For a Transatlantic Monetary Policy

Dario Zuddu1 and Jay T. Chittooran2

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.

However, Bergsten does expect the G-2 to eventually develop into a transatlantic agreement that
would set a fluctuating range for the dollar-euro exchange rate. As a matter of fact, setting a
dollar-euro exchange rate would be the next logical step if the transatlantic economy were to
integrate further. However, closer US-EU cooperation in monetary policy would require a
consolidation of the decision making process in Europe, 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 made a case for a world
managed control of the money supply. He argued 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 pointed to the containment
of external deficits, which are associated to the capital inflows needed to finance the deficit.
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 guides: the creation of an
international regulatory framework, the development of a global bank insurance organization,
similar to the FDIC in the US, being inclusive of emerging markets and other players in the
global economy, establishing a rules-based system to ensure that, with the current economic
realities, countries do not impede trade through protectionism, and lastly, appealing to mutual
self-interest of countries in maintaining stability.

1
Research Fellow, The Streit Council, 2005
2
Research Fellow, The Streit Council, 2009
Others, like Timothy Adams and Arrigo Sadun, both of the Financial Times, suggest that the
creation of a global economic council (Gleco as it is referred), in an effort to supersede the G20,
G8, and the current 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 the Bretton Woods system
downfall in the 1970s. However, a new understanding between Brussels and Washington can
encourage stronger relations. In the 1970s, the euro did not even exist, let alone a common
European monetary policy. Europe now speaks with one voice in this area, making a common
monetary policy in the transatlantic relationship not only more feasible, but also a likelihood.

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.

However, the global financial crisis of 2008-2009, which decreased revenue streams worldwide
and led to budget deficits in Europe, raises more questions of sustainability. 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 the nascent
stage, the idea of creating a European Monetary Fund is gaining traction. The EMF would have
power over members’ monetary and fiscal policy. Even though reform is occurring, 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.

References:

-Adams, Timothy, and Arrigo Sadun. "Global economic council should oversee all." The
Financial Times [London] 17 Aug. 2009: 9.

-Cooper, Richard. "Toward a Common Currency?" Conference on the Future of Monetary Policy
and Banking,. World Bank and International Monetary Fund, June 2000.

- Duncan, Richard. The Dollar Crisis: Causes, Consequences, Cures. Singapore: Wiley & Sons,
2005.

-Posen, Adam S., ed. "The Euro at Five: Ready for a Global Role?" Peterson Institute of
International Economics (2005).
-Review of the Framework for Relations between the European Union and the United States: AN
INDEPENDENT STUDY. Rep. no. S 83-070340. European Commission, Directorate General
External Relations, Unit C1 (Relations with the United States and Canada), 2004.

-"The Euro." European Commission.

-"Why a Single Global Currency?" Single Global Currency.

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

-Wolf, Martin. "Why Agreeing a new Bretton Woods is vital and so hard." The Financial Times
[London] 16 Dec. 2008: 4.

-Yueh, Linda. "From the Great Moderation to the Global Financial Crisis: Emerging Markets and
Reforming the International Economic System." The Whitehead Journal of Diplomacy and
International Relations 10.2 (2009): 39-63.