PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS BRUEGEL SPECIAL REPORT 22 Transatlantic Economic Challenges in an Era of Growing Multipolarity Jacob Funk Kirkegaard, Nicolas Véron, and Guntram B. Wolff, editors July 2012 Special Report 22_Transatlantic Cover_Final.indd 1 6/25/2012 9:33:27 AM Transatlantic Economic Challenges in an Era of Growing Multipolarity Jacob Funk Kirkegaard, Nicolas Véron, and Guntram B. Wolff, editors PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS BRUEGEL Washington, DC July 2012 Jacob Funk Kirkegaard has been a C. Fred Bergsten, Director research fellow at the Peterson Institute for Edward A. Tureen, Director of Publications, International Economics since 2002 and is Marketing, and Web Development also a senior associate at the Rhodium Group, a New York–based research firm. He is author Typesetting by BMWW of The Accelerating Decline in America’s High- Printing by Versa Press Skilled Workforce: Implications for Immigration Policy (2007) and coauthor of US Pension BRUEGEL Reform: Lessons from Other Countries (2009) and 33 Rue de la Charité/Liefdadigheidsstraat 33 Transforming the European Economy (2004). He B-1210 Brussels, Belgium is a graduate of the Danish Army’s Special Phone: +32 2 227 4210 School of Intelligence and Linguistics with Fax: +32 2 227 4219 the rank of first lieutenant; the University of www.bruegel.org Aarhus in Aarhus, Denmark; and Columbia University in New York. Jean Pisani-Ferry, Director Nicolas Véron is senior fellow at Bruegel Copyright © 2012 by the Peter G. Peterson and visiting fellow at the Peterson Institute Institute for International Economics and for International Economics. A graduate of Bruegel. All rights reserved. No part of France’s École Polytechnique and École des this book may be reproduced or utilized Mines, his earlier experience combines policy in any form or by any means, electronic work as a French civil servant and corporate or mechanical, including photocopying, finance as a junior investment banker, chief recording, or by information storage or financial officer of a small listed company, retrieval system, without permission from and independent strategy consultant. In the Institute. 2006 he coauthored Smoke & Mirrors, Inc.: Accounting for Capitalism (Cornell University For reprints/permission to photocopy Press). He writes a monthly column on please contact the APS customer service European finance, which is published by department at Copyright Clearance leading newspapers and online media in most Center, Inc., 222 Rosewood Drive, Danvers, Group of Twenty (G-20) countries. MA 01923; or email requests to: [email protected] Guntram B. Wolff is the deputy director of Bruegel. Prior to joining Bruegel, he worked Printed in the United States of America at the European Commission and was an 14 13 12 5 4 3 2 1 economist at the Deutsche Bundesbank. He was also an advisor to the International Library of Congress Cataloging-in- Monetary Fund and has taught economics at Publication Data the University of Pittsburgh. His columns have Transatlantic economic challenges in an era been published and cited in the Financial Times, of growing multipolarity / Jacob Funk New York Times, Wall Street Journal, Frankfurter Kirkegaard, Nicolas Veron, and Guntram B. Allgemeine Zeitung, BBC, Die Welt, and CNBC. Wolff, editors. He is coeditor (with William R. Cline) of p. cm. Resolving the European Debt Crisis (2012). He Includes index. holds a PhD from the University of Bonn and ISBN 978-0-88132-645-1 has studied economics at the Universities of 1. United States—Foreign economic Bonn, Toulouse, Pittsburgh, and Passau. relations—European Union countries. 2. European Union countries—Foreign economic relations—United States. PETER G. PETERSON INSTITUTE FOR 3. European Union countries—Economic INTERNATIONAL ECONOMICS policy—21st century. 4. United States— 1750 Massachusetts Avenue, NW Economic policy—21st century. Washington, DC 20036-1903 I. Kirkegaard, Jacob F. II. Véron, Nicolas. (202) 328-9000 FAX: (202) 659-3225 III. Wolff, Guntram. www.piie.com HF1456.5.E8T73 2012 337.7304—dc23 2012015638 The views expressed in this publication are those of the authors. This publication is part of the overall program of the Institute, as endorsed by its Board of Directors, but does not necessarily reflect the views of individual members of the Board or the Advisory Committee. Contents Preface v Introduction: The Transatlantic Relationship in an Era of Growing Economic Multipolarity 1 Jacob Funk Kirkegaard, Nicolas Véron, and Guntram B. Wolff I 2010 Policy Conference, Washington, DC 1 Postcrisis EU Governance 5 Marco Buti 2 From Convoy to Parting Ways? Postcrisis Divergence Between European and US Macroeconomic Policies 9 Jean Pisani-Ferry and Adam S. Posen 3 US Climate Change Policy: Implementing the Copenhagen Accord and Beyond 45 William R. Cline 4 EU Climate Change Policy: Can It Mobilize Innovations for Clean Energy Technologies? 63 Reinhilde Veugelers 5 The Transatlantic Relationship in an Era of Growing Economic Multipolarity 79 Mario Draghi 6 Too Big to Fail: The Transatlantic Debate 85 Morris Goldstein and Nicolas Véron 7 Reform of the Global Financial Architecture 125 Garry J. Schinasi and Edwin M. Truman II 2011 Policy Conference, Berlin 8 Transatlantic Relations and Globalization in Time of Crisis? 185 Vítor Gaspar 9 The International Monetary System at a Crossroads: Opportunities and Risks for the Euro 189 Ignazio Angeloni and André Sapir 10 European Monetary Unification: Precocious or Premature? 209 Joseph E. Gagnon 11 Europe’s Growth Emergency 221 Zsolt Darvas and Jean Pisani-Ferry 12 Challenges to Economic Recovery in the United States and Europe 247 Michael Mussa 13 The Euro Area Crisis and Future Global Implications 267 Wolfgang Schäuble 14 The Debt Challenge in Europe 273 Alan Ahearne and Guntram B. Wolff 15 General Government Net Indebtedness: Is There a Role for the Asset Side? 301 Jacob Funk Kirkegaard About the Contributors 335 Index 343 Preface The transatlantic political and economic relationship has shaped and domi- nated the global economy and its institutions since the end of the Second World War, but today the United States and Europe account for a smaller and diminishing share of world economic output. Transatlantic trade similarly represents a declining part of world trade. It is only in the field of finance that the relationship remains unrivaled. The launch of the G-20 in the midst of the global financial crisis repre- sented a natural evolution in the global governance architecture, which must at all times strive to include a critical mass of global actors to secure effective global policy cooperation. Global trends have, therefore, forced a rethink of not only how the United States and Europe act externally toward new rising economic poles but perhaps more importantly what the two partners see as the substantive contents of the transatlantic relationship itself. How must the transatlantic relationship evolve to remain relevant in a multipolar world? Do policy areas still exist where the transatlantic rela- tionship remains indispensable? Are there issues that the United States and Europe must still take the lead on? And if so, are Washington, Brussels, and other European capitals capable of successfully coordinating their respective positions, engage their domestic constituencies and interest groups, and rise to such occasions? The challenges are many: restore economic growth, reduce public and private debt overhangs, achieve financial-sector re-regulation, re- form the existing global financial institutions, cope with ageing societies, and address climate change. These are some of the questions that transatlantic policymakers face, and the papers in this volume are intended to help facilitate discussion on and provide answers to these questions. v The papers, associated discussion, and topical addresses by key trans- atlantic policymakers in this volume were initially prepared for and presented at two policy conferences organized jointly by the Peterson Institute for Inter- national Economics and Bruegel, the first in Washington in October 2010 and the second in Berlin in September 2011. Adam S. Posen and Jean Pisani-Ferry addressed the question of diverg- ing macroeconomic perspectives in the United States and Europe. William R. Cline and Reinhilde Veugelers assessed the challenges to transatlantic climate change policies. Morris Goldstein and Nicolas Veron compared the terms of respective policy debates on too-big-to-fail banks on both sides of the Atlan- tic. Edwin M. Truman and Garry Schinasi tackled the outlook and require- ments for effective reform of the global financial architecture and especially the International Monetary Fund. Ignazio Angeloni, Andre Sapir, and Joseph Gagnon examined the role played by, and challenges to, the international monetary system. Michael Mussa and Zsolt Darvas explored the outlook for restoring economic growth in the United States and Europe. Jacob Funk Kirkegaard, Alan Ahearne, and Guntram Wolff considered the scope and chal- lenge of high postcrisis transatlantic debt levels. The Peter G. Peterson Institute for International Economics is a private, nonprofit institution for the study and discussion of international economic policy. Its purpose is to analyze important issues in that area and to develop and communicate practical new approaches for dealing with them. The Insti- tute is completely nonpartisan. The Institute is funded by a highly diversified group of philanthropic foundations, private corporations,