affairs is bound to clash with Germany's sense of its own importance. At the same time, smaller European countries will be frustrated as they discover they have sacrificed their sovereignty over domestic economic and social policies and eventually over international policies without gaining any significant influence on the decisions that are made in Berlin and Paris. Some Europeans may try to reduce the divisive effect of intra-European conflict by finding a common external adversary, with the U.S. the most likely target.

If the EMU leads to a strong European political union with its own foreign and military policy, the conflict with the U.S. will extend beyond trade issues to foreign policy and military affairs. The French do not hide their disagreements with Washington in the Middle East, Russia and even Latin America. France remains outside NATO's military structure and says it will join only if a Frenchman can replace the American commander of NATO's Mediterranean forces, a demand that NATO has turned aside. Many in France see political union as a vehicle for giving French foreign policy the backing of nearly 300 million Europeans.

The launching of the EMU is the most significant political event since the end of the cold war. A Europe that is no longer dependent on the U.S. for protection from the Soviet Union has started to develop its own political future. The U.S. should not regard this as a matter of solely European interest. Europe has been America's most important political and military ally. Americans must understand what is happening in Europe if they want that to continue. If the U.S. does not understand the new risks and manage them wisely, the direction in which Europe is moving will bring problems for us all.

Martin Feldstein, professor of economics at Harvard University, chaired Ronald Reagan's Council of Economic Advisers, 1982-84