Why U.S. - EU Economic Co-Operation Holds The Key To Global Governance

By Robert Hutchings

The globalised economy and the rise of new economic giants demand a radically reformed international system, says Robert Hutchings. But it will nevertheless fall to Europe and America to fashion these new structures for global governance. Despite the many calls for a “new Atlanticism” or a “new transatlantic bargain,” the U.S.-European relationship is still imprisoned by old habits and ways of doing business. Yet, it is an inescapable reality that almost all the new challenges lie outside the traditional NATO relationship, and many of them are in areas where U.S. and European views have long diverged.

It would be too much to ask that there be a U.S.-European meeting of the minds on every global issue, but on many of these issues U.S.-European strategic convergence seems both possible and necessary. These include management of the global financial and trading system, addressing energy security and climate change, and re-fashioning existing international institutions to address all these problems.

Perhaps it has taken the global economic crisis to compel Americans and Europeans to revitalise their cooperation and exercise co-leadership. It was noteworthy that the International Monetary Fund found itself totally sidelined, making it the first time since its creation at the 1944 Bretton Woods conference that it has played no role in a major financial crisis. It was for this reason that the Europeans, led by UK Prime Minister Gordon Brown, called for a summit meeting of the G20 world economic powers to consider a “Bretton Woods II” world financial architecture, bypassing not only the IMF but the G7 as well.

imfThis initiative and the three G20 summits which have since taken place – Washington in November 2008; London in April of last year; and Pittsburgh in October – have been a promising start. With European and U.S. leadership, several measures were undertaken to strengthen financial oversight and monitoring via the IMF and a Financial Stability Board that replaces the old Financial Stability Forum. The G20 leaders also agreed to recapitalise the IMF and multilateral development banks via an impressive $1.1 trillion package of measures to assist the poorest countries. The G20 was formally designated at Pittsburg as the premier forum for international economic cooperation, but although it is far more inclusive and representative than the G7, the G20 is itself far from ideal because Europe is so greatly over-represented,with France, Germany, Italy, the UK and the EU all having seats at the G20 table.

The essential next step is to bring the new economic powers more fully into the global system and to have their growing power and influence reflected in the IMF, World Bank and other institutions. The emerging market economies account for 30% of global GDP, 45% of total exports, and 75% of foreign exchange reserves, yet the traditional Western powers of the OECD continue to hold 63.8% of the total voting shares in the IMF, with the G7 alone constituting 43.7% of the total. Symbolically, a good place to start would be for the United States and Europe and to give up their conventional claims to the top World Bank and IMF jobs and open those leadership positions to candidates from other countries. Procedurally, emerging economic giants like China and India should be accorded substantially greater voting power. One possible formula would be for the U.S. to relinquish its position as the sole country with veto power in return for the EU’s agreement to reduce its combined voting share from 30% down to the same level as the U.S. The size of the IMF’s executive board should be reduced from 24 to 20 by consolidating European representation. Although the United States and its European partners have pledged to reform IMF governance, so far they have been loath to relinquish their privileged positions.

The global financial crisis also has contributed to a growing crisis of the world trading system, with governments responding to anti-globalisation pressures by pursuing mercantilist policies. Bilateral and regional trade agreements have been proliferating, most of them the kinds of discriminatory trade deals that the U.S.-led international order was designed to prevent. Meanwhile, the Doha Development Round, launched in the aftermath of 9/11, risks becoming the first post-war multilateral trade negotiation to fail. Doha’s failure would aggravate protectionist pressures and could cause irreparable damage to the World Trade Organisation’s own credibility.

Yet despite their rhetorical commitments to completing the Doha round, neither the U.S. nor any other economic power has done much to move it forward, and the reasons for this inaction are not hard to find. In the U.S. and elsewhere, it has sparked widespread opposition from workers and trade unions, and only tepid support from the wider public. It is, in short, the familiar story of gains being widely distributed while losses are sharply focused, usually by sector, often by region. Reviving Doha will only be possible if the American public and the Congress see large, headline-grabbing benefits that could offset opposition from those who would be adversely affected. The abstract appeal of free trade would need to be accompanied by a widely shared conviction that it is fair as well free.

farming-indiaA bold international move would be needed to overcome entrenched positions, and that means a deal involving substantial concessions by the U.S. and the EU on agriculture in return for commensurate commitments by India, Brazil, China and others to open their own markets for services and agriculture. With the Europeans, simultaneous pursuit of an “enhanced transatlantic market” would make a new U.S.-EU Doha initiative on agriculture more attractive to both sides, as it would aim at reducing additional barriers to transatlantic trade that are not covered in the multilateral round.

On energy and environmental cooperation, the G20 has increasingly taken on a key role that reflects the fact that its members account for more than 85% of global economic activity, energy consumption and greenhouse gas emissions. As in global finance and trade, solutions to the world’s growing energy and environmental challenges call for new mechanisms and the greater involvement of China, India and other rising powers.

Another legacy of the outmoded international system is that the International Energy Agency includes none of the major energy supply countries. The U.S. and Europe should take the lead in expanding its membership to include China, India, Russia and other non-OECD countries, and in elevating the IEA, along with an expanded Energy Charter Treaty, as a forum for energy security through negotiation among suppliers, consumers, and transit countries.

Solarenergie-BergeThe EU and U.S. should also exercise leadership in fashioning a new global environmental regime that includes the world’s rising economic powers. As Copenhagen’s outcome has made clear, a global mega-deal is probably not feasible under current economic conditions, so the most realistic outcome would seem to be flexible national plans with political, rather than legally binding, commitments to cap carbon emissions by 2050, reviewed and monitored by an international body analogous to the WTO trade policy review mechanism. To induce China and India to join such a consensus, the U.S., EU and Japan would need to take the lead in assembling a clean energy fund with significant private sector participation – a more ambitious version of the International Partnership for Energy Efficiency Cooperation (IPEEC) established at the G8 summit in L’Aquila, Italy, last July.

In sum, the world is on the cusp of the most profound shift in global power and influence in a century. Managing this quiet revolution calls for nothing short of a new international system, with a radical revision of existing institutions and patterns of doing business. The existing international system, fashioned for the world of the mid-20th century, is not very relevant to the new global agenda, and the emerging re-distribution of power roughly from west to east is unlikely to permit any new global order to be managed by a U.S.-European condominium.

Having said that, the United States and Europe nonetheless have an indispensable role to play in fashioning a new global order that can integrate the rising powers and accommodate their interests, while at the same time preserving the basic liberal values that have underpinned the western-led post WWII system. But an attempt to deal with new problems within the framework of existing institutions cannot provide the solutions required. This is where the international community has been stuck for the nearly two decades since the end of the cold war; trying to adapt those institutions to new challenges and open them to new members, while invoking a sense of common interests that were more relevant to the last half of the 20th century than they are to the early 21st. That effort at incremental adaptation has about run its course; now a new burst of creativity and leadership is needed.

It has been a popular rallying cry since the end of the cold war that on almost every issue of the day Americans and Europeans would be better off working together than working separately. It is an inspiring message, and may even be true, but the years since the collapse of the old order have shown that just because Americans and Europeans should act together in this new era did not necessarily mean they would do so.
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