The European Connection

In a very interesting interview on FT.com, World Bank president Robert Zoellick warns about the dangers inherent in the current global economic downturn. With rhetoric reminiscent to historians’ talk about the 1930s, Zoellick makes an interesting point about Eastern Europe and its relationship with the EU.

Considering the relatively recent openness of these economies and the lack of “strong foundations” in their market and democratic institutions (merely as a function of time, if nothing else), it is important for developed economies to help reduce the volatility associated with Eastern European economies. Given the importance of European FDI and its political stake in the region, Zoellick convincingly argues that it falls on to the EU to act. Unlike where the French and British may be heading, the solution is to help these economies not veer away from the path of market integration, open regulation, and perhaps most importantly, democratic institutions.

Even in the era of the European Union, the Weimar Republic nightmare is never too distant in Central Europe.

Back in the day, when the euro was launched, many of Europe’s finest minds said it would not last. There were many op-eds, articles, and even books written about how it would end like the Latin Monetary Union. Quite strikingly, however, this time History does not seem to be repeating itself. Au contraire.

Just a few weeks ago, when Iceland became the first sovereign victim of the financial crisis, a formerly anti-EU country changed its views on economic integration and even monetary union literally overnight. Granted, it took a crisis with the UK, the nationalization of its three banking giants, and rumors of default. WIth the krona in free-fall and the government between a rock and a hard place, it is not surprising that Iceland has fallen in love with Europe. The case for monetary integration is not merely about exchange of goods and services, but, perhaps more importantly these days, about stability in times of financial turmoil.

According to FT columnist Wolfgang Munchau, the same may happen to none other than the UK, the euro’s worst enemy. His great column is linked here. I think he is right: It is in Britain’s best macroeconomic interest to consider joining the monetary union, strengthening the European Central Bank institution, keeping London as the world’s financial center, and moving forward on European integration. 

But how realistic is it? As Muchau admits, it would take a change in the Labour government’s policy, a vote in the Commons, and even a positive referendum vote, all of which seem utterly utopian. And yet, as the economic crisis deepens around the globe, perhaps it is not a bad idea to dream…