Chapter 7

Another, perhaps equally successful, and still on-going union - is the CFA franc Zone.

The CFA (stands for French African Community in French) franc has been in use in the French colonies of West and Central Africa (and, curiously, in one formerly Spanish colony) since 1945. It is pegged to the French franc. The French Treasury explicitly guarantees its conversion to the French franc (65% of the reserves of the member states are kept in the safes of the French Central Bank). France often openly imposes monetary discipline (that it sometimes lacks at home!) directly and through its generous financial assistance. Foreign reserves must always equal 20% of short term deposits in commercial banks. All this made the CFA an attractive option in the colonies even after they attained independence.

The CFA franc zone is remarkably diverse ethnically, lingually, culturally, politically, and economically. The currency survived devaluations (as large as 100% vis a vis the French Franc), changes of regimes (from colonial to independent), the existence of two groups of members, each with its own central bank (the West African Economic and Monetary Union and the Central African Economic and Monetary Community), controls of trade and capital flows - not to mention a host of natural and man made catastrophes.

The euro has indirectly affected the CFA as well. "The Economist" reported recently a shortage of small denomination CFA franc notes. "Recently the printer (of CFA francs) has been too busy producing euros for the market back home" - complained the West African central bank in Dakar. But this is the minor problem. The CFA franc is at risk due to internal imbalances among the economies of the zone. Their growth rates differ markedly. There are mounting pressures by some members to devalue the common currency. Others sternly resist it.

"The Economist" reports that the Economic Community of West African States (ECOWAS) - eight CFA countries plus Nigeria, Ghana, Guinea, the Gambia, Cape Verde, Sierra Leone, and Liberia - is considering its own monetary union. Many of the prospective members of this union fancy the CFA franc even less than the EU fancies their capricious and graft-ridden economies. But an ECOWAS monetary union could constitute a serious - and more economically coherent - alternative to the CFA franc zone.

A neglected monetary union is the one between Belgium and Luxembourg. Both maintain their idiosyncratic currencies - but these are at parity and serve as legal tender in both countries since 1921. The monetary policy of both countries is dictated by the Belgian Central Bank and exchange regulations are overseen by a joint agency. The two were close to dismantling the union at least twice (in 1982 and 1993) - but relented.

II. The Lessons

Europe has had more than its share of botched and of successful currency unions. The Snake, the EMS, the ERM, on the one hand - and the British Pound, the Deutschmark, and the ECU, on the other.

The currency unions which made it have all survived because they relied on a single monetary authority for managing the currency.

Counter-intuitively, single currencies are often associated with complex political entities which occupy vast swathes of land and incorporate previously distinct -and often politically, socially, and economically disparate - units. The USA is a monetary union, as was the late USSR.

All single currencies encountered opposition on both ideological and pragmatic grounds when they were first introduced.

The American constitution, for instance, did not provide for a central bank. Many of the Founding Fathers (e.g., Madison and Jefferson) refused to countenance one. It took the nascent USA two decades to come up with a semblance of a central monetary institution in 1791. It was modeled after the successful Bank of England. When Madison became President, he purposefully let its concession expire in 1811. In the forthcoming half century, it revived (for instance, in 1816) and expired a few times.

The United States became a monetary union only following its traumatic Civil War. Similarly, Europe's monetary union is a belated outcome of two European civil wars (the two World Wars). America instituted bank regulation and supervision only in 1863 and, for the first time, banks were classified as either national or state-level.

This classification was necessary because by the end of the Civil War, notes - legal and illegal tender - were being issued by no less than 1562 private banks - up from only 25 in 1800. A similar process occurred in the principalities which were later to constitute Germany. In the decade between 1847 and 1857, twenty five private banks were established there for the express purpose of printing banknotes to circulate as legal tender. Seventy (!) different types of currency (mostly foreign) were being used in the Rhineland alone in 1816.

The Federal Reserve System was founded only following a tidal wave of banking crises in 1908. Not until 1960 did it gain a full monopoly of nation-wide money printing. The monetary union in the USA - the US dollar as a single legal tender printed exclusively by a central monetary authority - is, therefore, a fairly recent thing, not much older than the euro.

It is common to confuse the logistics of a monetary union with its underpinnings. European bigwigs gloated over the smooth introduction of the physical notes and coins of their new currency. But having a single currency with free and guaranteed convertibility is only the manifestation of a monetary union - not one of its economic pillars.

History teaches us that for a monetary union to succeed, the exchange rate of the single currency must be realistic (for instance, reflect the purchasing power parity) and, thus, not susceptible to speculative attacks. Additionally, the members of the union must adhere to one monetary policy.

Surprisingly, history demonstrates that a monetary union is not necessarily predicated on the existence of a single currency. A monetary union could incorporate "several currencies, fully and permanently convertible into one another at irrevocably fixed exchange rates". This would be like having a single currency with various denominations, each printed by another member of the Union.

What really matters are the economic inter-relationships and power plays among union members and between the union and other currency zones and currencies (as expressed through the exchange rate).

Usually the single currency of the Union is convertible at given (though floating) exchange rates subject to a uniform exchange rate policy. This applies to all the territory of the single currency. It is intended to prevent arbitrage (buying the single currency in one place and selling it in another). Rampant arbitrage - ask anyone in Asia - often leads to the need to impose exchange controls, thus eliminating convertibility and inducing panic.

Monetary unions in the past failed because they allowed variable exchange rates, (often depending on where - in which part of the monetary union - the conversion took place).

A uniform exchange rate policy is only one of the concessions members of a monetary union must make. Joining always means giving up independent monetary policy and, with it, a sizeable slice of national sovereignty. Members relegate the regulation of their money supply, inflation, interest rates, and foreign exchange rates to a central monetary authority (e.g., the European Central Bank in the eurozone).

The need for central monetary management arises because, in economic theory, a currency is never just a currency. It is thought of as a transmission mechanism of economic signals (information) and expectations (often through monetary policy and its outcomes).

It is often argued that a single fiscal policy is not only unnecessary, but potentially harmful. A monetary union means the surrender of sovereign monetary policy instruments. It may be advisable to let the members of the union apply fiscal policy instruments autonomously in order to counter the business cycle, or cope with asymmetric shocks, goes the argument. As long as there is no implicit or explicit guarantee of the whole union for the indebtedness of its members - profligate individual states are likely to be punished by the market, discriminately.

But, in a monetary union with mutual guarantees among the members (even if it is only implicit as is the case in the eurozone), fiscal profligacy, even of one or two large players, may force the central monetary authority to raise interest rates in order to pre-empt inflationary pressures.

Interest rates have to be raised because the effects of one member's fiscal decisions are communicated to other members through the common currency. The currency is the medium of exchange of information regarding the present and future health of the economies involved. Hence the notorious "EU Stability Pact", recently so flagrantly abandoned in the face of German budget deficits.

Monetary unions which did not follow the path of fiscal rectitude are no longer with us.

In an article I published in 1997 ("The History of Previous European Currency Unions"), I identified five paramount lessons from the short and brutish life of previous - now invariably defunct - monetary unions:

(A) To prevail, a monetary union must be founded by one or two economically dominant countries ("economic locomotives"). Such driving forces must be geopolitically important, maintain political solidarity with other members, be willing to exercise their clout, and be economically involved in (or even dependent on) the economies of the other members.

(B) Central institutions must be set up to monitor and enforce monetary, fiscal, and other economic policies, to coordinate activities of the member states, to implement political and technical decisions, to control the money aggregates and seigniorage (i.e., rents accruing due to money printing), to determine the legal tender and the rules governing the issuance of money.

(C) It is better if a monetary union is preceded by a political one (consider the examples of the USA, the USSR, the UK, and Germany).

(D) Wage and price flexibility are sine qua non. Their absence is a threat to the continued existence of any union. Unilateral transfers from rich areas to poor are a partial and short-lived remedy. Transfers also call for a clear and consistent fiscal policy regarding taxation and expenditures. Problems like unemployment and collapses in demand often plague rigid monetary unions. The works of Mundell and McKinnon (optimal currency areas) prove it decisively (and separately).

(E) Clear convergence criteria and monetary convergence targets.

The current European Monetary Union is far from heeding the lessons of its ill fated predecessors. Europe's labour and capital markets, though recently marginally liberalized, are still more rigid than 150 years ago. The euro was not preceded by an "ever closer (political or constitutional) union". It relies too heavily on fiscal redistribution without the benefit of either a coherent monetary or a consistent fiscal area-wide policy. The euro is not built to cope either with asymmetrical economic shocks (affecting only some members, but not others), or with the vicissitudes of the business cycle.

This does not bode well. This union might well become yet another footnote in the annals of economic history.

The Concert of Europe, Interrupted

By: Dr. Sam Vaknin

"(Plan for establishing) an economic organization ... through mutual customs agreements ... including France, Belgium, Holland, Denmark, Austria, Poland, and perhaps Italy, Sweden, and Norway".

The German "September Plan" to impose an economic union on the vanquished nations of Europe following a military victory, 1914

Europe spent the first half of the 19th century (following the 1815 Congress of Vienna) containing France. The trauma of the Napoleonic wars was the last in a medley of conflicts with an increasingly menacing France stretching back to the times of Louis XIV. The Concert of Europe was specifically designed to reflect the interests of the Big Powers, establish their borders of expansion in Europe, and create a continental "balance of deterrence". For a few decades it proved to be a success.

The rise of a unified, industrially mighty and narcissistic Germany erased most of these achievements. By closely monitoring France, the Big Powers were fighting the last war - instead of the three next ones. Following two ineffably ruinous world wars, Europe now shifted its geopolitical sights from France to Germany. In an effort to prevent a repeat of Hitler, the Big Powers of the West, led by France, established an "ever closer" European Union. Germany was (inadvertently) split and sandwiched and, thus, restrained.

To its East, it faced a military-economic union (the Warsaw Pact) cum eastern empire (the late USSR). To its West, it was surrounded by a military union (NATO) cum emerging Western economic supranational structure (the EU). The Cold War was fought all over the world - but in Europe it was about Germany.

The collapse of the eastern flank (the Soviet - "evil" - Empire) of this implicit anti-German containment geo-strategy led to the re-emergence of a united Germany. Furthermore, Germany is in the process of obtaining hegemony over the EU by applying the political weight commensurate with its economic and demographic might. It is a natural and historical leader of central Europe - the EU's and NATO's future lebensraum and the target of their expansionary predilections ("integration"). Thus, virtually overnight, Germany came to dominate the Western component of the anti-German containment master plan - while the Eastern component has chaotically disintegrated.

The EU - notably France - is reacting by trying to assume the role formerly played by the USSR. EU integration is an attempt to assimilate former Soviet satellites and dilute Germany's power by re-jigging rules of voting and representation. If successful, this strategy will prevent Germany from bidding yet again for a position of hegemony in Europe by establishing a "German Union" separate from the EU. It is all still the same tiresome and antiquated game of continental Big Powers. Even Britain maintains its Victorian position of "splendid isolation".

The exclusion of both Turkey and Russia from these re-alignments is also a direct descendant of the politics of the last two centuries. Both are likely to gradually drift away from European (and Western) structures and seek their fortunes in the geopolitical twilight zones of the world. The USA is unlikely to be of much help to Europe as it reasserts the Monroe doctrine and attends to its growing Pacific preoccupations. It will assist the EU to cope with Russian (and to a lesser extent, Turkish) designs in the tremulously tectonic regions of the Caucasus, oil-rich and China-bordering Central Asia, and the Middle East. But it will not do so in Central Europe, in the Baltic, and in the Balkan.

Of these three spots, the Balkan is by far the most ominous. Russia - as it has proved in 1877-8 - has historical claims there which it is willing to back militarily. Many of the nations of the Balkan are far closer to Russia than to the West and tend to regard the latter with suspicion and hostility. Turkey, if it so chooses, can easily assume the role of the protector of Balkan Moslems - sure to provoke Greek ire. A military conflict among two NATO members will constitute a body blow to the credibility and prestige of this alliance in search of an enemy. Moreover, Turkey is the prefect staging ground for operations in the Middle East, Central Asia and China. It constitutes a vital American interest and the pivot of NATO's southern flank. But it is derided by the EU, its NATO membership notwithstanding.

It is here, in the Balkan, that the New World Order and the End of History hypothesis are being tested. A new European balance of the Big Powers will emerge here. But hitherto, alas, this particular concert of Europe has been quite a cacophony.

The Eastern Question Revisited

A lecture organized by the daily "Politiken"

in Copenhagen, Denmark

June 25, 2001

By: Dr. Sam Vaknin

When the USSR disintegrated virtually overnight, in 1989, its demise was often compared to that of the Ottoman Empire's. This was a very lacking comparison. Turkey's death throes lasted centuries and its decomposition was taken to be so certain that its division and partition (the "Eastern Question") animated European geopolitics for the better part of two centuries. Yet, both left a power vacuum in the Balkan in their sorry wake.

The Big Powers of the time - Russia, Great Britain, France, Austria-Hungary, and the emerging Germany and Italy - possessed conflicting interests and sentiments. But, at this stage or another, most of them (with the exception of Austria-Hungary) supported the nationalist solution. It was Russia's favourite discussion topic, France espoused it under Napoleon III, everyone supported the Greeks and, to a lesser extent, the Serbs against the weakening Ottomans.

The nationalist solution encouraged the denizens of the Balkan to adopt national identities, to develop national myths, to invent a national history, and to aspire to establish modern nation-states.

The examples of Germany and, especially, Greece and Italy were often evoked. For a detailed treatment of this theme - see "Herzl's Butlers".

The competing solution was reform. The two Balkan empires - the Ottomans and Austria-Hungary - endlessly, tediously, and inefficaciously tinkered with their systems or overhauled them. But, to no avail. The half-hearted reforms often failed to address core issues and always failed to assuage the growing nationalist sentiment. It was a doomed approach.

Nationalist solutions were inherently self-destructive. They were mutually exclusive and strived to achieve ethnically homogeneous lebensraums by all means, fair and foul. The nation's genuine and natural ("historic") territory always overlapped with another nation's no less historic claims. This led to recurrent conflicts and to a growing sense of deprivation and loss as actual territories never tallied with national myths disguised as national histories. It also prevented the emergence of what du Bois calls "Double Consciousness" - the mental capacity to contentedly belong to more than one social or national grouping ("Afro-American", "Latino-American", "American Jew").

Thus, the Big Powers proffered a nationalist solution when a regional one was called for. Following two devastating Balkan Wars (1912 and 1913) and a World War (1914-1918), regional groupings began to emerge (example: Yugoslavia). The regional solution stabilized the Balkan for almost 7 decades (excluding external shocks, such as the combined invasions of Nazi Germany and fascist Italy).

Yet, the regional solution was dependent on both the existence of real or perceived outside threats (the USSR, the USA, Great Britain) - and on the leadership of charismatic figures such as Tito and Hoxha. When the latter died and the USSR evaporated, the region imploded.

The last two decades of the 20th century witnessed a resurgence of narrow geographical-political identities (a "Europe of Regions"). Countries - from the USSR to Italy to Belgium to Canada to Yugoslavia - were gradually reduced to geopolitical atoms: provinces, districts, regions, resurrected political units. Faced with the Yugoslav wars of succession, the Big Powers again chose wrongly.

Instead of acknowledging the legitimate needs, concerns, and demands of nations in the Balkan - they proclaimed two untenable principles: borders must not change and populations must stay put. They dangled the carrot of European Union membership as an inducement to peace. In other words, even as virulent nationalism was erupting throughout the Balkan, they promoted a REGIONAL set of principles and a REGIONAL inducement (EU) instead of a nationalist orientated one. Yet, as opposed to the past, the remaining Big Powers were unwilling to actively intervene to enforce these principles. When they did intervene feebly, it was either too late (Bosnia-Herzegovina, 1995), too one-sidedly (Kosovo, 1999), or too hesitantly (Macedonia, 2001). They clearly lacked commitment and conviction, or even the military ability to become the guardians of this new order.

The Big Powers (really, the West) would have done well to leave the Balkan to its own devices. Clearly its inhabitants were intent on re-drawing borders and securing ethnic homogeneity. Serbs, Croats, Bosniaks, Kosovars - were all busy altering maps and ethnically cleansing minorities. The clumsy and uninformed intervention of the West (led by the USA) served only to prolong these inevitable conflicts. By choosing sides, labelling, providing military and diplomatic succour, arming, intervening, cajoling, and imposing ill-concocted "solutions", the West internationalized local crises and prevented attrition and equilibrium - the prerequisites to peace. The West's artificial arrangements, served on the bayonets of SFOR and KFOR are unlikely to outlast SFOR and KFOR. Moreover, humanitarian military interventions have proven to be the most pernicious kind of humanitarian disasters. More people - Kosovars included - died in Operation Allied Force than in all the years of Serb repression combined. The Balkan is simply frozen in geopolitical time. It will re-erupt and revert to old form when Western presence is reduced and perhaps even before that.

The West should have ignored the Yugoslav wars of succession. But it would have done well to offer the combatants - Serbs, Croats, Albanians - a disinterested diplomatic venue (a benign, voluntary Berlin Congress or Dayton) to iron out their differences, even as they are fighting. The agenda of such a Congress should have included minorities and borders. There is no doubt that sporadic fighting would have punctuated the deliberations of such a congregation. It is certain that walk-outs, crises, threats, and break-ups would have occurred regularly.

But the participants could have aired grievances, settle disputes, discuss differences, judge reasonableness, form coalitions, help each other to multilateral give and take, and establish confidence building measures. With the West keeping all cards close to its chest, such a venue was and is sorely lacking.

With the exception of Imperial Russia, "stability in the Balkan" has always been the mantra. But stability is never achieved diplomatically. If there are lessons to be learned from history they are that diplomacy is futile, peacekeeping meaningless, imposed agreements ephemeral. War is the ultimate and only arbiter of national interest. Parties resort to peace only when they are convinced that all military or coercive options have been exhausted. When nothing further is to be gained by means of force and its application - peace prevails. But peace (as opposed to a protracted ceasefire) is impossible even a second before the combatants are struck by this realization. Equilibrium is never the result of honed negotiating skills - and always the outcome of forces matched in battle. Attrition, fatigue, a yearning for stability, a willingness to compromise - are all provoked and enhanced to the acutest level by bloodshed and atrocities. It is an inevitable phase. The road to peace is bloodied.

The Balkan has never been as politically fragmented as it is today. It has never been under the auspices of only one superpower. These are destabilizing facts. But one thing has not changed. The Balkan has always been the battlefield of numerous clashing and equally potent interests coupled with military might.