CIAO DATE: 02/02

U.S.-EU Relations after the Introduction of the Euro and the Reinvention of European Security and Defence

Pál Dunay
Director, International Training Course,  Geneva Centre for Security Policy

Joint Workshop on Europe and Transatlantic Security: Issues and Perspectives
Kandersteg, Switzerland
August 25-27 2000

The Geneva Centre for Security Policy

Introduction

The current phase and the prospects of U.S. - EU relations can be analysed from different vantage points. The most logical is to deal with the position of the main actors, the United States or the European Union. This paper makes an attempt to analyse the prospects of U.S. - EU relations in light of two major developments: the beginning of the third phase of the economic and monetary union, symbolised by the introduction of the Euro and the verbal (re-)establishment of European defence. The paper makes an attempt to pay attention to the arguments of the United States, though the emphasis is on the European perception of the possible complications of the new phase of evolution that European integration may generate in the relations between the two entities.

The relationship of the U.S. and the European Union (and its member-states) is the single most important international affair for the coming decade or two at least. Suffice it to mention that five members of the G-8 belong to this grouping. Three of them are among the five permanent members of the UN Security Council, and - irrespective of its composition, the majority of the Contact Group is composed of them. The two represent the largest trading entities of the world and their economic relations, trade and investment combined, represent 1,400 billion USD per annum (1998). The collective gross domestic product (GDP) of the EU now rivals that of the US. There are some other actors of international relations that have major bearing upon world affairs. Due to their not entirely harmonious internal development (lack of economic prosperity and stability in Russia, absence of democracy in the PR of China) the chance that either of them could influence world affairs in the coming decade to the extent the two players mentioned above could is negligible.

If one takes a closer look at the evolution of the EU, it can be concluded that there have been two important characteristic features. 1. The EU has evolved with an uneven speed. There are phases when the organisation takes major steps forward and then consolidates its achievements. The Maastricht Treaty, establishing the three pillar union, is an example of the former, the Amsterdam Treaty, half a decade later, is an example of the latter. 2. The EU and its predecessors have never given up any ideas on the agenda of the organisation, even though some of them have been floating around for several years or decades. Suffice it to mention the idea of common defence, embodied in the European Defence Community in the first half of the 1950s and at the dawn of European integration, or that of the single currency, originated at the beginning of the 1970s. Ideas emerge in order to submerge for some time and then to re-emerge again. This fact makes the activity of the organisation predictable on an abstract level. An analysis of these ideas, such as the harmonisation of tax levels or the introduction of direct EU taxation, just to mention two, gives an idea as to what will sooner or later appear on the official agenda of the Union. The concept of the final stage to be achieved by the Union certainly belongs to this, though on a higher level of unpredictability as far as its outcome.

Currently the agenda of the Union is heavily loaded with demanding items. The reform of the institutions, the achievement and consolidation of the third phase of Economic and Monetary Union, the deepening of co-operation in justice and home affairs, putting European security and defence policy (ESDP) into practice, the increased number of member states from 15 to well above 20, the engagement of countries far from mature for membership, the stabilisation of some peripheries in the vicinity of the Union, primarily on the Balkans, are major examples. Nearly a decade after the three pillar Union was established by the Maastricht Treaty, its implementation has started to expand to each of the three pillars. The existence of the framework updated in the Amsterdam Treaty, among others - though not exclusively - through the incorporation of the so-called Petersberg tasks defined in 1992 by the WEU Ministerial Council, has certainly made progress towards ESDP comparatively easy.

When the agenda is so heavy and complex it is extremely important to set the priority right. This unavoidably leads to another round of discussions concerning "the final stage" of the process of European integration. It follows the same structure as in the past, most recently in the early-1990s at the time of the adoption of the Maastricht Treaty. Theological references to the ideas of the founding fathers, citations from Monnet and Schuman usually in support of the arguments presented on the topical problems and the prospects of the EU, and then certain visions about the longer term perspectives of the Union. The signal this time came from the German foreign minister. Fischer, while emphasising that he was delivering his address in an unofficial capacity, mentioned several elements of the further evolution of the EU that are probably close to the position of the federal government. Without giving an extensive account of Fischer's speech it is important to emphasise those elements that are directly related to the topic of this paper. These are the following: First, the asymmetry between the level of integration of the economy and that of politics: "A tension has emerged between the communitarization of economy and currency on the one hand and the lack of political and democratic structures on the other, a tension which might lead to crises within the EU if we do not take productive steps to make good the shortfall in political integration and democracy, thus completing the process of integration." Second, the tension between the integration of the economic sphere and security has increased with the advent of the third phase of monetary union: "For how in the long term can it be justified that countries inextricably linked by monetary union and by economic and political realities do not also face up together to external threats and together maintain their security?" Third, the further deepening of European integration must be based on differentiation. There are many competing visions in this respect. His idea is that an "avantgarde" is to be formed that must not be exclusive. It can be based on the "federation of nation-states" or a "core Europe" can be created. It is clear, Fischer's preference is to build this avantgarde around "the further development of Euro-11 to a politico-economic union", however. Fourth, the basis of the centre that will form a federation is a constituent treaty. The federation will not erase the nation-state, as this continent (apparently in contrast with the United States - according to Fischer) is "full of different peoples, cultures, languages and histories".

The answer came from the French President, no doubt in his official capacity, a month and a half later. In his speech at the Bundestag, Jacques Chirac put the emphasis differently. In order not to take issue directly with Fischer's vision, he argued that "it cannot be said for the time being how this future Europe will look like". His position differed from Fischer's in many respects nonetheless: 1. The emphasis is far less on the synchronisation of the level of economic and security integration. His emphasis is on the institutional development in the short run - understandable for a head of state whose country was due to take over the EU presidency in a few days. 2. The co-operation is to deepen in each of the three pillars, rather than in order to harmonise the depth of integration between the first and the second pillar. "Improvement of the co-ordination of economic policies, strengthening of security and defence policy as well as guaranteeing a greater efficiency to fight criminality." 3. Chirac has furthermore rejected the permanent separation of a core (or avantgarde) group from other member-states. This group should rather play the role of "preparing the way" for further deepening integration, with France and Germany at its core. In this respect Chirac did not attribute any importance to the Euro-zone as a potential core of the Union. 4. As there is far less differentiation than in the other concept, the legal basis is not a "treaty in a treaty" for the core. It is a "European Constitution" for the entire Union.

While ranking statesmen discussed the issue, economists felt the need to call attention to the fact that for "the foreseeable future, any further ambitions for future political integration will have to be founded on a sound, successful economy. Above all, monetary union must not fail. ... Given the challenge of enlargement, economic success is a necessary condition for progress towards further political integration." An important reminder to those who take economic integration for granted and turn their attention away to politics. If one compares the above statements, the conclusion can be drawn that they are based on different time horizons. Fischer goes back to the political roots of European integration and is of the view that the concept de finalité should serve as compass of the objectives. He, no doubt, takes the longest perspective. Chirac is taking a shorter time span and a different basis to approach the future of the Union. Issing starts from the assumption that even though the foundations of European integration were political, the EC/EU has mainly evolved on the side of the economy. It was thanks to the success of economic integration that everything was built upon in the EU. Successful economic integration shall continue as the condition of integration in other areas. One may call this the "long detour". There is no reason to change this in the future either. The three positions represent three different approaches to integration. Fischer is taking a high political, Chirac a constitutional, Issing an economic approach to integration. A few months later Fischer showed some understanding to Chirac's arguments. He realised that a clearly federative agenda cannot count on the support of many member-states. He was of the view that by the end of the decade the EU "Will not be a clear federal state. ... [w]ill have federal elements, but will also carry elements of a confederation".

If one takes a look at the U.S. side, the conclusion that largely determines its relations to the world at large is its early and easy adaptation to the fundamentally changed structure of international relations. Not much after the end of the East-West conflict back in 1992, President George Bush clearly said: "... we are the United States of America, the leader of the West that has become the leader of the world". This tenet has dominated U.S. foreign policy since the end of the Cold War without too much variation. Washington rightly concluded that in "every era of human history, modernity ... has meant the ways, norms, and standards of the dominant and expanding civilization. Every dominant civilization has imposed its own modernity in its prime." International relations in the post-Cold War era have no doubt been dominated by liberal, industrial democracies. The U.S. has been satisfied with this. Where Washington seems to have lost track is that it has continued its unilateral domination that was based on the need of cohesion during the Cold War. It came to the conclusion that the opinion of like-minded countries does not matter much. The U.S. wanted to have a democratic system only to the extent in which the views of other major players coincided with its own. In sum, we have arrived at a system of democracies without having a democratic system of international relations. It seems that a growing number of western European democracies have this perception and primarily attribute this shortcoming to the United States. This may have long term repercussions.

From CFSP to ESDP and some concerns in the United States

The facts are overwhelmingly known. The EC/EU, after having struggled for three decades with the idea of a loosely defined common foreign and security policy, seems to have taken a decisive step. The change started with a bilateral declaration issued in St Malo in early December 1998 by the British and the French leaderships. Formally, it was issued in anticipation of the entry into force of the Amsterdam Treaty. It was not to anybody's surprise that France had embarked upon building "the progressive framing of a common defence policy" and "the capacity for autonomous action, backed by credible military forces ... in order to respond to international crises". It was a far bigger change that the UK was ready to accept such a formulation. Furthermore, London has endorsed those multilateral documents that the EU Council adopted between June 1999 and June 2000. Those documents have specified the need to create the conditions for putting European defence policy into practice.

The more recent EU documents seem to have overshadowed the beginning of the change, the circumstances in which the bilateral St Malo document came about. It is extremely important to know what was hiding behind the change of British policy. It would also be important to have an idea of what role the U.S. played in the matter, if any. There is little solid evidence available, yet. According to my impression it is important to make a difference between long-term tendencies and short lived developments.

The United Kingdom has not been an enthusiastic supporter of the European integration process, particularly not when it carried the danger of constraining the sovereignty of the member-states. The closer one got to the traditional core of sovereignty, the stronger the British opposition was. When the Labour government was formed, the British leadership noticed it faced a certain marginalisation in Europe. To put it differently, the contribution of the UK was smaller than one would assume from its great power status. European affairs were dominated by Bonn and Paris. There were two (more recently three) areas where the UK did not go along with the evolution of the Union in the last decade: 1. The introduction of the third phase of the Economic and Monetary Union, the Euro; 2. The common foreign and security policy; and 3. The implementation of the Schengen regime. The unaffordable political costs did not make a revision of the earlier British position possible in the first and the third areas. The situation was different in common foreign policy, including defence, for three reasons: 1. The evolution of CFSP and ESDI were lagging so heavily behind other areas that even major steps could not be regarded to have gone too far. 2. The contribution of the UK to the conflicts in the post-Yugoslav area was so significant throughout the 1990s that it could be regarded as an example. Britain could be mentioned as a country that takes responsibility for conflict resolution internationally. 3. The U.S. has for some time encouraged its European partners to take more international responsibility and share more of the burden. It remains to be seen whether these reasons are strong and lasting enough to have modified the evolution of the second pillar of the European Union from a policy of declaration to one backed by capabilities.

The Amsterdam Treaty incorporated the so-called Petersberg tasks, adopted by the Ministerial Council of the WEU in 1992. Accordingly, the list consists of "humanitarian and rescue tasks, peacekeeping tasks and tasks of combat forces in crisis management, including peacemaking". Irrespective difficulties of interpretation, particularly with respect to the content of peacemaking, it is clear that the EU has not gained any traditional defence task in Amsterdam. After the entry into force of the Treaty, Mr CFSP was appointed and the visibility problem of CFSP has been reduced, though at the price of further complicating the institutional structure of the Union, and eventually creating certain rivalries between those who formulate EU policy.

The war against Yugoslavia in order to reintroduce elementary human rights in Kosovo gave an important signal to Europe. For 60 per cent of U.S. defence appropriations Europe had far less than 60 per cent of the operational capability of the U.S. Eighty per cent of the air sorties were carried out by the U.S. air force, not to mention the asymmetry in real time intelligence.

The Cologne European Council in June 1999 allowed the EU to take on direct defence competence, but only in the field of crisis management as defined by the Petersberg tasks. It was the Helsinki Council in December the same year that represented a certain breakthrough. It agreed in particular that to "[cooperate] voluntarily in EU-led operations, Member States must be able, by 2003, to deploy within 60 days and sustain for at least 1 year military forces of up to 50,000-60,000 persons capable of the full range of Petersberg tasks". The next regular European Council meeting in June 2000 did not add too much to the former. It reaffirmed the commitment of the member states to meet the headline goal target agreed in Helsinki. Whereas EU member states were anxious about their ability of military conflict management, if necessary together with the U.S., they identified a related non-military shortcoming that was known to experts for quite some time. "... Member States, co-operating voluntarily, have undertaken that by 2003 they will be able to provide up to 5,000 police officers for international missions across the range of conflict prevention and crisis management operations. Member States have also undertaken to be able to identify and deploy up to 1,000 police officers within 30 days." This is a useful addendum to the headline goal adopted in Helsinki closing an important capability gap in post-conflict settlements.

The U.S., at least on the high political level, has been facing a new situation. The European security scene has been set in motion again. The EU now aims - or at least declares its willingness - to have a fully operational three pillars foundation. An element of the so-called European security architecture, the WEU, in fact ceased to exist. The evolution of European security and defence policy coincided with some developments in transatlantic relations that made the U.S. suspicious. 1. There is no common external threat that would be present as a unifying force. The Soviet threat is gone and no other one is sufficiently severe to provide cohesion. 2. The importance of economic relations has declined. 3. A change of generation is under way in many European countries, including key ones. The new, post-World War generation may be less strongly committed to the idea of an Atlantic community. One may say the post-Cold War era "started to bite" and has required a change to the transatlantic agenda.

The tone was set by the U.S. Secretary of State who outlined her three "no-s" concerning ESDP. ESDP should not result in de-coupling, duplication or discrimination. In light of the constraints of the European project outlined above, one may guess whether the U.S. leadership based its assessment on facts or whether it was taken hostage by its perception of the potential ESDP might carry in case further decisions were taken. Formally, European NATO member countries have veto rights and may thus be able to bloc the decisions of the Atlantic Alliance and de-couple from it. They have always had it. Consequently, perceiving ESDP as the source of change does not hold water. Bearing in mind the absence of any existential threat, a gradual disengagement shall not be excluded, nevertheless. One should seriously consider, however, whether the U.S. should not start paying more attention to the concerns and reservations of Europe, when considering the most appropriate means to address a regional conflict - particularly in Europe and its periphery. Hence, I think the potential that Europe will have at least the chance to be a bit more self-reliant and have a slightly more solid ground to express its opinion in international politics is not necessarily a disadvantage for the functioning of the international system. It might reduce the tendency of U.S. unilateralism. The same goes for discrimination. As long as the transatlantic link continues and the parties on both sides are confident that "neither the US nor Europe threatens vital or important interests of the other side" power relations will prevent discrimination against non-EU member NATO states. Duplication appears on a different level. Whereas de-coupling and discrimination would undermine transatlantic relations politically, duplication is largely a technical concern of the U.S. Currently Europe depends militarily on the U.S. in many respects. Strategic intelligence and long range transportation are only two examples. There are experts in Europe who argue that a difference must be made between necessary and unnecessary duplication. The consideration seems to be missing in the U.S. that may be of the view that duplication is generally unnecessary. Beyond the narrowly defined matter of duplication, the U.S. encourages its European allies to increase their defence appropriations, among others to modernise their arsenals. The U.S. would probably be unhappy if the Europeans decided to implement this by buying each other's products rather than continue to buy American ones.

The emergence of a European Security and Defence Policy does not put the U.S. establishment at ease even though there are certain welcome elements in it also for Washington. Recently, the U.S. started to emphasise those factors that it welcomes and pushed the list of reservations to the backburner. The positive assessment given by the U.S. Secretary of Defence in October 2000 may be surprising to many and certainly represents a departure from the earlier approach. There might be several different considerations behind it. The most important is that the U.S. could notice that the European Union project has limited aspirations and does not endanger the leadership role claimed by the U.S. A Europe that may be able to take more responsibility in its own peripheries may relieve the U.S. and make it possible that Washington would focus on other regions. Furthermore, the U.S. may interpret (rightly so) that ESDP has increased its freedom of action. Namely, after 2003 the U.S. maybe in the position to decide on a case by case basis in the management of which conflicts in and around Europe it wants to get involved in and when it would be leaving this for the EU countries. In light of the limited operational capability the European Union will develop, this is the most severe danger of the project. The U.S. will enjoy a position in which it can arbitrarily decide when to help Europe and when not to. As the current defence capability package based on the target goals of the Helsinki Council will be suitable to address only the lower echelons of crisis management, the illusion of a European defence capability may result in a situation in which higher intensity cases will not be adequately addressed by anybody. One can give credit to William Cohen when he states: "The notion that Europe must begin to prepare for an eventual American withdrawal from Europe has no foundation in fact or in policy." It does not mean, however, that the U.S. noticing a more autonomous European defence capability will not start to disengage gradually from European affairs. It is another welcome development for the U.S. that ESDP may well increase the defence capabilities of its European allies, and involve those NATO countries that are not members of the EU. Thus the two most important organisations, the EU and NATO, will have more to do with each other than heretofore.

NATO Secretary General Lord Robertson, following Madeleine Albright's famous three "D"-s, has invented his less negative "three I"-s on ESDP. These are "the indivisibility of the transatlantic link; the improvement of European capabilities; and the inclusiveness of all allies in Europe's defence policy" to replace the three "D"-s. There will no doubt be tensions between the U.S. and Europe in the process of implementation of ESDP, particularly if the U.S. continues to see the project with suspicion. The literature seems unanimous that it is not only the Europeans who should follow the changes of U.S. perception attentively. It is also necessary that Washington understands that "the Cold War bargain struck between a recovering Europe and a hegemonic America is fast wearing thin ... If the Atlantic link is to be maintained, the US and Europe must be prepared to strike a new and more equitable deal. Leaders on both sides of the Atlantic must face this reality..."

If we go beyond the self-evident advantages of ESDP for Europe and try to understand why the United States should find it advantageous the following can be drawn. Bearing in mind that Western Europe is the partner of the U.S., that shares most of the fundamental values it has declared, it may be to the benefit of the new "uni-pole" to have a critical partner that does not challenge it. One may call this "Europe as a reality check". Europe may also be the partner that represents "a new concept of power" combining military and non-military factors of security. This would be particularly to the advantage of the U.S. in those cases when the U.S. as "trigger happy sheriff" may be tempted to rely on military force prematurely or unnecessarily. Last, but not least - as was mentioned above - Europe may be a somewhat better security producer or security provider in its own ambit with ESDP than without it.

In the preceding paragraphs an attempt was made to identify some of the issues that have to be watched closely in order to avoid certain problems in transatlantic relations. Those who present the above arguments start out from the idea that the ESDP project will be a success. No doubt it will, to the limited extent adopted in Helsinki. There can be serious doubts, however, whether those tacit expectations going way beyond the Helsinki agenda present in some European capitals may be realised. According to my impression the U.S. position has gradually changed. It started with a "yes, but" attitude in Washington, started to move away from it and I am afraid that it will gradually move to the expression of reservations, in case attempts are made in Europe to put more ambitious European defence plans into practice.

One has the impression that there is a certain fault line in the debate that surrounds U.S. reaction to ESDP. Issues are discussed as if the Union could be characterised as a supranational entity. This does not seem founded, however, particularly not in foreign and security policy. Whenever the U.S. takes a more elaborate negative position about the European project it will most probably be in the position to bloc or constrain it with the assistance of some pro-Atlanticist members of the EU. That is why the role of the UK was so important not only in 1998 but may be decisive later as well. There may be other reasons to put the project to a halt. The glorious feeling of any major EU member-state indicating that this is the ultimate project to liberate Europe from U.S. tutelage may have the same effect. So many other members of the EU may feel alienated by such an approach that could put the modest continuation of the project at a halt. In sum, the will of EU members will generally affect the prospects of ESDP. Furthermore, if a major external player, e.g. the Russian Federation, gives the impression that Europe without the U.S. is a better place, the determination of the EU member countries to carry European defence into effect may quickly vanish.

The EU does not face any measurable military threat nowadays. Under these conditions it is difficult to sustain its major efforts to upgrade defence. European countries may of course implement their project so that they assign those military units that have already been participating in international missions as part of the European force. It can be done by "double- or triple hatting". In this case the project can be implemented easily. Unfortunately, it would not contribute to the military power of Europe. Public support to put a more ambitious plan into practice may dry up quickly.

It seems that expectations concerning the future of ESDP have been exaggerated both as far as its prospects and its inherent risks. It will most probably continue as a project confined to regional conflict management. Bearing in mind its limited scope it will not put U.S.-European relations at risk. The fact that it ought not to interfere with the bilateral relationship, objectively does not mean that it will not result in complications due to misperception, inexperience or change of interests of one party or the other. It can be used as an excuse, for example if those forces that favour disengagement from Europe gain upper hand in the U.S.

The Introduction of the Euro and Its Impact on U.S. - EU Relations

When the idea of a common European currency was codified in the Maastricht Treaty, and the Madrid Council of the Union decided that the third phase of EMU, identified with the Euro, would begin in January 1999, speculations arose about the world-wide repercussions of the new currency. Interestingly, the atmosphere reflected overwhelming enthusiasm in political circles. The question most often asked was whether the Euro will become a global reserve currency that will replace the US dollar. Discussions on the political repercussions were derailed for instance by an article which predicted that the "conflicts over economic policies and interference with national sovereignty could reinforce long-standing animosities based on history, nationality, and religion". A year and a half after the introduction of the Euro and similarly eighteen months before the Euro bills and coins appear in those 11 EU member-states that joined the Euro-zone (and Greece that will join in the beginning of 2001) it is better to base the assessment of this phenomenon on reality.

The United States officially welcomed the launch of the Euro. President Clinton, on the first business day after the launch of the currency, reiterated the well-known supportive position of the U.S. administration: "A successful economic union that contributes to a dynamic Europe is clearly in our long-term interest." It was difficult to hear any even ambiguously dissenting remark from official Washington. The furthest one could get was a reference to the need to prevent that Europe would rely on export-led growth. For the U.S. it was most important to maintain the balance with the EU on a high level both in trade and investment. Unofficial America was more critical of the project and regarded the Euro as a challenge. Except for a few extreme opinions, the fundamental dilemma was correctly formulated: "American conventional wisdom about Europe reflects serious thought about the particular issue of EMU ... For nearly fifty years it has been an article of faith for Americans that European division is a bad thing, the cause of wars; that Europe should be urged to integrate; and that a federal United States of Europe, created in emulation of the United States of America, would be the best outcome of such a process of integration." Here, just as in the case of ESDP, the question emerges whether the fundamental assumption is still correct and whether it is still good for the U.S. if Europe integrates further.

Beyond the political rationale, the question emerged whether or not it is good for the U.S. economy if its unchallenged reserve currency faces a challenger. Fred Bergsten, in his article published the day the Euro was launched, highlighted "the other side of the coin" and concluded: "It may well be the challenge, gradually reducing the reserve currency role of the US dollar, put its economy under pressure, and represent a further incentive to reduce budget deficit, the double digit inflation and can even result in the elimination of its foreign trade deficit." It is common sense among economists that the advantage of the U.S., based on the fact that its currency forms more than 60 per cent of the world's currency reserve, does not represent a major advantage, except for receiving an interest free credit from everyone who holds currency outside the U.S. in USD. In the absence of another similarly trusted reserve currency, it is highly unlikely that a big portion of these reserves would suddenly move into another currency. Consequently, the interest free credit is provided in the long run. It may well be more important that the trade of certain strategic commodities, e.g. crude oil, is denominated in USD. This would eliminate the risk of currency fluctuation for the U.S. and would maximise it for other currencies, including the Euro.

It is important to briefly analyse what has happened after the introduction of the Euro, even though the short time period passed makes the drawing of definitive conclusions impossible. It was expected that no landslide change would occur in the world currency markets. It was believed that it would take time to build up the credibility of a new currency, even though it could partly be derived from the credibility of the composite currencies. Not to mention how well known it was that the Euro was overvalued vis-à-vis the US dollar when it was launched. As long as it could be expected that the Euro would lose value it would have been illogical to move currency reserves into Euro. The nearly 30 per cent loss of its value in the first less than two years has compensated for this more than twice. It is an important change in the world currency markets that the number of those currencies that may play a major international role has been further reduced by the introduction of the Euro. As the pendulum could only swing between the US dollar and the Euro in the world market marginally affected by some other major currencies, it has been in the interest of neither side to have an undervalued Euro. It boosts European exports to the United States that may undermine the long-term trade balance between the two. The U.S. certainly does not want to have another region in the world, in addition to the Far East, where it faces severe trade deficit. It is for this reason primarily that the U.S. monetary authorities joined their Japanese counterparts and the European Central Bank "in concerted intervention in exchange markets because of their shared concern about the potential implications of recent movements in the Euro exchange rate for the world economy". The buying of Euro and selling of USD in the world market has stabilised the value of the Euro only temporarily. It has given an important symbolic indication, however, that the three major financial centres are not reluctant to carry out concerted action in order to protect one of the major currencies. Not much later the value of the Euro continued to fall again in anticipation that the same action will not be repeated any time soon. The fact that the U.S. capital market is larger than the European one also means that it was unfounded to assume that a major shift would take place in the capital markets.

Beyond the factors mentioned above, it is extremely difficult to analyse the situation, as the U.S. economy and the Euro-zone is not in the same phase of the business cycle. The U.S. economy is on the top of its longest economic boom since World War II whereas the 11 European countries have imported major unresolved economic problems when they joined the Euro, as far as both growth and employment are concerned. The situation might change in the mid- to long-term, though definitely not before. Interest rate policy can only marginally influence the situation. It would be far more important to attract capital investment in Europe in order to carry out the necessary structural modernisation.

There is an important symbolic element in a common currency. It is inescapable that the Euro will thus contribute to the further deepening of European integration. For the foreseeable future the Euro is established as a regional currency that leaves, for many years to come, the global role of the US dollar without a challenge.

Conclusions

It is a historical tendency to overestimate the complexity of the current situation and assume that it is far more difficult than in the past. The relationship between the U.S. and the EU are certainly going through a post-Cold War redefinition. A decade after the end of the East-West conflict both sides are aware that the old clichés are not applicable any longer. No external force can provide those existential strategic interests that would automatically hold the two together. There are major common interests, however.

It is easy to consider the U.S. responsible for the occasional problems in bilateral relations. The unilateralist approach to many international issues has gained dominance in Washington. This is not new. The only difference is that contrary to the previous decades in the 1990s the "lid of bipolarity" was taken off. The U.S. expects support from its allies and the sharing of the burden of its international role. The Europeans, crippled by U.S. prominence, are willing to share responsibility. It is not strength that currently presents a problem for the more active involvement of Europe in living up to the responsibility claimed. It is the shortcomings of adaptation to the post-Cold War environment that presents the problem.

The two projects launched by the European Union in the 1990s, ESDP and the common currency, have a potential on the regional level. The interest of Europe, except for two great powers, may not go beyond the borders of larger Europe. In the framework of its confines, ESDP and the Euro may be important components of the international system. It would thus be important to encourage the Europeans to foster their projects. It is interesting to see that the U.S. has apparently more problems with ESDP than with the common currency that may pose challenges in the long run. The reason of this is an arbitrarily defined centre of gravity of U.S. policy in Europe with a clear and heavy emphasis on NATO and security generally. This will definitely cause problems, as the means of influence and power projection will be increasingly different on the two sides of the Atlantic.