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

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Joint action onfinancial marketreform will leadto superior policyoutcomes. It’ssuccess hinges onthe U.S. and theEU solving theirbilateral issuesand forging aheadwith internationalcooperation.forum of policy coordination from the traditionaladvanced nations of the G7 to the 20 mostimportant economies promised a more effectivehandling of the 2008 financial crisis and a moresustainable policy framework for navigating thepost-crisis environment. It did this by inviting fastdevelopingnations such as China, India, and Brazil,which enjoy a growing share in global trade andoutput and increasing stakes in global productionand asset ownership, as well as formidable financialreserves. Including key emerging economies inglobal economic policy coordination has beenpraised widely as a major leap forward for globalgovernance.The potential benefits of closer cooperation amonga larger number of key players are substantial.In financial market policy, a joint approach toregulation and supervision promises a more levelplaying field in terms of regulation and a lowerrisk of regulatory arbitrage by market participants.By establishing high-quality rules across the G20,the overall level of financial market oversightcould be raised substantially. Closer cooperationamong supervisory authorities may contribute toa more effective handling of cross-border risksfor international capital flows and transnationaloperations of financial firms. In other words, jointaction may result in superior policy outcomes,as the logic of what theorists refer to as collectiveaction also applies to financial market diplomacy. 3But so do the problems associated with collectiveaction. Thus, the likelihood of reaching agreementamong the participants in the policy processdeclines with their number and with a risingheterogeneity of their interests. The transitionfrom G7 to the G20 has added to both. In addition,the chances of finding joint solutions rise with3Masson (2009) provides a comprehensive theoretical analysisof the dynamics behind international cooperation in financialmarket regulation.the expected costs of failure to do so, 4 and theunexpectedly quick economic recovery afterthe crisis in many parts of the world has clearlydiminished the sense of urgency perceived in thecontext of financial market reform. Cooperationmay get further aggravated by the multitude ofnegotiating bodies involved, especially if theirmembership varies as is the case between the G20,the IMF, the FSB, IOSCO or the Basel Committee. 5Finally, the question of the right scope of theG20 remains a latent issue. Depending on theperspective they have, critics have claimed that theGroup may be either too large or too small, andthat the range of political issues on the G20 agendawas too extensive or too limited. 6Theory, however, tells us another important storyabout international negotiations: Their successcritically hinges on group dynamics – atomistic,self-interested countries are less likely to reachagreement than a limited number of oligopolisticplayers, and the likelihood of joint solutions vitallydepends on one or more large countries forgingahead with international cooperation. 7This brings us to the United States and the EU. Iftheory — let alone historical experience — is rightabout the central importance of a small number ofkey drivers in intergovernmental processes, thenthe United States and the EU intuitively qualifyas important promoters of joint G20 solutions.Judging by their economic and financial weight,they should indeed be the driving force behindglobal policy coordination, especially in the area offinancial market regulation.4Masson (2009), pp. 18-19.5Weber (2007), p. 103 and Bradlow (2010).6Bradlow (2010), p. 12.7Masson (2009), p. 17.4Transatlantic Academy
The United States and the EU:Global Centres of Finance and RegulationThe still central role of America and Europe inglobal finance is impressive. In banking, well overtwo-thirds of global assets remain concentratedin financial centres in the United States and theEU. Together, they capture more than threequartersof the global revenue pool of investmentbanking services. On stock exchanges, the shareof the United States and the EU in global marketcapitalization remains dominant at more than 50percent of the total, and the 78 percent share inglobal equity trading attests to their strong positionas the key equity trading centres worldwide. Inaddition, more than 70 percent of all private andpublic debt securities and almost 80 percent of allinterest-rate derivatives outstanding are registeredin the traditional financial centres in the UnitedStates and the EU. Finally, foreign exchange trading,too, remains highly concentrated in transatlanticmarkets, capturing a combined 50 percent share inglobal trading.The financial crisis, despite its impact inparticular on the United States and the EU, hasnot immediately led to a critical change in thetectonics among the major financial centresaround the globe. The traditional financial centresin the United States and the European Unionhave managed to retain their strong position andcontinue to provide around three-quarters of globalfinancial services, albeit at least temporarily loweroverall levels of market activity in many marketsegments. 8The solid share of transatlantic financial markets,however, cannot belie the fact that the historicposition of the traditional financial centres inEurope and the United States is increasingly8For a more detailed analysis of the role of U.S. and EU financialmarkets in the world economy see Kern (2008), also TABD(2010).Decline of Traditional Stock MarketsSources: World Federation of Exchanges; own calculationsSources: World Federation of Exchanges; own calculationsbeing challenged by emerging competitors.Equity markets are an illustrative and in largeparts representative example: Today’s 50 percenttransatlantic share in global stock marketcapitalization has declined substantially from its78 percent peak in 2001, while its share in stocktrading has fallen from 86 percent to just over 70percent in the same period. Strikingly, the growthof stock markets in the BRIC countries amountedto more than 40 percent per year, while the EU andTraditionalfinancial centresin the UnitedStates and theEU have retainedstrong position.But this cannotbelie the factthat they areincreasinglychallengedby emergingcompetitors.The Real G2: Americans, Europeans,and their Role in the G205
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