Transatlantic coordination of standards for access to lendersof last resort will reduce moralhazard, regulatory arbitrage, andthe likelihood of the uneven,ad hoc responses that havecharacterized the aftermath of the current crisis.
debt crises. For banks, transatlantic coordination o standards or access to lenders o last resort will reducemoral hazard, regulatory arbitrage, and the likelihood o the uneven, ad hoc responses that have characterized theafermath o the current crisis.Tese strategic responses diminish both the likelihood o uture nancial catastrophes and their potential allout.While the United States and Europe should pursue suchreorms or their own separate benet, coordinatingthis strategic, ar-sighted response can only strengthenthe results. As Daniel W. Drezner has written, “Regu-latory coordination reduces the transaction costs o cross-border exchange, leading to an increase in staticeciency, which increases economic benets or allparticipating states.”
While multinational rms may resist strong, coordinated standards, Drezner agues thatsuch standards benet rms in the long-term by clari-ying regulatory restrictions, creating a level playing eldacross borders, and illuminating “the political processby which transnational regulatory standards can bechanged.” A coordinated, transatlantic nancial regula-tory policy built on the lessons o the global crisis is anessential step toward restoring healthy, growing econo-mies on both sides o the Atlantic.
Currency Exchange in the 21st Century
Facing new currency competition rom China and others,the United States and the European Union must makemonetary relations a priority. Historically, monetary management has been a key eature o the transatlanticpartnership. Te ollowing represent only a partial listo transatlantic monetary agreements over the last hal century: the Bonn Summit in 1978, the Plaza Commu-niqué among the G5 nance ministers and centralbankers in 1985, the Louvre meeting o the G7 in 1987,the rst Basel Capital Accords o 1988, and even the enig-matic meeting o Presidents Nixon and Pompidou in theAzores in 1971. For the last 20 years, however, monetary relations have been dramatically underrepresented, espe-cially compared with trade relations.
Tis approach made sense during the “GreatModeration,”
when, starting in the mid-1980s, lowoverall economic volatility allowed central banks to ocusalmost exclusively on ination targeting. Te economicgrowth ollowing the collapse o the Soviet Union also
All Politics are Global
, pp. 43-45. Princeton University Press (2007).
Though often attributed to Ben Bernanke, this phrase rst appeared in James H.Stock and Mark W. Watson, “Has the Business Cycle Changed and Why?,”
NBER Work-ing Papers
, #9127, National Bureau of Economic Research. (2002).
contributed to complacency among central bankers andpolicymakers. Since the advent o the euro in 1999, theFederal Reserve and ECB have shown a “benign neglect”or their mutual exchange rate. In the wake o the nan-cial crisis, however, the dollar-to-euro exchange rate hasbecome highly volatile. In a world o vigorous cross-border trade, the costs o this volatility, i ongoing, couldexceed the costs o managing the exchange rate moreactively. It is time or monetary management to return tothe transatlantic agenda.Te extensive literature o ideas or a more active rela-tionship between the Federal Reserve and the ECB datesback to the introduction o the euro. In 1999, PeterBonger argued or an active exchange rate manage-ment in which the ECB deends the upper band andthe Federal Reserve deends the lower band at a certaindollar-per-euro value via interventions on the oreignexchange market.
All oreign exchange market interventions impact themonetary base. Tereore, central banks will sometimesinevitably have to carry out ination- or deation-spur-ring strategies to deend exchange rate bands. Bonger’sstrategy, however, could be accomplished using sterilizedinterventions — that is, interventions that counteract rstround orex-market interventions. When threatened by ination, which calls or the deense o the upper band,the central bank could issue bonds domestically to mopup the excessive money supply. Exchange market inter-
See Bonger, “Options for the Exchange Rate Management of the ECB EconomicAffairs Series,”
ECON 115 EN, European Parliament Working Papers