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Why the VW scandal could do some good

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The Volkswagen logo is seen on the grill of a Passat in the U.S.   © Reuters

"If only everything in life was as reliable as a Volkswagen" ran the punchline of one of the automaker's most successful television commercials in North America. That was almost 30 years ago. Since VW was exposed as systematically cheating authorities in the U.S. and Europe so as to hide the levels of pollutants emitted by its diesel cars, it seems like a relic from a far more distant past.

     The scandal has shaken customers' once rock-solid trust in the German company, inflicting incalculable damage on its brand and dashing its cherished ambitions to supplant Toyota as the world's biggest carmaker. It has also triggered investigations by the European Union and South Korea, which may implicate other manufacturers as well as EU member governments. Who would think a simple piece of software, designed to reduce emissions only when cars were undergoing government testing, could wreak so much havoc?

     However, the implications of the affair do not stop there. It has produced two other, quite different, lessons which, while so far less remarked upon, are significant for what they say about the balance and exercise of political power in the world today.

     The first concerns the international standing of the EU. The bloc has long proclaimed itself, with a zeal sometimes verging on the sanctimonious, to be the global exemplar of rules-based governance and the pacesetter in tackling climate change. Indeed, environment policy is one of the very few areas other than international trade in which the EU can claim to have exercised global leadership and clout, offering it a pulpit from which it has regularly preached to other countries on the need to follow its virtuous example.

     The VW scandal has called into question, if not punctured, both claims. One would have expected a well-ordered, rules-based society to be meticulous about laying down stringent requirements for its industries, and ruthless about enforcing them. Yet VW's cheating was discovered not by authorities in the green-conscious EU, but in the U.S., which is notoriously the world's biggest per capita producer of greenhouse gases and is often chastised by Europeans for inadequate environmental laws.

More to come

Worse may yet emerge. According to recent reports, other car manufacturers, as well as VW, have not only lobbied hard to get EU standards for auto emissions watered down but have connived with national governments to put pressure on Brussels to do so. That may not be illegal, but it hardly seems ethical, above all in a group of nations that make so much of their green credentials.

     Admittedly, the EU's self-proclaimed international leadership on climate change has been dwindling for some time. Initially, the reason was that other countries ignored its calls to action and sat on their hands. More recently, it has been because they have become serious about the environment and seized the initiative themselves. The most dramatic case in point is last year's agreement by the U.S. and China to cooperate on limiting greenhouse gases. From now on, the pace of change looks more likely to be set by Beijing and Washington than by Brussels. The VW scandal can only further weaken the EU's remaining influence by undermining its claims to occupy the moral high ground.

     The second lesson concerns the U.S. Though still pre-eminent politically, economically and militarily, the country is currently in the grips of one of its periodic fits of self-doubt and uncertainty about its role in the world. The nationalistic breast-beating evident in the Republican primaries campaign sits awkwardly with dark fears of being eclipsed by China's rise, while U.S. determination to remain the unchallenged global superpower contrasts with growing popular weariness with foreign adventurism and intervention.

     America's capacity and desire to continue acting as global policeman by force of arms are almost certainly declining, even though there is no other country remotely ready to step into that role. However, Washington still possesses an immensely effective instrument for imposing its will on the world -- the long arm of American law. Its power and reach have been growing.

Long arm of justice

The VW scandal, which lays the company open to potentially huge U.S. penalties, is just the latest example. It is the U.S. Department of Justice that decided to crack down on misdeeds at FIFA, world soccer's governing body; it is the U.S. that has done most to punish foreign banks for transgressions, be it in the subprime mortgage market or money laundering; and it is U.S. sanctions that have hit Moscow hardest in retaliation for its annexation of Crimea.

     Part of the explanation is that in those areas, the U.S. is simply a more active enforcer of the law than other countries. But it also wields bigger sticks. One is the power conferred by the sheer scale and importance of its national market. No company with ambitions to operate globally these days -- as increasing numbers do -- can afford not to have a presence in the U.S. Consequently, the threat of being barred from its market or branded as a lawbreaker there is a sanction that any foreign company ignores at its peril.

     The U.S., however, possesses an even more devastating weapon: denying dollar-clearing facilities to foreign banks, companies or individuals. In other words, it can make it impossible to transact business in dollars or to convert them into other currencies. Since global trade and financial transactions are overwhelmingly conducted in dollars, removal of dollar-clearing effectively means not only exclusion from the U.S. but isolation from most of the world economy. Russia, Iran and Sudan have all learned that the hard way. China, for all its aspirations to be recognized as a superpower, can only dream of wielding such clout.

     Some observers have argued that U.S. readiness to deploy the dollar-clearing weapon will drive the world away from the dollar and undermine its status as the leading reserve currency. That risk, however, seems small for the moment. No other currency possesses the unique combination of strengths that make the dollar so attractive as a store of value and medium of international exchange, and none seems likely to acquire them anytime soon.

     But possessing power and using it wisely are not the same thing. Critics accuse the U.S. of abusing its position to impose its writ extraterritorially, riding roughshod over other countries. There is some justification to such complaints. However, it is also true that U.S. intervention has sometimes been positive, because it has shown up and to some extent compensated for the inadequacy of other countries' laws and enforcement procedures.

     In any event, it is unhealthy for the rest of the world to rely on one country to act as global policeman, particularly one that is going through a period of intense soul-searching about its international role. If that situation is not to persist, other governments need to step up their efforts to maintain law and order in their own backyards. If the VW scandal jolts them into taking action, it will have done some genuine long-term good.

Guy de Jonquieres is a senior fellow at the European Centre for International Political Economy, a Brussels-based think tank, and formerly a journalist with the Financial Times.

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