The U.S. and Europe have made major strides in reforming the financial system, most notably with the passage in the U.S. of the Dodd-Frank Act. However, there remains a huge amount of work to fully define the regulatory framework, to fill in this framework with specific rules, and to organize and train the supervisors to effectively enforce those rules. It is critical that the remaining steps are coordinated on a global basis.
The most important axis of cooperation needs to run across the Atlantic, since the U.S. and Europe still dominate the financial world, especially in the more sophisticated products. We were recently members of a taskforce that examined the state of transatlantic cooperation on these issues and made a series of recommendations to optimize that cooperation. (Douglas Elliott was also the author of the taskforce's report.)
Gratifyingly, a close examination shows that the U.S. and Europe have coordinated surprisingly well, despite media reports which tend to dwell on the relatively small number of remaining conflicts. The conflicts are not minimal; they involve such important issues as agreeing on the accounting rules that underlie the many numbers used to calibrate and enforce regulation. However, the conflicts are dwarfed by the great degree of commonality in approach.
This commonality flows from three main sources. First, there is a great deal of overlap in the views on both sides of the Atlantic about what caused the crisis and therefore in the general direction of reforms. Second, the G-20 club of the world's dominant powers came together in an unprecedented way to lead in finding solutions to the financial crisis that threatened all nations. The groundrules it laid down have strongly influenced the resulting legislation and regulation. Finally, there is much more transatlantic cooperation and coordination behind the scenes than is apparent on the surface. Governmental contacts, usually at senior staff levels, are frequent and quite productive.
Despite this generally very positive story, there do remain areas of contention and it is clear that the mechanisms for cooperation need to be strengthened, as the report lays out in detail. One area where better institutional mechanisms would help is through encouragement of deeper discussions between the U.S. Congress and the European Parliament. Both have a tendency to focus too much on purely domestic issues, without enough attention to international coordination, and the EU Parliament is new to its greatly expanded powers taken on under the Lisbon agreement. A better dialogue would help avoid legislative proposals that would lead to substantial conflicts.
Finally, the largest challenge for transatlantic cooperation comes from the other side of the world. Emerging market powers, particularly in Asia, will hold the key to whether global approaches to financial reform work. The danger is that there is significant sentiment in those countries that the crisis was a "North Atlantic" one that requires action by the U.S. and Europe, but not the emerging markets. Taken too far, this could lead to "regulatory arbitrage" in which much of the financial activity that is globally mobile could move to more lightly regulated jurisdictions that did not make changes corresponding to those we are making. So, it is critical that we reach true agreement globally, not just on the shores of the Atlantic.