Financial Restructuring in the Age of the Euro, in The State of the European Union: With US or Against US? European Trends in American Perspective. Vol 7, edited by Nicolas Jabko and Craig Parsons, Oxford University Press, 2005. pp. 219-251.

President Hollande has just attended his first European Council meeting, where he has conveyed his view that the EU should engage on an ambitious growth policy, the heart of which he suggested should be that all Euroland member states underwrite their debts through the issue of Eurbonds. Chancellor Merkl disagreed: for her,fiscal discipline must come first; the joint underwriting of EU member state debts through the issue of EU eurobonds should be the final step after the creation of an EU federal state.

Meanwhile, German policy in the EU is predicated on the reality of Europe as home to diverse nation states, of which Germany is primus inter pares. As the Constitutional Court opined, the EU is a Staatenbund, an alliance of states, and not a Staatenbund, a federation. It follows that nation states have to get their own house in order.

In short, Germany is behaving as it always has, giving prior consideration to its national economy. In the past, Germany enveloped its mercantilist domestic policies in a thick veneer of EU-speak. Other countries, of course, did so too. The novelty is that over the past year, Germany has no longer bothered to conceal its hegemonic position in Euroland. Germany’s huge current account surplus, 60% of which is with Euroland, is because German workers make goods people want to buy. Germany cannot lend money to sustain such consumption. So debtors have to shape up, cut budget deficits, compress their wages, and liberalise their labour, product and financial markets. Virtue, the message is, is earned, like Germans, by high work standards and saving.

This chapter, written before the 2008, crash, argues that “the battle of the (national) systems” between the member states was alive and well, even though the Euro was in place.  This came as a surprise to many people who believed that the EU was embarked on a post-modern path, where national differences would fade away as powers accrued to “Brussels” The only statement I would add is that the Euro has aggravated the struggle, and not dimished it, as President Mitterrand had hoped. More than  ever, traditional European power politics is visible under the veil of EU integration. Here are the opening paragraphs: a url version of the chapter is below for your reading, if you wish.

Financial Restructuring in the Age of the Euro

On January 1, 2002, eleven countries in the EU adopted Euro-notes and coins for retail use, thereby taking the EU a step closer to business conditions in the US. Yet implementing corporate strategies across Europe is still heavily conditioned by different national jurisdictions, which have generated distinct institutional configurations. These configurations represent bundles of norms–freedom, efficiency, justice or security—and their distinctness resides in which predominates: in the US, liberty; in the UK, utility; in France, justice, or in Germany, security. The particular mix of liberty, efficiency, justice or security arrived at over a lengthy period in any one jurisdiction also produces unintended consequences. These different mixes, with their intended and unintended consequences, were supposed to fade away, due to market competition between them or EU and global regulation over them. This has not occurred, as underlying differences between jurisdictions have not been eliminated , and competition in market and political arenas between corporations rooted in different member state jurisdictions remains a defining characteristic of Europe. The “battle of the systems” within the EU is as lively as it ever was, if not livelier.

My theme is that one of the prime reasons for divergence in the style of trans-Atlantic relations from the past—notable not just over Iraq, but over the litany of differences regarding the environment, intellectual property rights, export subsidies, or GM foods—is the implicit convergence in policy priorities across the Atlantic resulting from the intra-European politics leading to monetary union, and the successful launch of the Euro. National calculations drove the EU to a single currency and a single capital market, and national calculations continue to prevail in the market for corporate assets after the Euro’s introduction. Europe is not converging on a single capitalism, but the many forms it takes are all subject to similar forces. There is convergence in the processes at work in the world and in Europe—the complex processes often summarised as “globalisation”—but there is continued divergence in the national structures which endure,  restructure and shape them.

The Euro is a prime example of active “globalisation”. It is a creation, an act of will by the participant states using Europe’s more traditional and also newer instruments of diplomatic statecraft. This makes the politics of before and after monetary union very different to what the politics of monetary or financial market politics would be in the US. In the US polity, class or religious distinctions form the sociological bedrock of  pluralist politics in a federal system, much as they do in the domestic politics of European states. In the European polity, the salient feature is diplomacy, an updated version of which is the European Union. There were two prime sets of motives behind setting up monetary union, one being to stabilise the interdependent European economy operating in a multi-currency system, where the dollar and the DM called the shots; the other motivation was to prevent the emergence of a united Germany as the unequivocal potential leader of Europe. Class politics was present before and after the Euro’s creation, but in significantly different ways. Before monetary union, class politics was played out  in the highly developed welfare institutions of the European member states, interacting one with another through the price mechanism whose central components were interest and exchange rates. Germany ruled the roost, so that German macroeconomic preferences, being closely tailored to Germany’s micro-economic arrangements, took precedence over those of most other states in the EU and beyond. After monetary union, national politics continue to prevail but achieving near full employment in the Euro-area requires creating Europe-wide labour, product and service markets. National welfare states and a single currency and capital market are not necessarily antagonistic, but they are not comfortable bedfellows.

Using Neil Fligstein’s terminology,[i] efficiency is socially constructed rather than constructed by markets, and monetary union—as a formidable promoter of efficiency in Euro-land markets—is eminently a social construct. The argument here is that French policy of embracing Germany in the European Union is only to be consummated through the adoption of policies heavily biased in a neo-liberal direction at the level of the Union in order to end the impasse created for the European economy by the co-existence of national mercantilist policies. In this often conflictual co-existence, Germany came to predominate through the DM, sustained by its powerfully integrated business system.[ii] German unity–Chancellor Kohl, President Mitterrand, Commission President Delors feared–,  would consolidate German primacy, and the solution they reached—the creation of a European Central Bank along Bundesbank lines—definitely addressed their shared concern.[iii] The DM is no more, and Germany is far from dominant in the EU. But this eminently political act to establish a single currency, and with it, a capital market denominated in Euros, creates a structure of incentives which points to an unravelling of significant features of national business systems—notably, national cross-shareholdings, clubby corporate governance arrangements,  patient bank finance, or protectionist national labour market practices.

Monetary union thus reinforces competitive pressures running through global markets, while reducing the EU’s collective vulnerability to global exchange rate shifts. By the same token,  monetary union deprives member states of the interest and exchange rate tools, and in addition, substitutes a national capital market  for a European capital market. France or Germany are that much more like Texas or California in the US. But they also, like other member states, carry a long, national legacy. The interplay between national legacies and the new monetary and capital market regime is what “the battle of the systems” in updated form [iv] is all about. But first some brief definitions.


About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) ( His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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