U.S.- EU economic relations in a multi-polar world

On Thursday, January 20 the German Marshall Fund and Bruegel, a Brussels based economic think tank, hosted a day-long conference on “U.S. – EU Economic Relations in a Multi-Polar World: Securing Economic Governance Architecture For Global Prosperity” featuring three panel discussion and a luncheon keynote speech by Assistant Secretary of the U.S. Treasury Charles Collyns and comments by Antonio de Lecea, Acting Deputy Head of the EU Delegation to the United States.

Panel I: Crisis in the Euro zone: Implications for U.S. Policymakers & Global Financial Architecture

The panelists discussed possible ways for EU policymakers to tackle the sovereign debt crisis in order to counter growing pressures on affected states in danger of defaulting. Proposals ranged from increasing the size of the European Financial Stability Facility (EFSF) to having the EFSF buy bonds of member states to prevent the rise of unsustainable spreads, provided for an interesting debate among participants. Panelists also focused on the implications of regulatory policy implementation in Europe and the United States in response to the crisis. Various participants stated that global capital markets are being fragmented by haphazard regulations, which could inadvertently lead to increased borrowing costs and inefficiencies in the global financial system. Furthermore, divergence between the EU and the United States in responding to the global economic crisis will have long-term implications for both actors. While the United States has pumped additional money into its economy and pursued debt based growth, Europe has focused on strict austerity measures which, according to one speaker, will place the EU in a better position in the next 18 to 24 months.

Panel II: “Global Trading System at Risk: Growing Regionalism, Currency Competition, & Doha stagnation

The second panel focused on current issues in the transatlantic trade agenda. Special emphasis was placed on the ongoing deadlock in the Doha Round and the proliferation of regional trade agreements.

While Doha negotiations have been stalled for years, in recent months the negotiators in Geneva have actively been engaging in deliberations to revive the round. One speaker pointed out, however, that significant transatlantic divergences continue to exist, given the EU and U.S. positions regarding the latest deal offered by Pascal Lamy two years ago. Particular attention was paid to the rapid proliferation of regional trade agreements (RTAs) since the early 1990s, as these have contributed to diluting efforts for multilateral liberalization. One panelist attributed the rise of RTAs to the inclusion of new issues such as services and intellectual property rights to the trade agenda. The speaker also underscored the fact that bilateral agreements are easier to negotiate compared to the multilateral agreements, which makes them attractive for policymakers dedicated to making progress in limited time spans. However, the discussants came to a general consensus that the majority of world trade still occurs under the WTO, while a small portion of it is subject to the rules of regional agreements.

Keynote: Perspectives on the Transatlantic Relationship in the G20

In his keynote remarks, Assistant Secretary Charles Collyns focused on four main challenges facing the transatlantic relationship. Firstly, he stated that both within the G20 and between the United States and the EU, states must ensure that the global economic recovery is sustained. Mr. Collyns also referred to the fact that creating conditions within emerging economies which stimulate domestic demand and an uptick in domestic imports in expanding economies may positively contribute to rebalancing the global economy and ensure growth as reliance on U.S. demand is no longer a sustainable policy.

The speaker referenced the G20 as a major vehicle for the international community to encourage surveillance of countries running large currency surpluses and deficits. He elaborated by stating that China’s currency controls create unfavorable conditions for global sustainable growth, which not only affects the United States but developing countries around the world. Though initial steps have been taken to allow the Renminbi to appreciate, policymakers must not refrain from continuing to make progress in further adjusting currency rates to reflect reality. Mr. Collyns also called on the G20 to continue to make progress on international financial reform to ensure robust capital flows.

Following Assistant Secretary Collyns’ remarks, Antonio de Lecea, Acting Deputy Head of the EU Delegation to the United States, provided an EU perspective on the next phase of G20 meetings. He stressed that initial reforms implemented by the G20 were swift and effective, but as the world economy began to recover countries proceeded to implement national structural reforms without clear international coordination.

Panel III: The Macro Challenge: Deficit Reduction, Monetary Policy Coordination & Finding new Source of Growth.

In debating the divergences in macroeconomic responses to the global financial crisis, panelists came to a general consensus that monetary policy instruments remain largely tools for addressing domestic growth challenges, which makes global coordination especially difficult to achieve. As one panelist pointed out, the U.S. Treasury’s proposal at the Seoul G20 summit to institute a threshold on surpluses and deficits was shortsighted as a one size-fits all approach would not be prudent considering divergent economic structures between developing and advanced economies.

Europe and the United States need a large economic project to reinvigorate the TEC and define the transatlantic relationship in relation to growing economic ties between China and the United States, argued one panelist. Political leadership is needed to encourage transatlantic investment projects in alternative energy, infrastructure, and clean car technology as this would spur growth and demonstrate that Europe and the United States don’t have an “inferiority complex” vis-à-vis China’s rapid growth. Europe is steering ahead of the curve in terms of making fiscal retrenchment a priority, which will encourage investor confidence and keep excessive spreads in check. The U.S., however, still has not laid out a clear plan for getting its budget deficits in order and setting strict fiscal targets, which in the long run, if unaddressed, will have adverse affects on economic growth rates.