By Griffin W. Huschke, Mayme and Herb Frank Research Fellow; with contributions from Jay Chittooran, a former Mayme and Herb Frank Fund Research Fellow
As central bankers and diplomats prepare to head into the G-20 this week, the Federal Reserve’s infusion of $600 billion into the US economy sparked harsh words from Germany, a major transatlantic partner of the United States. This comes on the heels of the recent remarks by prominent economists describing the growing lack of coordination in transatlantic economies, noting that:
"In recent months, trans-Atlantic differences have emerged over the appropriate scope and timing of fiscal stimulus measures, implementation of reformed banking regulations, and the governance of international financial institutions, among other issues. C. Fred Bergsten, director of the Peterson Institute, said this is unfortunate . . ."
Financial discord between the European Union and the United States is a worrying prospect. The US has long relied on exports to Europe to bolster its economy, but it is doubtful that the US can rely solely European importers to increase economic output. The troubled PIIGS (Portugal, Ireland, Italy, Greece, and Spain) are all suffering from incredible budget deficits, brought on by excessive spending during periods of prosperity. Poor domestic and supra-national monitoring also played a part. Rising unemployment, ranging from 8.2% (Italy) to 19% (Spain), decreased liquidity, and low productivity are major indicators of Europe’s inability to encourage a quick recovery. A decrease in European demand also will lead to a proportional decrease in US exports.
Adding to these transatlantic woes is the massive drop in the euro vis-à-vis the US dollar. The value of the euro has decreased by over 15% since last year, causing a spike in the prices of US goods in Europe, which led to a decline in US exports. This large drop in the Euro caused a reduction in the competitiveness of US exports, which makes it harder for the US to rely on European trade for economic gains.
Transatlantic cooperation with decision makers on economic issues, however, may make up for some of the losses in cross-Atlantic trade. Diplomats cannot let the Fed’s decision derail collaboration on financial reform, fiscal and monetary policy, and reforming international lending organizations (namely the IMF and World Bank), which can work to overcome factors limiting transatlantic trade . There still is time to ensure that this financial crisis is a “good crisis”—engendering short term financial damage but better insulating the foundation of the economy from future shock—but only so much can be achieved without a recommitment to transatlantic cooperation.