The Accidental Player: The EU and the Global Economy

Jean Pisani-Ferry, director of the European think-tank, Brugel, talked about the reasons for the EU's less than significant role in world economic affairs. At a recent lecture in New Delhi, Pisani-Ferry argued that the three Ds - disinterest, distraction and diversity - have led to a situation where the EU has not been able to fully  leverage its true potentia in the global economic sphere. He asserted that in future EU would have to play a more assertive role if it wants to be an effective world power. ICFDC.com's Chacko Philip reports.

Where does the European Union figure in the global economic order? This issue was raised recently at a lecture organised by the Indian Council for Research on International Economics (ICRIER) at Alliance Francaise in New Delhi by Jean Pisani-Ferry, director of Brugel, a European think-tank devoted to international economics. Titled, 'The Accidental Player - the EU and the Global Economy', Mr. Pisani-Ferry's paper was in response to a paper recently presented by ICRIER's director, Aravind Virmani, in which he had argued that by 2050 we would be moving towards a tripolar world and the three powers of reckoning would be the US, China and India. Dr. Virmani completely dismisses any major role for the EU in such a world order, and provides two reasons for his contention: the trend of declining population in Europe and the unlikely formation of a 'virtual state' in which nation states surrender power to a pan-European government.

Mr. Pisani-Ferry sought to reiterate that Europe cannot be ignored in the years to come. Europe has a significant share in the distribution of power in international economic and financial institutions. Taking into consideration the major economic and financial institutions in the world, EU is well represented and sometimes over represented. In the case of international institutions such as the Group of Seven (G-7), the OECD (Organisation for Economic Cooperation and Development) and the International Energy Agency, membership to these institutions is very Euro-centric. In the case of G7 finance meetings, the EU commissioner for economic and financial affairs and the finance minister of the country holding the EU presidency participate in addition to the ministers of finance of the four European member states (France, Italy, Germany and the UK). EU accounts for a significant share of the membership of  global institutions like the World Trade Organisation (WTO) and IMF. EU is represented by 26 member-states in WTO (25 countries plus EU as a separate entity) out of 148 members and in the case of IMF 25 out of 184. In fact, the voting weight of EU in the WTO would constitute almost 30 percent. If the EU countries form a coalition, in the case of IMF, then they would be the dominant power in the IMF with a voting power index of 48 percent. In the case of financing the various international institutions, EU member states provide between 30 per cent and 40 per cent of the funds. In addition to having two development banks of their own (the European Investment Bank and the European Bank for Reconstruction and Development), the EU participates in the African, Asian and Latin American regional development banks.

Pisani-Ferry's paper also looked at the issue of whether the EU makes use of its institutional power to shape the architecture of the multilateral system to determine the agenda of the discussions to broker deals that correspond to its objectives and to influence decisions. For addressing these questions he took into consideration three domains: international trade, exchange rates and macroeconomic surveillance and international finance.

Trade:<-span> The EU is without a doubt a major player in international trade negotiations. It has clearly stated priorities and the ability to push for them. Along with the US, it has steered the successive international discussions on multilateral trade liberalisation. The EU is also the inventor of trade regionalism. It is itself a regional bloc and has actively promoted the creation of regional trade arrangements.

International macroeconomics:<-span> There are many reasons why EU is a key player in the international macroeconomic scenario. First, Europe has made a major economic and institutional investment in the creation of a common currency (the Euro) and the setting up of supporting institutions. Second, having a common currency has strong implications for policy-making. It implies that the BoP (Balance of Payments) and the exchange rate become collective goods and must therefore be managed jointly. Third, the EU still accounts for one-third of world GDP at current exchange rates and one-fifth at PPP (Purchasing Power Parity) exchange rates. Its main currencies, the Euro and the Pound Sterling, rank number two and four in international currency transactions. While pointing out these facts, Pisani argues that the EU has undoubtedly a major stake in the international monetary system.

International finance:<-span> The EU has been an active part of the discussions within the G7, the G20, and the Breton Woods institutions.  But it has never pushed for radical new ideas; it has often responded to new developments, slowly adapting to events and adjusting to new proposals. In many instances in the IMF and World Bank decisions, the US has always played a lead role, while the EU has not used its potential strength fully. Many a times the EU's effective role does not seem to be commensurate with its representation in the Breton Woods organisations.

Even though the EU does not use its institutional power to its full potential, Pisani argues that there are two main reasons for this: disinterest and distraction. Europeans seem reluctant to be excessively involved in world governance and would rather have a free-ride on a presumably benevolent US hegemony. The other reason could be that they are preoccupied with their domestic and regional affairs. There seems to be some truth in Pisani's argument that most EU member-states are 'disinterested' in changing the world. Many of the member states are small countries and this could be a key reason for their disinterest. Since the mid-1980s, Europe has been dealing with the process of EU enlargement. And therefore, the 'distraction' may well be a temporary phenomenon. Not all member countries share the 'small country culture' and as EU, as a single entity, enlarges it could well be preparing to play a larger role in world affairs.

The third reason that could perhaps explain the EU's less than significant role as a major player in world affairs is the Diversity issue. The EU member states continue to be divided due to the differing agendas of each of the countries within the EU entity, leading to dysfunctional governance. With an increasingly diverse EU, there are differences among EU member states on a variety of issues ranging from functioning of labour markets to the significance of domestic political institutions. And therefore it is not unreasonable to believe that this diversity also impacts economic issues. The EU has put in place very complex and diverse arrangements for organising its international economic and financial relations with the rest of the world. Often responsibility is divided between member states and they only endeavour at coordinating their views. It could thus be the inefficiency of some of its governance mechanisms that prevents the EU from playing the role it could play, Pisani-Ferry argues.

At this point Pisani-Ferry agrees with Virmani. The reason why the EU, despite being a large entity, has not been able to leverage its power to its full potential may have something to do with the degree to which member states are ready to accept a federalisation of international economic policy. Pisani-Ferry concludes that the main issue for the EU is to resolve the internal redistribution of power. However this is hardly a valid excuse for inaction he says, unless the EU wants to demonstrate that it does not deserve the power it has.