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Transatlantic Market and Monetary Integration

Creating a Transatlantic Market

The global economy needs to be managed. Prudential standards in the financial markets, consumer protection and safety measures in trade in goods, and standardized procedures for oversight and control need not only to be harmonized but also mutually recognized by the major players of the world economy.

Because of this, transatlantic cooperation in economic matters needs to be enhanced. Although it is true that more trade across the Atlantic would help the world economy to grow, as noted by many observers1, the efforts should go beyond a liberalization of transatlantic trade and the settlement of trade disputes between the EU and the US .

We are encouraged by the 2005 Roadmap, an outcome of the June 2005 Us-EU semiannual Summit, in which it was agreed that “concrete regulatory cooperation” is necessary in order to reinforce the stability of the word economy. The lessons of the Currency Crises of the late 1990s have shown that interdependence in the world economy is more than a cliché; it is the source of fragility that may easily weaken the entire world economy. The creation of specialized agencies under the rubric of a “G-2” would be a positive development that would allow the transatlantic world to alleviate many of the problems that the world economy is faced with. The June Summit encouraged closer cooperation in such areas as automobile safety, non-animal testing methods and hydrogen fuel cells. Such a cooperation, as part of a “concrete roadmap” should extend to financial regulation and, through a G-2 mechanism, to a common foreign economic policy2. The needs and fragilities of the American and the European economies are similar and mutually reinforcing.

Given this reality, making economic cooperation and a “common” foreign economic policy the “anchor” for closer transatlantic relations is both feasible and necessary3. In this context, cooperation should start from harmonization of technical standards and prudential regulations along sectoral lines as foreseen in the Roadmap.4 Along similar lines, several ideas concerning a Transatlantic Free Trade Area (TAFTA), whether general or sectoral, or a more targeted “Transatlantic Liberalization Initiative” have also been floated and warranted reactions5.

These changes would also provide a very promising springboard for the expansion of transatlantic cooperation in other areas, especially as sectoral cooperation expands.

The warning that “a ‘laissez-faire approach’ to the world’s single most important economic relationship is neither sustainable nor defensible6,” should be taken at heart.

Notes:

1 Look: Horst Seibert, Kiel Institute of World Economics; Rolf J. Langhammer, University of Kiel ; Daniel Piazolo Feri (Financial & Economic Research International), The Transatlantic Free Trade Area: Fuelling Trade Discrimination or Global Liberalisation? Journal of World Trade, Vol. 30, No. 3, June 1996.

2 Look: Institute for International Economics, The Euro at Five: Ready for a Global Role? Adam S. Posen, editor, April 2005

3 Independent Study Commissioned by the European Commission, Directorate General External Relations, Unit C1.: Relations with the United States and Canada OJ 2004

4 For Official documents on the roadmap: http://europa.eu.int/comm/enterprise/enterprise_policy/gov_relations/
interntl_regul_coop_eu_us/index.htm

5 Look: Horst Seibert, Kiel Institute of World Economics; Rolf J. Langhammer, University of Kiel ; Daniel Piazolo Feri, Ibid.

6 Europe Needs America 's Help , Bruce Stokes, 14 June 2005 , National Journal

References:

Jean-Philippe Cotis, The Transatlantic relationship, Mutual benefits, costs of continued barriers Presentation at the State Department, Washington DC 27, October 2005.

Transatlantic Business Dialogue, Stakeholder Consultation on the Transatlantic Economic Partnership, Comments and Proposals, 12/17/2005 .

Edited By Daniel Hamilton and Joseph Quinlan, Deep Integration: How Transatlantic Markets are Leading Globalization

Transatlantic Economy 2005: Annual Survey of Jobs, Trade and Investment between the United States and Europe by Daniel Hamilton and Joseph Quinlan, Available through the Brookings Institution Bookstore

Bergsten-Koch Weser, Restoring the Transatlantic Alliance, Institute for International Economics

Ellen L. Frost, Institute for International Economics, Transatlantic Trade: Towards a North Atlantic Economic Community

Benn Steil, Building a Transatlantic Securities Market, Council on Foreign Relations, 2002

Alan Tonelson and Robin Gaster, Our Interests in Europe, The Atlantic Monthly, August 1995

For a Transatlantic Monetary Policy

In Euro at Five, Fred Bergsten from the Institute for International Economics makes a case for a coordinated management of the euro-dollar exchange rate. The author argues for the creation of a sort of financial “G-2” mechanism. “At the very minimum the monetary authorities of the USA and Euroland need to create a new consultative arrangement to monitor the evolution of the euro-dollar exchange rate and be prepared to recommend contingency plans to their governments if market movements become disorderly and/or overshoot. […] It is simply inadequate for these officials, as to the present, to get together sporadically around G7 or other broader meetings-which are also complicated by the presence of other countries that are less relevant […].” Bergsten makes clear that G-2 would not be an actual institution, but a steering committee which could also improve international financial arrangements.

Interestingly, Bergsten expects the G-2 to develop into a transatlantic agreement setting a fluctuation range for the dollar-euro exchange rate. As a matter of fact, that would be the most logical development if the transatlantic economy were to integrate ever further. The US and EU Central banks would be requested to manage the exchange rate agreement with proper sterilized intervention and also jawboning arrangements. However A closer US-EU cooperation in monetary policy would require a consolidation of the decision making process in Euroland, in particular in the field of fiscal policy, which is still subject to the unanimity rule.

An authoritative, though indirect support for a revival of a Bretton Woods-like system, comes from The Dollar Crisis, by former IMF analyst Richard Duncan.

Duncan makes a case for a world managed control of the money supply. He argues that the post Bretton Woods system is inherently instable and incapable of preventing long term external deficit, with their associated financial instability. An international monetary authority could avoid such a rise in international money supply as that responsible for the current crisis. Duncan also points to the containment of external deficits, which are associated to the capital inflows needed to finance the deficit.

The USA and Europe could well act as the original founders of this new “Bretton Woods-like” system. Their accentuated degree of integration, strongly increased in the last years, and the closer cultural and political understanding make the transatlantic allies suitable candidates to establish a new monetary order.

Disagreements between the USA and Europe convicted Bretton Woods. A new understanding between Bruxelles and Washington can revive it. Today we have more a solid monetary background and a more compelling need to act. In the 1970s we didn't have the Euro and a common European monetary policy. Europe now speaks with one voice in this field and that would make a common rule of monetary policy much more feasible.

A common monetary framework in the transatlantic relationship is much more likely to succeed today than in the 70s.

References:

Euro & US Dollar

Euro at Five: Ready for a Global Role? , edited by Adam Posen

Richard Cooper, Toward a common currency?

Single Global Currency Association, Why a Single Global Currency (SGC)?

Martin Wolf, "A global market economy needs a global currency", The Financial Times, Aug.4, 2004