The transatlantic economy really is “too big to fail”

by Joseph P. Quinlan
With the transatlantic economy “in shambles”, says Joseph Quinlan, what better time to push ahead and create a deeper more integrated EU-U.S. marketplace? But first, he warns, policymakers on both sides must call a halt to the transatlantic bickering over stimulus measures to combat the economic crisis
“Too big to fail” has become a common refrain in the global financial crisis. It's a phrase used to justify large bank bailouts on Wall Street and in defence of automobile giants. Invoking the phrase is akin to drawing a line in the sand – that a company like A.I.G., the massive U.S. insurance company, or General Motors, must be saved at all costs. It is also rhetoric that rings hollow. Granted, the failure of either company just mentioned would have serious and far-reaching repercussions. But the impact on the global economy would be marginal. The same is not true, though, if the transatlantic economy – through benign neglect from both sides of the Atlantic – were to flounder as a result of the financial crisis. As one of the largest and most important economic entities in the world, the transatlantic economy is indeed “too big to fail”, a fact that policymakers have been slow to grasp. And, sadly, the economic crisis has pushed the U.S. and Europe further apart rather than pulling them closer together.
Advertisement
The overarching importance of the transatlantic economy is one of the best kept secrets in the world. Despite all the chatter about the rise of China and India, and the spectacular growth of sovereign wealth funds, the transatlantic economy accounts – on a Purchasing Power Parity basis – for around 45% of world GDP. Over half of world exports and imports originate with the transatlantic economy, and in 2007, the transatlantic economy accounted for nearly three-fourths of global outward foreign direct investment stock and for a similar share of global mergers or takeover deals. In terms of wealth, or of personal consumption, there is no substitute for the transatlantic economy – the U.S. and Europe together accounted for 60% of global personal consumption spending in 2007, up slightly from a decade before. All of this is another way of saying that there is no more important commercial artery in the world than the one that binds the United States and Europe. That’s why when one half of the transatlantic partnership suffers or goes into recession, like the United States in 2008, the other half suffers as well. Thank to the U.S. sub-prime meltdown and the attendant credit crisis, the transatlantic economy has now fallen into one of the deepest recessions since the Great Depression of the 1930s. The global weight of the transatlantic partnership means that disputes and disagreements between the United States and Europe invariably take on a global dimension too. Unless U.S.-EU cooperation comes to the rescue, the stalled Doha international trade liberalisation negotiations are bound to fail. Aid and assistance to the world’s developing nations will also flounder, and global issues like the war on terrorism, talks on climate change, energy security, peace in the Middle East and the proliferation of weapons of mass destruction won’t progress. All of these critical issues hinge on collaboration and cooperation between the United States and Europe. Against this backdrop, the world cannot afford a failure of the transatlantic economy, and that makes the transatlantic bickering since the crisis began all the more discouraging. Instead of cooperation and collaboration, conflict and competition have marred the transatlantic partnership in recent years. At the macro level, the transatlantic debate has pivoted around U.S. demands for more fiscal stimulus versus European demands for more industry regulation. Europe has in large part been more circumspect about priming the fiscal pump than the United States has, which is on its way to a federal budget deficit in excess of 13% of GDP. Unfortunately, but not surprisingly, the financial crisis has done more to divide than unite the U.S. and the EU. One of the key risks is that soaring unemployment on both sides of the Atlantic will trigger political populism and anti-trade and investment policies. The jobless rate in the United States and Europe too is poised to climb in the near term, and the higher it goes, the greater will be the pressure on policymakers to erect protectionist barriers and purse policies that will be detrimental to the transatlantic economy. American efforts to encourage U.S. firms to invest more at home than overseas could quickly result in less foreign direct investment in Europe, and would probably be countered by European policies that aim to protect and shelter so-called “national champions”. The result would be to damage and perhaps even halt transatlantic deal-making. There is another risk, and it is that both the United States and Europe may squander the “Great Recession of 2008/2009” by failing to think big. The crisis is tough, but it also creates an opportunity to think outside the box in tackling some of the structural deficiencies and impediments to growth that have long burdened the transatlantic economy. If the crisis is also an opportunity, that means the need for transatlantic leadership has never been greater. Cyclical forces (the current recession) and secular dynamics (the growing clout of the emerging markets) should be met with a renewed transatlantic effort to tackle and overcome many of the barriers that stand in the way of further US-Europe integration. Rather than muddling through – the most likely scenario – the transatlantic partnership should view the current crisis as a golden opportunity to fundamentally alter the political backdrop. Rather than working in silos, independent of each other, the U.S. and Europe should consider the following transformational initiatives:
Concentrate on further integration of the transatlantic capital markets, allowing for greater access to transatlantic capital and economic efficiencies that would help promote growth. Related to the ongoing financial crisis, leaders on both sides of the Atlantic should consider the creation of a transatlantic “bad bank”, a move that would help improve the impaired balance sheets of banks on both sides of the Atlantic and pave the way for greater transatlantic financial integration and coordination.
The establishment of a wider and deeper Transatlantic Market, notably with emphasis on reducing and eliminating barriers to transatlantic service activities. Such a process would not only promote growth in the near term but would also reinforce and strengthen the global competitiveness of both.
Undertake joint efforts to strengthen the energy security of the transatlantic partnership. And by the same token, both parties should work closely in aligning goals and objectives related to the environment and global climate change.
All of these issues have been broached and debated at length in the past, even though little energy and coordination has been forthcoming on either sides. But with the transatlantic economy in need of a major “reset”, the time for transformational policies is now. Now is also the right time to push ahead in other areas that require joint US-EU cooperation. More transatlantic coordination and common goal-setting is needed on things like biofuel standards, container cargo security, green product standards, reinsurance, health care, intellectual property rights, import product standards and accounting standards. Greater transatlantic standardisation and harmonisation would help promote growth on both sides. Today’s crisis presents a unique opportunity for leaders on both sides of the Atlantic to re-write and re-configure some of the fundamentals of the transatlantic economy. With the financial systems of both the U.S. and Europe impaired by the toxicity of non-performing loans, what better time to revamp and create transatlantic capital markets? With the transatlantic economy in shambles, what better time than to push ahead with the idea of a deeper and more integrated transatlantic marketplace? And with both the U.S. and Europe so energydeficient while also struggling with global climate change, what better time for the two to more aggressively coordinate their responses to global challenges? Rather than looking inward and retreating behind protectionist devices, American and European policymakers and legislators should adopt bold, far-reaching initiatives that set a new and sounder course for the transatlantic economy. Their more coordinated response to the crisis would underpin the transatlantic economy’s global role. That the transatlantic economy is too big to fail should be top of mind to policymakers on both sides of the Atlantic.