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The Euro, EU Social Democracy, andInternational Monetary Power: A Critique ofNew ConstitutionalismGerard Strange aa University of Lincoln , UKPublished online: 20 Apr 2012.

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The Euro, EU Social Democracy, and International Monetary

Power: A Critique of New Constitutionalism

GERARD STRANGE

University of Lincoln, UK

ABSTRACT This article critically interrogates the principle claims of the ‘new constitutionalist’

thesis, particularly as applied to the evaluation of European monetary union (EMU). In doing so,

it argues for the (continuing) efficacy of the euro as a vector for social democratic advance both at

the EU and global levels. It is argued that new constitutionalism’s exclusive focus on the internal

and external ‘neoliberal’ constraints EMU imposes on social democracy is overdrawn. The

article critically examines the internal and external dimension of EMU’s alleged ‘self-

limitation’. Drawing on evidence from the recent eurozone crises as well as the SGP crisis of

the early to mid-2000s, it is argued that EMU’s internal self-limitation has been consistently

subject to successful challenge and reform through a process of ‘permanent renegotiation’.

This has played out in the context of ongoing tension within EMU between alternative models

of integration and decision-making. In terms of the external dimension, the article focuses on

the euro’s structural power and the potential this provides for global leverage. It is argued that

new constitutionalism exaggerates American dominance in the global monetary domain,

deflecting attention from fundamental changes in the structure and politics of international

money that have contributed to the diffusion of power in a new conjuncture marked by policy

conflict, contestation and uncertainty. The ‘presence’ of euro is one such structural change.

Keywords: European Monetary Union, euro, monetary power, decision-making, fiscal reform,

exchange rate policy, social democracy, neoliberalism

Introduction

In the late 1980s, the then European Commission president, Jacques Delors, sought to directly

link the project of European monetary union (EMU) and the European Union’s (EU’s) suprana-

tional ‘social dimension’. But after the successful launch of the euro in 1999, much debate on the

Correspondence Address: Gerard Strange, School of Social Sciences, University of Lincoln, Lincoln LN6 7TS, UK.

Email: gstrange@lincoln.ac.uk

ISSN 1474-7731 Print/ISSN 1474-774X Online/12/020257–16 # 2012 Taylor & Francishttp://dx.doi.org/10.1080/14747731.2012.658255

Globalizations

April 2012, Vol. 9, No. 2, pp. 257–272

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Left has centred on the extent to which a genuine social Europe—for example, one based on

‘Keynesian’ principles of macroeconomic demand-side activism and social solidarity rather

than ‘neoliberal’ labour market and welfare ‘reform’—could be reconciled with a monetary

union cast within the broader frames of ‘open regionalism’ and globalisation (Gamble and

Payne, 1996). Within this debate, social democratic supporters have argued that monetary

union provides the EU with a new and important dimension of structural power in a globalised

world that represents a political response to (neoliberal) globalisation as much as a part of that

process (Bretherton and Vogler, 2008; Cohen and Subacchi, 2008; Gamble, 2002; Henning,

2006; Hettne, 2005). As such, the euro has become a critical ‘vector’ of integration through

which social Europe could, in principle, be advanced (Van Rompuy, 2010).

Yet this relatively benign and optimistic understanding of the euro stands in marked contrast

to what has become the dominant and highly pessimistic view on the Left of both monetary

union and EU integration more generally. Central to this pessimistic evaluation as well as its

wide academic influence has been the work of leading Marxist neo-Gramscian scholar,

Stephen Gill, who has approached the study of globalisation, EU open regionalism, and monet-

ary union through the conceptual lens of global ‘new constitutionalism’ (Gill, 2008, chapters 7,

9). New constitutionalism envisages EMU as part of a broader institutionalised, disciplinary,

meta-framework of binding transnational rules, laws, and legally enforceable agreements.

This operates at both the global level, through American-backed neoliberal agency and Amer-

ica’s dominance over the core institutions of global economic governance, and at the regional

level, through treaty-based projects of economic integration such as the EU’s. Such rule-

based power, Gill argues, serves to ‘lock in’ the market, private property, sound finance, and

capital mobility as ‘automatic’ or constitutionalised constraints on the ‘progressive’ interven-

tionist capacities of formally independent nation-states.

EMU, Left critics claim, both contributes to and operates within this broad new constitution-

alist frame, imposing and consolidating neoliberalism while actively stifling possibilities for

social democratic advance at the EU level. The central argument that flows from Gill’s frame-

work contains both an internal and an external dimension. Internally, the framework of EMU

governance, underwritten in the EU’s treaties, imposes ‘self-limitation’ on the social and econ-

omic purposes monetary union can serve (Cafruny and Ryner, 2007, p. 141). First, the EU trea-

ties formally grant goal setting and operational independence to the European Central Bank

(ECB) (Buller and Gamble, 2008, pp. 259–60; Cafruny and Ryner, 2007, p. 148). Alongside

the grant of independence, the treaties mandate that the prime objective of the ECB is the main-

tenance of price stability within the eurozone. The result, critics claim, has been to ‘lock in’

monetary orthodoxy and anti-inflationary bias at the heart of EMU. Second, EMU has institutio-

nalised ‘macroeconomic asymmetry’ in the eurozone creating supranational monetary policy

alongside decentralised, intergovernmental fiscal policy. Within this asymmetric framework,

the Stability and Growth Pact (SGP) constrains the fiscal policies of eurozone member states

through its famous 3% budget deficit and 60% national debt rules. Together, these treaties’ com-

mitments to monetary orthodoxy and constrained fiscal decentralisation bias EMU towards neo-

liberalism, ensuring that ‘policy making is “locked into” a monetarist framework to an

unprecedented degree’ (Cafruny and Ryner, 2007, p. 148).

New constitutionalists argue that EMU’s internal self-limitation is reinforced by its subordi-

nation to external forms of neoliberal power, specifically, the monetary and financial power of

the United States and the disciplinary rules of global governance institutions. It is conceded that

US power is not what it once was. America no longer exercises ‘integral hegemony’ as it did

until the early 1970s under the terms of the Bretton Woods agreement. But US monetary and

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financial power remains structurally dominant, as is evident in the dollar’s continued global pre-

eminence. Moreover, this structural power is underpinned by a transatlantic ‘organic alliance’

among strongly integrated, finance sector based, US and European business elites, who share

a commitment to neoliberalism (Cafruny and Ryner, 2007, pp. 143–7). Cast subordinately

within this broader hegemonic frame, the euro, despite its structural presence, has been

unable to challenge neoliberalism and has been subject only to ‘benign neglect’ on the American

side (Cafruny and Ryner, 2007, p. 149; Cohen, 2009).

According to new constitutionalists, EMU’s internal and external ‘self-limitation’ has been

the primary cause of a succession of crises that have afflicted the euro since its launch. It is

claimed that with each crisis the attempt has been made to further consolidate neoliberalism

through new market-favouring policy initiatives and policy change, for example, the Lisbon

employment process. This crisis-based neoliberal path dependency in policy has increasingly

marginalised social democracy, but the concomitant trajectory of eurozone crisis has not been

resolved. Rather, the ideological legitimising bases for EMU have been eroded. This has

brought into question the future of the euro amidst calls from a range of ideological sources

for the complete or partial renationalisation of Europe’s money (Cafruny, 2003; Lapavitsas

et al., 2010).

This article critically interrogates the principle claims of the new constitutionalist thesis as

applied to the evaluation of EMU. In doing so, it argues for the continued efficacy of the euro

in terms of social democratic advance both at the EU and global levels. It is conceded that, in

the context of globalisation and open regionalism, EMU provides few guarantees for social

democratic regulation and that the nature, meaning, and operational parameters of social

democracy have to be substantively rethought (see, for example, Annesley and Gamble,

2003; Clift and Tomlinson, 2006). Nevertheless, it is argued that new constitutionalism’s

exclusive focus on the internal and external constraints that EMU imposes on social democ-

racy is overdrawn. First, the article critically examines the internal dimension of EMU’s

alleged ‘self-limitation’. Drawing on evidence from the recent eurozone crises as well as the

SGP crisis of the early to mid-2000s, it is argued that EMU’s internal self-limitation has

been consistently subject to successful challenge and reform, contradicting the notion of con-

stitutionalised neoliberal lock-in. Second, the article critically examines EMU’s external

dimension and the external limitations allegedly imposed on eurozone macroeconomic

policy by American power and the wider structures of global governance. It is argued that

new constitutionalism exaggerates American dominance, deflecting attention from fundamen-

tal changes in the structure and politics of global monetary power, not least the creation of the

eurozone itself. These changes, alongside Lisbon treaty provisions facilitative of exchange rate

activism, pave the way for the active assertion of structural power by the eurozone, with posi-

tive implications for social democratic advance at the EU level.

Permanent Crisis or Permanent Renegotiation? Reform of EMU’s Internal Domain andthe French and German Models of Decision-making

As The Economist (2010b, p. 12) recently argued, reflecting on the eurozone’s most recent and

deepest crises, there is ‘nothing ordained about Europe’s failure’. Indeed, from the start, EMU’s

‘self-limitation’—a primary source of crisis, according to new constitutionalists—has been

subject to constructive political challenge and reform, what has been termed a process of ‘per-

manent renegotiation’ (Henning 2007a, p. 336; see also The Economist, 2010d, p. 58). Although

crises heighten processes of policy change, the basis for permanent renegotiation also lies in the

The Euro, EU Social Democracy, and International Monetary Power 259

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politically ambiguous demarcations of authority and competencies within the complex ‘constel-

lation’ of EMU’s governance, what Dyson (2008) refers to as EMU’s built in ‘institutional fuz-

ziness’. Of course, this can be a recipe for policy inertia, discord, and ‘non-decision’, part of a

broader problem inherent in the EU’s non-federal union identified by critics and supporters of

EMU alike (Cohen and Subacchi, 2008). But, given EMU’s ‘unique’ system of governance, it

has also facilitated policy change (Dyson, 2008, p. 3).

As Dyson emphasises, institutional fuzziness partly reflects the still incomplete nature of

EMU (and indeed the political union itself) and ongoing debates about the wider strategic objec-

tives EMU might serve in the future (Dyson, 2008, p. 3). Central to this debate has been alterna-

tive ‘models’ of decision-making within EMU, described by Henning (2007a, p. 316) as the

‘German’ and ‘French’ models (see also Barber, 2010; The Economist, 2010b, pp. 23–6).

The German model gives emphasis to the efficacy of price stability and broadly endorses

ECB independence, as granted under the treaties, as a means of securing this specific objective.

More generally, the model favours rule-based decision-making and as such has often been ident-

ified with neoliberalism (Burnham, 2001). The French model focuses on the broader strategic

orientation of EMU and emphasises the efficacy of politicised governmental control over mon-

etary and fiscal policy. It therefore favours decision-making by the European Council—the ‘col-

lective government’ of the EU—as well as the strengthening of the policy authority of the

Economic and Financial Affairs Council (Ecofin) vis-a-vis the ECB. Typically, advocates of

a more social democratic EMU favour this model.

According to new constitutionalists, the German model has unambiguously dominated EMU.

This dominance, it is claimed, has favoured what Burnham refers to as the ‘depoliticisation’ of

macroeconomic management and thereby radically constrained the development of social demo-

cratic policy initiatives within EMU. Yet, while the formal dominance of the German model of

EMU is not contested here, it is argued that the depoliticisation of monetary policy has long fea-

tured as a component of successful social democratic regimes, notably Germany’s, as much as

neoliberal ones and so cannot be identified uniquely with neoliberalism, a critical point more

recently acknowledged in Burnham’s own research on post-Second World War British social

democracy and monetary policy (Burnham, 2011). Conversely, Gill’s (1998) identification of

social democracy with a ‘policy’ of debauching the currency caricatures and exaggerates the

destabilising impact of politicisation. That successful social democratic projects must build

on price stability is, as Gamble (2002) notes, one of the critical lessons to be drawn from the

crisis period of the 1970s and from research in critical comparative political economy.

Finally, the promise of embedded price stability and credibility through the euro regime were

critical reasons why the euro project was so widely supported by social democratic constituen-

cies in the EU prior to the launch of the single currency (see Notermans, 2001; Rhodes, 2002,

pp. 306–11).

That said, contestation, renegotiation, and reform away from this default position have been

(as Dyson argues) significant features in the evolution of EMU and policy change therein. Such

policy change, often occurring in response to crisis, has typically favoured the French model of

politicised decision-making. While such openness to renegotiation and the ultimate dominance

of the French model tends to contradict the new constitutionalist characterisation of EMU in

terms of neoliberal lock-in, it supports Dyson’s claim that EMU has been ‘simultaneously depo-

liticising and repoliticising’ (Dyson 2008, p. 3, emphasis added). One case in point is the reform

of the SGP in 2005 following a protracted period of policy crisis. A more recent case is the

ongoing reform of EMU governance following the euro crises of 2010. These are now con-

sidered in turn.

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Reform of the Stability and Growth Pact

The SGP has been the primary mechanism through which EMU authorities have sought to

impose budgetary discipline on eurozone member states. New constitutionalist critics have

regarded the SGP as a neoliberal-inspired fiscal constraint, designed to support the conser-

vative monetary policies of the ECB by imposing strict budgetary rules on the spending

programmes of eurozone member states. The SGP, it is claimed, has been depoliticising,

since its aim has been to limit the discretionary power of democratic governments to

deploy fiscal policy as an active tool of social democratic redistribution and demand

management.

While Burnham’s (2001) notion of depoliticisation describes well the logic of neoliberal

policy-making, it does not capture the dynamics and empirical trajectory of the evolution of

the SGP. Contra new constitutionalism, the fact is that, since its launch in the early 2000s,

the SGP has failed to act as an automatic constraint on government spending. Rather, designed

as an imperfect surrogate for fiscal union, it has been subject to fundamental renegotiation and

reform because of the refusal of governments committed to monetary union to accept EMU’s

‘neoliberal’ constraints. Hence, it was the persistent breaching of the SGP’s fiscal reference

values by core member states, notably Germany and France and then the failure of the European

Commission’s subsequent legal moves to force compliance, which led to a process of broader

policy change away from a neoliberal SGP. After two years during which the SGP was effec-

tively suspended, Ecofin council—one of the core institutions of politicised decision-making

in EMU—agreed reform of the pact in March 2005.

Arguably the most important change was the subordination of SGP ‘automaticity’ to minis-

terial discretion. In a ‘victory’ for the French model, Ecofin was given new authority (above

the Commission) to determine whether member states in breach of SGP rules should be

subject to sanctions. Moreover, the rules themselves were also relaxed. As Buller and

Gamble (2008, pp. 264–5) note, a key change was the introduction of greater flexibility

around the SGP’s fiscal reference values—the 60% accumulated debt rule and the 3%

budget deficit rule. The reform package placed a new policy focus on the full length of the

economic cycle, as had been demanded by many critics, including the British treasury and

the French government (Buller and Gamble, 2008, pp. 263–4). This introduced a greater

degree of short- to medium-term flexibility, enabling eurozone member states to legitimately

overshoot what had been rigid fiscal targets and pursue counter-cyclical adjustment policies

if required by ‘exceptional’ economic circumstances. In moving towards more symmetrical

reference values, the SGP reforms signalled a shift by the eurozone authorities—under politi-

cised decision-making by Ecofin—towards a form of rule-bound social democracy or ‘con-

strained Keynesianism’ as practised, for example, by New Labour in Britain (Annesley and

Gamble, 2003; Clift and Tomlinson, 2006). Both the British and French governments remained

critical of the pact for its failure to grant still greater fiscal flexibility to countries with rela-

tively low levels of accumulated debt (below the SGP’s 60% reference value), as well as its

failure to exclude investment from spending targets (Buller and Gamble, 2008, pp. 264–5).

Nevertheless, it has been generally recognised that the reformed SGP marked a considerable

formal relaxation of eurozone ‘automatic’ budgetary discipline in favour of political discretion.

Indeed as neo-Gramscian critics of ‘Maastricht EMU’ have acknowledged, the 2005 reforms

represented ‘a radical retraction of the objectives initially set for the SGP . . . a belated admis-

sion of the trade off between macroeconomic “balance” in the medium term and growth’

(Cafruny and Ryner, 2007, p. 163 n. 66).

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The 2010 Euro Crisis, Fiscal Activism, and Post-Crisis EMU Governance Reform

As noted above, the SGP has operated as a mechanism of fiscal coordination and stabilisation in

the absence of fiscal centralisation and political union within EMU. But it is precisely this

absence of fiscal capability, according to new constitutionalist critics, that, alongside ECB-

imposed monetary orthodoxy, has been the most significant form of macroeconomic self-limit-

ation within the eurozone. For such critics lack of fiscal centralisation reflects a deliberate bias in

EMU’s design towards ‘negative’ forms of integration which favour neoliberalism as well as the

German model of decision-making (i.e. constitutionally based) while ruling out the development

of ‘positive’ forms of coordinated macroeconomic activism central to social democracy and

favoured in the broader ideological orientation of the French model (Van Apeldoorn et al.,

2003, p. 29). Unlike social democratic nation-states, the EU has only a limited permanent

budget for designated spending programmes equivalent to little more than 1% of total

member state GDP. Concomitantly, the EU has strictly limited powers to raise supply

through taxation. The absence of fiscal centralisation also means that, unlike unified monetary

areas under sovereign government, the eurozone lacks the type of automatic stabilisers, such

as transfer payments to the unemployed, that have enabled governments at the national level,

especially social democratic ones, to maintain high levels of demand, sustain economic

growth, and promote greater social equity and inclusion.

Moreover, such limitations around the EU’s powers to tax and spend have been compounded,

new constitutionalists maintain, by legal provisions explicitly constraining ECB fiscal activism.

For example, writing in 2007, Cafruny and Ryner confidently asserted that the Maastricht treaty

ruled out the emergence of bank-based fiscal centralism since it explicitly ‘forbid’ ECB lending

to EU institutions and member states. (The relevant provision is now Article 125 of the 2009

Lisbon Treaty.) This belied, they claimed, any ambiguity surrounding the Bank’s possible

role in augmenting supranational fiscal capability as a component of a more social democratic,

demand-management orientated EMU (Cafruny and Ryner, 2007, p. 149).

Recent events arguably contradict key aspects of this assessment. Responding decisively to

the eurozone’s bond crisis of 2010, the EU utilised the French model of decision-making

(vis-a-vis an emergency meeting of the European Council and Ecofin between 7 and 10 May)

to apparently sweep aside EMU’s monetary orthodoxy and constitutional limitations on fiscal

centralisation in order to mobilise a massive stabilisation package—the European Financial

Stabilisation Facility (EFSF)—in support of eurozone deficit countries threatened by the with-

drawal of credit lines from global money markets. At E750 billion, the EFSF represented

over 8% of eurozone GDP, dwarfing the EU’s pre-crisis permanent budget. As such, it provided

the EU with a new and significant (in macroeconomic terms) collective fiscal capability. While

initially agreed as a temporary measure to be withdrawn after three years, the announcement of

the EFSF presaged, according to The Economist (2010a, p. 78), a more permanent shift towards

‘a kind of fiscal federalism’ with lasting implications both for the macroeconomic management

of the eurozone and for decision-making processes within EMU (see also Time, 2010, p. 19).

Subsequent developments have arguably confirmed this view. Thus, between March and

October 2010, following six meetings of a special ‘taskforce’ on the future of economic govern-

ance in the EU, headed by the European Council’s permanent president, Herman Van Rompuy,

Ecofin and the European Commission had reached consensual agreement on a set of reform pro-

posals designed to embed the EFSF as a permanent mechanism (the so-called European Stability

Mechanism (ESM)). At the time of writing, controversy has continued to surround the new pro-

posals for the ESM, the terms of its operation, and the primary purposes it should serve. But for

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this article what is important to note, first, is that the policy debate has been marked by the fam-

iliar tension and conflict between the German/ECB and French decision-making models within

EMU, and second, that, despite the recommendations of the ECB, the proposals have once again

opened up EMU to political renegotiation, including at the level of substantial treaties change.

Having apparently been forced by political decision to intervene to buy up ‘junk’ bonds in

order to operationalise the EFSF (a move that overruled Article 125 of the Lisbon Treaty, the

so-called ‘no bailout’ clause), the ECB has subsequently argued against a permanent stability

mechanism that would further entrench an interventionist role. Instead, the Bank has advocated

a strengthening of ‘automatic’ budgetary discipline within EMU, focused on the augmentation

of existing SGP rules and sanctions on deficit member states alongside the strengthening of cen-

tralised budgetary surveillance by the European Commission and the imposition of punitive

penalties, such as the withdrawal of voting rights and even suspension from the eurozone for

countries persistently in breach of the SGP. As the principal voice of orthodoxy within EMU,

the ECB has largely opposed the consolidation of fiscal activism because it regards any such

move as an encouragement to ‘profligacy’ and therefore counterproductive in terms of what it

sees as the main objectives of EMU governance reform, namely, debt reduction and fiscal con-

solidation aimed at underpinning long-term money market confidence in the euro. The ECB’s

policy position is in line with what new constitutionalism regards as EMU’s all-pervasive neo-

liberal core.

By contrast, the French government, in particular, has utilised post-crisis policy debate,

including the meetings of the Van Rompuy taskforce, to mobilise the case not only for a perma-

nent fiscal stability mechanism but more broadly for a greater commitment within EMU to pol-

itically coordinated macroeconomic balance and economic growth. This reflects the long-held

French view—shared by Van Rompuy—that the underlying causes of the euro’s crises have

been structural in nature, reflected, for example, in long-running macroeconomic asymmetries

between surplus earning competitive exporters, such as Germany, and less competitive

member states running structural trade deficits. From this view, stabilisation in the eurozone

requires an ongoing commitment to fiscal transfers (hence, French support for the proposed per-

manent ESM) alongside a strategic commitment to an active external monetary policy for EMU

around a more sustainable euro exchange rate that better reflects the eurozone’s underlying com-

petitiveness (Van Rompuy, 2010, pp. 7–8). Within this broader interventionist frame, the French

government has acknowledged the efficacy of national level budgetary discipline in general

terms. But it has opposed the ECB’s singular (neoliberal) focus on this aspect of reform and

has been highly reluctant to support the strengthening of sanctions or a move towards greater

‘automaticity’ in the imposition of sanctions.

While EMU’s post-crisis policy debates remain ongoing, the final report of the Van Rompuy

taskforce, published on 21 October and agreed unanimously by finance ministers, contained at

least two core recommendations fundamentally at odds with the ECB’s preference for German

model, rule-based fiscal limitation and the concomitant strengthening of automatic budgetary

discipline. Rather, both in terms of decision-making procedure (focused on Ecofin consensus-

building) and substantive policy recommendations, the report reflected the counter-influence,

if not dominance, of the French model. First, it was agreed that the EFSF should be consolidated

and replaced by a permanent, centralised facility for EMU. The report recognised that the pro-

posed ESM, whatever its final form, would require significant (but unspecified) treaties change,

therefore necessitating treaties renegotiation. At the time of writing, neither the size or terms of

operation of the ESM had been determined but the possibility of further deepening fiscal union—

through the introduction of euro bonds, for example—had not been ruled out. Second, while the

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taskforce endorsed some of the new proposals for strengthening budgetary surveillance and

sanctions, it did not favour the more extreme measures canvassed (such as member state expul-

sions from EMU) and it rejected the call for automaticity as forcefully advocated by orthodox

opinion within the ECB (FT.com, 2010b). Instead, drawing on a compromise reached by the

French and German governments, the report recommended introducing a ‘reverse majority

rule’ for the adoption of budgetary ‘enforcement measures’. Contrary to ECB demands, such

a procedure leaves the ultimate power over SGP sanctions with Ecofin and the political discre-

tion of finance ministers acting under the qualified majority voting procedure (European Union,

2010, p. 14).

The Euro’s External Domain: World Order Change, the ‘Exchange Rate Weapon’, and

the Diffusion of Monetary Power

Somewhat curiously, the euro’s external dimension, in particular the role of policy in the deter-

mination of the euro exchange rate, has not featured prominently in recent Left assessments of

EMU. For example, two otherwise detailed reports from the Left written in response to the 2010

euro crises, both of which explicitly address post-crisis strategy, provide little more than cursory

remarks about eurozone exchange rate policy or policy options (Euromemo Group, 2010; Lapa-

vitsas et al., 2010). This is surprising, because, prima facie, the common exchange rate is the

most important and powerful macroeconomic instrument made available to the eurozone as a

direct consequence of currency union. Particularly in the absence of full fiscal union, deploy-

ment of the ‘exchange rate weapon’ (Henning, 2006), though controversial, could in principle

underpin a sustainable expansion of demand in the eurozone, providing a macroeconomic plat-

form for a social democratic programme based on growth, employment, and social cohesion.

Despite this potential, a key feature of macroeconomic management in EMU has been what

Cohen and Subacchi (2008, p. 4) identify as a ‘passive’ exchange rate policy. For critics, this

reflects the fact that the EU’s monetary policy, despite the creation of a single currency, has, to

date, functioned largely as a conduit for neoliberalism and the projection of American monetary

power. According to Cohen (2006, p. 31) ‘the macroeconomic level of monetary power consists,

first and foremost, of a capacity to avoid [domestic] payments adjustment costs either by delaying

adjustment or by deflecting the burden of adjustment on to others’. For new constitutionalists, it is

by such a projection of monetary power, through the conduit of open regionalism coupled to dom-

inance over the core institutions of global economic governance, that the US has been able to

impose neoliberalism on others while maintaining its own macroeconomic autonomy. In this

way, a global order of ‘competitive austerity’ (for all but the US) has come to be ‘locked in’

(Cafruny and Ryner, 2007, p. 150). This has led to a fundamental imbalance in the global

economy, but has reflected and sustained US ‘structural’ dominance. In turn, this dominance

has provided the cement for a deeper ‘organic alliance’ between US and EU policy elites

focused on neoliberal consensus (Cafruny and Ryner, 2007, pp. 144–6).

But this all-encompassing conceptualisation of hegemony overstates the sustainability of

America’s dollar based ‘exceptionalism’. It serves to deflect empirical and analytical attention

from fundamental changes in the contemporary IPE which have challenged US dominance

and in so doing have contributed to what others, including many critical scholars, regard as

the broad unravelling of neoliberal hegemony (Arrighi, 2007; Beeson, 2009; Henning, 2006;

Strange, 2011). Moreover, the key changes have been at the structural level, the foundations

of hegemonic dominance according to new constitutionalists (Henning, 2006). Three important

counter-shifts in structural power (alongside US relative economic decline) can be identified:

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first, the creation of the euro itself, albeit as an imperfect and incomplete currency union; second,

the rise of China as a proactive international monetary actor with ‘Great Power’ status; and third,

the emergence of international economic governance institutions as increasingly independent

global actors pursuing policy agendas often markedly at odds with global neoliberalism and

American policy preferences. Each structural shift has contributed to what Cohen (2008)

refers to as the ‘diffusion’ of international monetary power, a process that has undermined

US dominance and in doing so heightened the prospects for global monetary conflict and

policy change as the unravelling of the US-centred status quo throws up new policy options

and imperatives (see also Henning, 2006).

The Euro’s Structural Power

According to Henning (2006) the arrival of the euro in 1999 represented the most important

structural transformation in international monetary relations since the Bretton Woods conference

in 1944. In ‘one fell swoop’ it created a potential counter to the unilateral exercise of monetary

power by the US, a core characteristic of the IPE in the post-Bretton Woods period evident, for

example, in America’s dominance over the Plaza and Louvre accords of the 1980s. Moreover,

the decision to create a monetary union in Europe was, Henning contends, the direct conse-

quence of the over-extension of monetary power by the US. It was the destabilising inflationary

impact of this in the 1970s that underlined calls by European policy elites for a ‘zone of mon-

etary stability’ in Europe and which led initially to the galvanisation of the European Monetary

System in the 1980s around a coordinated policy of semi-fixed exchange rates vis-a-vis the

deutschmark-centred Exchange Rate Mechanism (ERM).

Monetary union was thus the culmination of the European Community’s strategic response to

the perceived impact and threat of US economic unilateralism in the post- Bretton Woods era. Pro-

viding a new structural capability for a region roughly the equivalent in weight to the US in terms

of GDP, the euro created a ‘greater symmetry in the international monetary system—read less US

dominance’ that could contribute to better (i.e. growth-orientated) macroeconomic policy out-

comes for Europe and globally (Henning, 2006, p. 130). Indeed, such an outcome had been antici-

pated by the European Commission in a major report of 1990 and was explicitly used to support the

case for economic and monetary union (European Commission, 1990; Henning, 2006, p. 130).

Enhancement of macroeconomic ‘autonomy’ (Cohen, 2006, pp. 42–3), or what Gamble

(2002, p. 6) refers to as ‘the capacity to act’, especially through the pooling of ‘exchange rate

risk’, is widely acknowledged as a major structural benefit derived automatically from currency

union in a globalised world (see also Cohen and Subacchi, 2008, pp. 2–4; Dyson, 2008, pp. 5–6;

Henning, 2010, p. 2). More than anything else, however, Henning argues that the arrival of the

euro, by arming the eurozone with its own collective exchange rate weapon, has made the active

projection of monetary power, including a challenge to ‘dollar hegemony’, possible, where once

there existed only relatively small European states structurally subordinate in the monetary

domain to the US. ‘Should the euro area develop and implement external monetary policy in

a deliberate, proactive, and assertive fashion’, Henning maintains, ‘it could throw its own

weight around in international monetary affairs’ (Henning, 2006, p. 131, emphasis added).

China’s Economic Development and Monetary Power

Though controversial, exchange rate intervention aimed at underpinning external competitive-

ness remains a critical tool of macroeconomic management in the contemporary IPE. For

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example, since the late 1980s China has successfully used the yuan peg against the US dollar as a

crucial support for its long-term development strategy built around export-led growth and open-

ness to foreign direct investment. The managed currency has helped China become the world’s

largest current account surplus country (overtaking Germany in 2009) and concomitantly to

accumulate the world’s largest foreign exchange reserves (currently estimated to be $2.7 tril-

lion). Such reserves represent the hard face of the structural dimension of Chinese monetary

power, power gained largely at the direct expense of the US (approximately 80% of China’s

reserves are dollar-denominated assets).

Not surprisingly, China’s policy has been subject to mounting criticism from the US admin-

istration and more specifically from the powerful congressional trade lobby. The yuan is esti-

mated to be between 25–40% ‘undervalued’ against the dollar, fuelling claims that China is

an aggressive currency manipulator. Moreover, the economic merits of China’s policy, for

China, have been strongly challenged in recent years. China has not been deaf to such criticisms

and its policymakers are aware of the potential economic costs, as well as benefits, of its external

monetary policy. Indeed, the yuan peg against the dollar has been relaxed on several occasions

since it was introduced in the 1980s, including most recently in June 2010. China’s latest five-

year plan places considerably greater emphasis than in the recent past on the expansion of dom-

estic demand, alongside export strength, as a basis for continued growth. But the Chinese leader-

ship has consistently and forcefully faced down US pressure, insisting on the legitimacy of

maintaining the dollar peg as the external face of its long-term strategy of development and

‘modernisation’. Thus, while growing conflict has surrounded the yuan peg, it remains strategi-

cally important, enabling China to augment reserve holdings and thereby engage in bilateral,

regional, and multilateral diplomacy from a position of monetary strength.

The Transformation of Global Economic Governance

Following Stephen Gill’s earlier pioneering work, new constitutionalists continue to regard

global economic governance institutions primarily as conduits for neoliberal hegemony under

a ‘Washington Consensus’. But this ignores the impact of structural transformation, including

the rise of developing countries, such as China, in forcing or facilitating change on global gov-

ernance, thereby precipitating widespread reform. The most evident change has been the emer-

gence of the G20 in the post-global financial crisis (GFC) period as a Summit-level global

economic policy forum that has largely displaced the G8. Likewise, the advent of the World

Trade Organisation (WTO) in 1995 has arguably been an important, if undoubtedly imperfect,

reforming influence, despite it being regularly vilified by radicals. The WTO is often criticised,

including by new constitutionalists, for allegedly imposing ‘unfair’ competition on developing

economies and thereby acting as a conduit for neoliberal consolidation under ‘triad’ (US, EU,

and Japan) leadership. Yet, formally, the WTO is a consensus-based rule and decision-

making body that gives considerable counter-influence to its individually weaker member

states. Indeed, it was from the WTO that developing country unity within the G20 was originally

born as a counterweight to the triad. The WTO’s commitment to multilateralism also means that

it can act as a powerful, independent, constraint on attempts by otherwise powerful states to

exercise economic leverage unilaterally. For example, according to James Bacchus, former

US trade negotiator and former chair of the appellate body of the WTO, WTO membership

has weakened the capacity of the US to impose trade restrictions on China as a potential

counter to China’s exchange rate policy (Bacchus, 2009).

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Alongside the emergence of these post-Bretton Woods governance institutions, recent years

have witnessed what Immanuel Wallerstein (2004, p. 10) has referred to as a ‘remarkable soft-

ening’ of the former pro-market ideology and concomitant policy rigidities of the International

Monetary Fund (IMF). More recently still, this has seen the IMF, inter alia support and facilitate

the G20’s multilateral framework for promoting balanced global growth, call for the overthrow

of inflation targeting as an overriding goal of macroeconomic management in favour of a

renewed emphasis on counter-cyclical government spending, support the EU in its fiscal initiat-

ive to stabilise the eurozone, and reject American demands for China to abandon exchange rate

management in favour of market-driven yuan appreciation.

Partly in response to criticisms of its governance role both prior to and after the GFC, but also

in line with an ongoing reform discourse within the institution pre-dating the financial crisis by

some years, the IMF has sought to develop new policy space not least by distancing itself from

neoliberalism and perceived US dominance. The IMF has sought to redefine its role as a global,

as opposed to country-specific or country-dominated economic regulator and finance provider,

partly along more long-term Keynesian and multilateralist lines. Following Bretherton and

Vogler (2006, pp. 27–9), such a reform process can in part be understood as an attempt by

the IMF to articulate greater independent ‘presence’ as a global actor, with corresponding impli-

cation for the structural dimension of global economic power. The reform agenda has addressed

changes to the IMF’s governing structures and voting procedures, so that voting rights better

reflect the changing balance of global economic power, the expanded use of Special Drawing

Rights (SDRs) as well as the possible development of a global reserve currency as alternatives

to the dollar, and finally, the permanent augmentation of the IMF’s financial power and loan-

granting capacity. Thus, through reform, the IMF has sought to increase its competence and

legitimacy as well as its basic economic capabilities. This reflects the IMF’s perception of its

future regulatory role within a fundamentally reformed global economic order (Batson, 2009).

Global Currency Conflict and the Future of the Euro

While the structural changes in global monetary power outlined above have contributed to the

unravelling of US/neoliberal hegemony, they have not, thus far, been decisive in policy

terms. Rather, against a broader backdrop of global and regional financial and economic

crises, the ‘diffusion’ of structural power has ushered in a new conjuncture marked by funda-

mental policy uncertainty, conflict, and change (Cohen, 2008; Henning, 2006).

In terms of the global level, many commentators anticipate that fundamental macroeconomic

and trade imbalances between long-term surplus and deficit countries, notably China and the US,

are poised to spark an out and out ‘currency war’ (The Economist, 2010c, pp. 11, 72–3). As

noted earlier, American-based trade lobbyists have argued that a key underlying cause of

global trade imbalances has been currency misalignments caused by deliberate exchange rate

manipulation, notably by China. Unable to secure a formal agreement on exchange rate realign-

ment (as it did in the 1980s under the Plaza and Louvre accords), a weakened United States is

seen by many as currently pursuing a covert ‘cheap dollar’ policy, using techniques such as

quantitative easing strategically to boost home demand and exports while at the same time

deflecting (or seeking to deflect) the primary burden of adjustment, in terms of exchange rate

appreciation and fiscal adjustment, onto others (FT.com, 2010a, 2010c). This has further heigh-

tened existing conflict not least because US policy is sharply counter-posed to high-level multi-

lateral efforts to secure a lasting global agreement around a Keynesian-inspired long-term

strategy of rebalanced global growth post the 2007–2008 financial crisis. This has focused on

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the so-called Framework for Sustainable and Balanced Global Growth (FSBG), launched at the

G20’s first summit-status meeting in March 2008 as a joint G20–IMF-led initiative with full

support from the EU and China as well as the US.

While US policy has served to destabilise the G20–IMF initiative—reportedly throwing the

G20’s November 2010 Seoul Summit aimed at consolidating the FSBG into disarray (FT.com,

2010a)—it has also more specifically served to open up what thus far has been a largely latent

macroeconomic policy conflict between the US and the EU. As Cohen (2008) has noted, the con-

flict is rooted in the negative economic impact in the eurozone of the euro’s passive but sustained

appreciation against the dollar. Consistently overvalued against the dollar since 2003 and reach-

ing a peak of $1.60 in 2008—nearly twice its lowest value of $0.82 recorded in 2000 (Cohen,

2008, p. 39; Cohen, 2009, p. 742), the ‘strong’ euro is widely recognised as having contributed

to the eurozone’s high unemployment and below potential growth performance over the past

eight years. Furthermore, such fluctuating and rising values have been a source of price instabil-

ity and inflation in the eurozone, putting pressure on the ECB for policy change. A significant

depreciation of the euro in 2010 towards the IMF’s estimated long-term equilibrium rate of

$1.17 provided a much-needed boost to growth and jobs in the eurozone, ‘good news’ largely

drowned out by the bond crisis and ongoing fiscal adjustment pressures faced by several euro-

zone member states, notably Greece and Ireland as well as Portugal, Italy, and Spain. But by the

autumn of 2010, following the announcement of another round of quantitative easing (QE2) by

the US, the euro had once again climbed against the dollar, peaking in early November at over

$1.40. This has again depressed the eurozone’s already precarious and constrained macroeco-

nomic performance and in so doing rekindled underlying US–EU conflict over transatlantic

macroeconomic policy (Henning, 2010).

EMU’s Exchange Rate Weapon

Against this backdrop and amidst mounting frustration with US monetary policy and diplomacy

(described recently by German finance minister, Wolfgang Schauble, as ‘clueless’), the euro’s

external dimension, including the exchange rate, has become increasingly central to policy

debates within the EU around the future of EMU (Cohen, 2009, pp. 759–61; Cohen and Subac-

chi, 2008, p. 5). Some commentators and policymakers have argued that EMU authorities should

be more proactive in facilitating and consolidating the euro’s rise as a global currency, thereby

arming the EU with monetary power capabilities sufficient to challenge dollar hegemony and

American macroeconomic unilateralism. Yet, as Cohen (2009) demonstrates, ongoing incum-

bency advantages enjoyed by the dollar limit the efficacy of such a strategy, at least for the fore-

seeable future. Moreover, such a strategy, Cohen argues, would be highly confrontational,

destabilising deep-rooted US–EU political, economic, and military relations to the point of

risking outright geopolitical conflict with positive outcomes for the EU at best unlikely

(Cohen, 2009, pp. 741, 759–63).

However, the strength of the Atlantic Alliance (at least in some form) alongside the continuing

global pre-eminence of the dollar does not mean that EMU is locked in to a monetary status quo

unilaterally favouring US macroeconomic autonomy, as new constitutionalists have argued. One

relatively modest and less confrontational policy recommendation, favoured by the French gov-

ernment and broadly consistent with social democracy, is for a new and more active strategic

orientation to EMU’s external monetary policy focused on a ‘weaker’ euro. This would

involve a decision by EMU authorities to signal a managed depreciation of the euro alongside

a clear long-term policy commitment to defend the currency’s value around its long-term

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equilibrium rate (see Cohen and Subacchi, 2008, p. 5). This would operate as a default policy

position in lieu of wider multilateral agreement on future currency arrangements and global

macroeconomic reform aimed at achieving balanced global growth. Any move towards such

active exchange rate management would represent a decision by EMU authorities to deploy

the exchange rate weapon and would mark a clear break with EMU’s long-running exchange

rate policy of laissez-faire ‘neutrality’.

According to new constitutionalists, the ECB’s dominant position within EMU coupled to the

institution’s policy conservatism, itself underwritten in the EU’s economic treaties, rules out any

such policy change away from exchange rate passivity. Others are less dismissive but have

nevertheless highlighted governance incoherence and the lack of clear lines of policy authority

and representation within EMU’s external dimension as an important limitation (Bretherton and

Vogler, 2006, pp. 72–4; Cohen, 2006, pp. 46–8; Cohen and Subacchi, 2008, p. 4; Van Rompuy,

2010). Yet, contra new constitutionalism, despite the dominance of policy passivity in EMU’s

external domain since the launch of the euro, the EU treaties specifically allow for EMU auth-

orities to negotiate and reach agreement among themselves on an explicit exchange rate policy

orientation for the eurozone and, having done so, to defend such a policy through appropriate

forms of foreign exchange market intervention and in relevant international policy forums.

The key legal provision is Article 219 of the Lisbon treaty (previously Article 111 of the

TEC, Article 109 of the Maastricht treaty), which gives Ecofin (in its Eurogroup configuration)

authority over formal exchange rate agreements with third parties. In the absence of a formal

agreement (as under the current system of floating exchange rates), it further allows the

Council, acting by qualified majority (again in its Eurogroup configuration), to issue ‘general

orientations’ on the euro’s exchange rate to the ECB. In issuing such orientations, the treaties

require the Council to take initiative from the European Commission and consult with both

the Commission and the ECB with a view to reaching ‘a consensus consistent with the objective

of price stability’.

These caveats notwithstanding, the balance of authority enshrined in Article 219 gives min-

isters, prima facie, considerable power and discretion over external monetary policy (Henning,

2007a, p. 316). Formally speaking the French model of decision-making dominates exchange

rate policy. Indeed, as new constitutionalist critics of ‘Maastricht EMU’ have acknowledged,

while the ECB may control interest rates and independently sets the inflation target (its policy

goal independence), ‘finance ministers still nominally control exchange rate policy’ (Cafruny,

2003, p. 294, emphasis added). In fact, this power is more than ‘nominal’. Since the launch

of the euro, the ECB has twice (September and November 2000) actively intervened in

foreign exchange markets, albeit in an attempt to shore up the external value of the euro. But

the Bank was able to act only after a political consensus had emerged in the eurozone on the

need for and efficacy of a higher value for the euro (despite market valuation to the contrary)

and only after lengthy negotiations conducted with Eurogroup and the Economic and Finance

Committee (EFC) had led to a formal agreement (the Turku agreement) on policy action and

its terms (Henning, 2007a, pp. 323–7).

Two important conclusions can be drawn from the historical experience of the eurozone’s

external monetary policy. First, exchange rate passivity has been the dominant but not the singu-

lar policy stance of EMU’s governing authorities. The active management of the exchange

rate—the exchange rate weapon—is a policy instrument available to EMU, one that has been

used in the past and could in principle be used again if a consensus for action were to emerge

and circumstances were judged to demand it. Second, while the ECB and the rationale of the

German model—focused on price stability and monetary orthodoxy—have de facto dominated

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exchange rate policy, such dominance is far from absolute. Specifically, it is not underwritten de

jure, where positive authority resides principally with Ecofin. As Henning (2007a, p. 335) notes,

based on the ongoing Turku agreement, ECB dominance operates ‘largely as a practical modus

vivendi and not a “final status” settlement of institutional prerogatives as a matter of legal prin-

ciple’. As such, exchange rate policy, even more so than internal monetary policy, is subject to

‘permanent renegotiation’. Finance ministers, along with the European Commission, retain the

power to reclaim delegated authority or to change its terms in relation to wider policy goals

(Henning, 2007a, pp. 335–6). The balance of power could shift back to Ecofin and the

broader ‘French’ conception of EMU, favouring exchange rate intervention around a ‘weaker’

euro to underpin European growth and competitiveness (Henning, 2007a, p. 316).

Conclusions

This article has argued for the efficacy of EMU in relation to what may be regarded as the EU’s

contested ‘shadow’ project of a social democratic ‘social Europe’. Against the new constitution-

alist assumption of neoliberal dominance through internal ‘self-limitation’ and external subordi-

nation to US power, the article has highlighted EMU’s ongoing capacity for permanent

renegotiation in the context of US hegemonic decline and the concomitant diffusion of (monet-

ary) power. While tension exists within this process between different models of EMU, the poli-

ticised and interventionist French model has tended to prevail, especially during periods of crisis

and policy uncertainty.

In the context of globalisation and open regionalism, the euro’s structural presence represents

an important potential gain for social democracy since it has augmented macroeconomic auton-

omy in the eurozone. But as Cohen (2008) argues, given the diffusion of power wrought by

wider structural change in the contemporary, post-hegemonic, IPE, autonomy must be actively

deployed as influence and through leverage if specific policy outcomes—including a social

democratic EMU—are sought.

Thus far, the EU has not been wholly successful in projecting power as influence. Indeed,

having been sidelined at the Copenhagen climate change summit in December 2009, Herman

Van Rompuy (2010) has warned that the EU risks becoming marginalised as a global political

actor. Nowhere has this been more the case than in the monetary domain where policy has

favoured a passive, but overvalued, euro. An early decision to review external monetary

policy, in light of the eurozone’s recent travails as well as growing divisions with the US

over global macroeconomic management, could precipitate a policy shift including towards

the strategic use of the exchange rate weapon to shore up eurozone competitiveness, demand,

and employment. French leadership of the G20’s agenda for balanced global growth during

2011 might then provide a real opportunity for the EU to exercise leverage and to promote

social democratic policy outcomes at the global level. But to do so from a position of monetary

strength requires prior exchange rate policy change.

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Gerard (Gerry) Strange is Reader in International Political Economy at the University of

Lincoln, UK.

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