Transatlantic Monetary Integration

Transatlantic Monetary Policy
Some skeptics believe that a transatlantic monetary policy - in light of various disagreements on both sides of the Atlantic - is impossible. The Streit Council believes that in order to strengthen the established ties between the EU and the US, it is necessary to reinforce and reevaluate the structural mechanisms of the Bretton Woods system.

In Euro at Five, Fred Bergsten from the Petersen Institute for International Economics made a case for a coordinated management of the euro-dollar exchange rate. The author argued for the creation of a sort of financial "G-2" mechanism saying that "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 [...]." While the G-2 would not be an actual institution, it would be a steering committee charged with improving international financial arrangements.

In The Dollar Crisis, former IMF analyst Richard Duncan made a case for an international monetary authority that could avoid such a rise in international money supply as that responsible for the current crisis. Martin Wolf, Chief Economist and Writer at the Financial Times, has also voiced his support for a new Bretton Woods system. Wolf argued that a new system, inclusive of more countries with more power in the structure, would be able to stabilize the financial system. Linda Yueh argued that a new Bretton Woods system must be created, but with certain guidelines. First, the creation of an international regulatory framework. Second, the development of a global bank insurance organization, similar to the FDIC in the US. It also must be inclusive of emerging markets and other players in the global economy, and establish a rules-based system to ensure that, with the current economic realities, countries do not impede trade through protectionism. The new system must also appeal to mutual self-interest of countries in maintaining stability.

Others, like Timothy Adams and Arrigo Sadun, both of the Financial Times, suggest that the creation of a global economic council, in an effort to supersede the G20, G8, and Bretton Woods systems, would update the rules and regulations of the IMF, and World Bank, while providing equal representation; this would result in stronger coordination. Better coordination means reducing the likelihood of future financial and economic collapses.

Disagreements between many countries, the US and Europe included, led to disillusionment with and mistrust for the Bretton Woods system, which eventually led to its downfall in the 1970s. The US and Europe could well act as the original founders of this new Bretton Woods-like system. The accentuated degree of integration, strongly increased in the previous years, and the closer cultural and political understanding make the allies suitable candidates to establish a codified transatlantic monetary policy.

The global financial crisis of 2008-2009 decreased revenue streams worldwide, in addition to growing budget deficits that were already present in some countries in the EU. The fiscal crisis confronting Greece and other Eurozone countries is serious and the EU leadership faces very difficult choices in the weeks ahead. Although the EU structural flaws have come to light and practical reforms are needed, the crisis has also created an opportunity to implement objective reform with agility and consensus. While in a nascent stage, the idea of creating a European Monetary Fund is gaining traction. A EMF would have acting power on members’ monetary and fiscal policy. Even though reform is on its way, it carries with it potential risks and raises many questions. The EU walks, albeit unwillingly, a slippery slope; enacting strict regulations of credit default swaps could affect investment, which could ultimately hold transatlantic foreign policy ramifications. For more information, please click here.

 


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