Time for Transatlantic Leadership

G20 Toronto

Saturday the leaders of the G20 will convene for a pivotal meeting on the future of global economic policy and financial market reform. Their first gathering in 2008 set a strong and encouraging tone of greater international cooperation. Less than two years on, this important spirit is getting lost. We need a renaissance of joint economic and political leadership by the U.S. and the EU and its members.

What is at stake? At their meetings in Pittsburgh, London, and Washington, the G20 leaders designed a policy framework to overcome the economic crisis and lay the foundations for sustainable growth and financial market stability by means of close policy coordination. This accord was an historical step and a deciding factor in halting the cascading loss of confidence battering financial markets, and it gave rise to the hope that in future financial markets would be governed by much more consistent rules than before.

Lately, however, this consensus is showing worrisome signs of weakness. In fairness, the challenges have grown. The Greek debt crisis and the risk of other countries experiencing a similar fate have shaken global markets.  This has also widened the policy rift between countries that need to stimulate growth, those that must fight mounting debt levels, and those struggling against overheating.

At the same time, international agreement on key regulatory measures has become harder to reach than initially expected. A decision on the consistent implementation of Basel capital requirements or IFRS-based international accounting standards in 2011 is set to become an uphill struggle. National regulatory initiatives outside the G20 agenda are threatening to blur what initially looked like a plan for a more coherent international regulatory system. Witness the stand-alone initiatives on the prohibition of certain bank activities, temporary bonus taxation, the banning of naked short selling and the plans for financial transactions taxation.

The U.S. and the EU take center stage in this global debate. Their economies are the largest in the world and their economic relationship is the deepest, generating over 4 trillion dollars in annual commercial sales and supporting 14 million jobs bilaterally. US firms have invested more than twice the amount in Ireland alone than in China, and more than two-thirds of all foreign direct investments in the U.S. come from Europe. Both sides share vital economic and political interests which are founded on deeply-rooted common values such as openness, transparency, the free flow of goods and investment, and a strong belief in the ability of markets to effectively allocate resources across and within societies.

What, then, should be done?

Obviously, the U.S. and the EU and its members need to provide joint leadership in the G20 activities going forward. This will be in their own best interest – and in that of their advanced and emerging market partners in the G20, all of which have lent important support to the process since the first crisis meeting.
In substance, this implies renewed joint U.S.-EU efforts in a number of key policy areas:

  • Managing growth and austerity: Macroeconomic policy coordination and resolving economic imbalances are key topics on the political agenda.  It will be critical that the withdrawal of fiscal stimulus programs in the EU and US be done carefully, so that tackling sovereign debt problems are not complicated by lowering economic growth when the world recovery is still fragile. The G20 partners need to square the circle of promoting growth while pursuing a solid course of fiscal consolidation. Their agenda includes a number of concrete measures, including the planned charter for sustainable growth, which should be addressed without delay.
  • Improving macro-prudential surveillance: With the development of the Financial Stability Board, the strengthening of the IMF and equivalent measures at home, the U.S. and the EU have set into motion important new mechanisms for promoting global financial stability. Both should cooperate closely to ensure that these bodies are well-equipped to fulfill their oversight function, with clear channels of communication and coordination in their efforts.
  • Aligning financial market regulation: Both sides should work resolutely to overcome their disagreement over key parts of the G20 regulatory agenda. Progress on the treatment of derivatives, alternative investment vehicles, and risk management is positive. Other areas are not going as well, with potentially disruptive differences regarding the establishment of international standards for capital requirements, accounting rules, bank resolution regimes and credit rating agencies. U.S. and European regulators should seek a maximum degree of convergence and equivalence on the implementation of these rules at the parliamentary or regulatory level.

These are ambitious objectives. It will, therefore, be essential for the U.S. and Europe to intensify their economic and regulatory dialogue across all levels of policymaking, between the U.S. Administration and the EU Commission, among regulators and supervisors, between Congress and the European Parliament. Importantly, however, the efforts will need forceful high-level guidance, resuming the tradition of annual summits between the U.S. and EU Presidents. Without such high-level political impetus from the transatlantic side, cooperation across the Atlantic and around the larger G20 table would remain patchy.

No other two economies in the world better understand the benefits that close political coordination will provide. The U.S. and the EU should therefore reinvigorate the leadership role in the G20 process that they are legitimately expected to fulfill. The global economy will be better for it.

Stuart Eizenstat, Head of International Trade and Finance at Covington & Burling LLP, former Deputy Secretary of the Treasury, Under Secretary of State, and Ambassador to the EU in the Clinton Administration; and Caio Koch-Weser, Vice Chairman of Deutsche Bank AG, former Deputy Finance Minister for Germany, Chairman of the Supervisory Board of the German Federal Financial Supervisory Authority.  They are Co-Chairmen of the Business and Economics Advisory Group at The Atlantic Council.  Photo credit: Prasanna Rajagopolan/CBC News.

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