Does Money Make the state? Political Development, the Greenback, and the Euro November 2003

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Currency and Statebuilding in the EU

If the civil war was the "true foundational moment" of the American state, the EU has yet to experience such a dramatic and consequential moment. While the EU shares the impetus of market integration for statebuilding with the early US case, European level political development is remarkable for its incremental, endogenous evolution rather than exogenous imperatives. The recent creation of the Euro, taking place not in the context of war but rather in its very long shadow, has brought new monetary policy capacity and thus new administrative and bureaucratic powers to the European federal level in the European Central Bank. It has also brought new responsibility to the European Parliament in monitoring the Bank, notwithstanding the ECB's high level of independence, and deepened the activities of Commission officials in the monetary and financial sphere. In part because of the differences in the sources of the single currency across the two cases, however, this transfer of political authority has not extended to fiscal policy, as taxing, spending and borrowing privileges remain overwhelmingly at the national level in Europe. Instead, the EU is severely constrained in the fiscal area and has relied on cooperation among national finance and treasury officials. In fact, the EU is prohibited by its own laws from borrowing to balance its budget and must operate entirely within its revenues (Laffan, 1997). It cannot impose direct taxation on EU citizens and strict limitations are placed on EU expenditures as a proportion of the overall European GNP.21 Although such expenditures have grown over the 1990s, the current EU budget runs at less than two percent of total EU GNP, a fraction of the 30 to 50 percent spent by national governments as a proportion of their economies.

The truncated nature of EU revenue extraction and expenditure has mean that the EU must rely on administrative rule making as the chief means of policy development and on the European Court of Justice and the national administrations of the member states for implementation and enforcement (Majone 1993). While there is today very little publicly voiced support for an EU fiscal institution and increased public financing at the EU level, privately many high level EU and national officials argue that the single currency can only function effectively if it is joined with fiscal policy capacity.22 Given the lessons from the US case, it may take a severe crisis, military, economic or social, to move fiscal capacity to Brussels, but such an outcome is now more feasible and, perhaps, more likely with the single currency in place.
A further lesson for EU political development can be drawn from the ways in which market integration linked to statebuilding in the American case. The EU has been able to sustain a single market without fiscal capacity in part because of its emphasis on market liberalization instead of traditional welfare or social objectives (Laffan, 1997, 35). But political contestation over the purpose of the EU and the role of fiscal federalism will continue as the balance between national and EU policy capacity evolves. The US case underscores the tension in this dynamic. While the centralization of money in the US forged important new links between the state and powerful societal actors that generated a new federal level polity, the fact that these societal coalitions were formed in the process of capital market integration meant that broader concerns of national wealth redistribution and social protection had no natural allies. The public justification for the Euro project, as with the EU integration as a whole, is similarly focused on its purported market efficiency aspects. The federal level polity that has begun to organize around the single currency and its institutions is one overwhelmingly rooted in the money and finance, with very weak participation by the social partners. Thus, it is perhaps unsurprising that there has been a lack of coalitional support and correspondingly incomplete and uneven development of the policy capacity of the EU. While the creation of federal level policy capacity in the EU will, by definition, mean the gradual organization of societal interests towards a new set of authority structures, they are unlikely to be widely representative of European society.
Keeping in mind these more subtle discussions on the nature and content of statebuilding, and the role of specific private and public actors in mediating between the causal impetus of war and market integration and outcomes of political development, Figure 4, below, enters our two empirical cases into the statebuilding framework developed earlier. The US case demonstrates the presence of both causal factors, and the EU shows how market integration alone produces uneven statebuilding; further research is needed to explore how the pressure of war without market integration shapes political development. Obviously, this two case study can only be suggestive; a larger sample of states is necessary to move beyond theory generation to actual testing of these relationships.
Figure 4: Political Development in the US and EU

Threat of War



Market Integration





(Uneven Statebuilding)



(Uneven Statebuilding)



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