the real g2: americans, europeans, and their role in the g20

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The G20 processhas arrived ata low point. Itseems difficultfor the UnitedStates and the EUto reach beyondthe minimumconsensus.U.S. markets actually contracted (see graphs page5). 9 China alone can be expected to raise its sharein global financial markets by the end of the currentdecade to 13 percent in banking, 5 percent in debtsecurities, and 16 percent in stocks. 10These long-term dynamics in financial marketsmake a very strong case for including key emergingeconomies in financial market reform at the globallevel. The still-dominant U.S. and EU shares inglobal finance, however, also illustrate that theUnited States and Europe are in a unique positionto promote global financial reform, a position thatfor the time being remains unattainable for anyother economy around the negotiating table.Transatlantic Financial MarketDiplomacy at a Low PointBeing the most important financial marketsworldwide is one thing. Pursuing joint interests,however, may be a completely different matter. Inprinciple, the United States and the EU may havediverging, possibly competing interests when itcomes to financial market policy, and they coulduse their economic and political weight as abasis for pursuing these interests in a G20 settingconcurrently.In fact, two years into the G20 process, transatlanticcooperation on financial market policy appearsto have reached a low point. On the one hand,some credit can be given to the United States andthe EU, as well as to the other nations representedin the G20. Arriving at a joint agenda for policydevelopment and on broad policy directions9All figures based on own calculations and data from Bank forInternational Settlements, International Financial Services,Transatlantic Business Dialogue, World Federation ofExchanges.10China’s share in the global total is expected to rise from 9percent to 13 percent in banking, from 2 percent to 5 percentin debt securities, and from 6 percent to 16 percent in stockmarkets (Kern 2009).especially in the area of financial market reformmarks an important political achievement that canhardly be overestimated.On the other hand, however, it has been difficultfor U.S. and EU policymakers to reach beyondthe minimum consensus on agenda items andbroad policy directions. Importantly, they differsubstantially in their approaches to the G20 agendaand its implementation at home. While the UnitedStates chose a single-package strategy that hasalready resulted in the Dodd-Frank Act, coveringall major areas of financial reform. The EU, on theother hand, follows a menu-type strategy of morethan 25 individual measures for final adoption inthe course of 2011. As a consequence, the politicalprocesses have remained largely out of sync.Apart from procedural questions, Americans andEuropeans also disagree on a number of substantiveissues. These include topics such as the U.S. VolckerRule, a proposal not directly contained in the G20agenda. While the EU is not planning comparablemeasures, there is widespread concern that itsimplementation may have negative extraterritorialeffects. Similarly, there is, reflecting on earlierexperiences, concern that the United States maynot succeed in implementing the recent versionof the Basel Accord on bank capital, despite itsendorsement at the November 2010 Seoul Summit.Americans, in turn, are ill at ease with the EUrules on alternative investments as adopted in theAlternative Investment Fund Managers Directive(AIFM) and are critical of the treatment of thirdcountryfunds under the new regime. Furthertransatlantic deviations can be found in theapproaches to additional bank taxes and levies, aswell as to short selling. 1111For details on the differing policy positions between theUnited States and the EU, see Atlantic Council (2010).6Transatlantic Academy
However, the rift between the United States andthe EU actually goes beyond crisis-related financialreform and has pushed earlier initiatives fromthe political agenda. Thus, the initial enthusiasmover a new era of dialogue at political and agencylevel, which was embodied by the U.S.-EUFinancial Market Regulatory Dialogue (FMRD)started in 2004 and the Transatlantic EconomicCouncil established in 2007, has disappeared, andpolicymakers appear to find it difficult to maintainnecessary communication. Even more ambitiousprojects, including the 2008 plan of taking concretesteps towards a more integrated U.S.-EU financialmarket by harmonizing and mutually recognizingsecurities market rules across the Atlantic, 12 are nolonger deemed realistic undertakings.The result of these rifts is regrettable. Lack ofcooperation across the Atlantic has preventedboth sides – and the other participants in the G20process – from arriving at more ambitious, betteraligned, and more synchronised policy responses tothe financial crisis.Joint Interest in More Stableand Efficient MarketsBut are American and European interests sodifferent after all? The economic evidence suggeststhat there is a strong rationale for a much closeralignment of activities and measures. In fact,financial markets on both sides are not only verylarge and sophisticated, they are also closelyintertwined and have reached a level of integrationunparalleled by other large economies. The tradingof securities between U.S. and EU investors servesas an instructive example where American andEuropean stocks and bonds make up well overone-third of foreign securities holdings in bothdirections, and where the growth rates of theseTransatlantic Securities Transactions andSavings PotentialSources: U.S. Treasury; own calculationsSources: U.S. Treasury; own calculationsbilateral shares have – interrupted by the crisis –been double-digit over the past decade (see graphabove). 13Clearly, securities transactions between the UnitedStates and the EU and other forms of capitalflows such as credit and direct investments havebenefitted investors on both sides over the pastyears. Growing transatlantic financial interactionThe economicevidence suggeststhat there is astrong rationalefor a much closeralignment ofactivities andmeasures onfinancial marketreform betweenthe United Statesand Europe.12U.S. SEC and EU Commission, Joint Statement on MutualRecognition, February 1, 2008.13For detailed calculations, see Kern (2010a) and (2008).The Real G2: Americans, Europeans,and their Role in the G207
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