Tuesday, October 12, 2010

The Case for a Transatlantic Economic Union by Richard Rosecrance

Richard Rosecrance has written an article titled “The Case for a Transatlantic Economic Union.” Rosecrance is an Adjunct Professor, a Senior Fellow, and Director of the Project on U.S.-China Relations at Harvard’s Kennedy School of Government. The article appeared in the May/June 2010 issue of “Foreign Affairs.”

Rosecrance suggests not only that the U.S. should become part of an economic bloc with the E.U., but that it must. He believes that in the global economy bigger is always better, and he seems to be saying that the U.S. is not yet “too big to fail.”
“The international consulting firm McKinsey & Company calculated that in 2007, world financial assets (including equities, private and public debt, and bank deposits) amounted to $194 trillion, or 343 percent of the world's GDP. It is easy to see why smaller economies can be defenseless against shifts in the global market. Money coming into a country can be an unexpected (and sometimes unwanted) boon; money going out can spell disaster. Local inflation and deflation can occur as a result of the whims of untutored but powerful investors based far away on Wall Street or in the City of London. Should foreign investors lose faith in a small country's economy, for whatever reason, that country is in trouble.”

“During the recent global economic crisis, moreover, even the largest economies confronted huge losses as foreign and domestic investors removed funds or sold their holdings. From 2007 to 2008, stock markets worldwide depreciated by 50 percent. U.S. interest rates remained low only because China, Japan, and Europe continued to buy and hold U.S. securities; had these funds been removed, no amount of domestic spending (or printing of money) could have compensated. Even the biggest players, in other words, were too small to surmount the crisis on their own.”
The author says that in 2006 Germany’s Angela Merkal proposed a free-trade zone composed of the E.U. and the U.S. He believes such a union would be to the advantage of both partners.
“Given the failure of a truly global attempt at international commercial openness, the way to extend the range and vitality of the U.S. economy is through new customs unions and currency arrangements. These are important not only to overcome the recession's enduring effects but also to match the growth of rising powers. Combining forces economically increases growth for the countries involved, and in the twenty-first century, that can be done without the risk of economic fragmentation or geopolitical conflict. A transatlantic free-trade agreement would provide its members the economic scale they need now and attract others in the future.”
The U.S. would presumably accrue the same benefits that E.U. members realized when the formed their union.
“The absence of tariffs in the EU allows greater cross-border commercial cooperation, which promotes specialization and efficiency and provides consumers in the member states with cheaper goods for purchase. Over time, as economists such as Andrew Rose and Jeffrey Frankel have shown, such trade zones increase their members' trade volume and GDP growth.”
I have to admit that this article took me by surprise. I am not the most astute student of economics, but I would have thought that something this big would have come to my attention if it had been seriously considered. That leaves me somewhat dubious about the seriousness of this proposal. Nevertheless, the author’s arguments deserve consideration.

I have a hard time accepting Rosecrance’s premise that the U.S. was in serious peril during the recent (and current) economic crisis, so it must respond in some way. The U.S. economy may not be as big compared to the world’s as it once was, but the U.S. still occupies a special position and is allowed special privileges. The notion that any or all of China, Japan and Europe would have purposely undermined the U.S. economy by stopping their purchase of U.S. debt does not make any sense. I could see China throwing a few feints in order to make political points, but it is in no one’s economic interest to bring down the U.S. These countries buy our debt for a reason, and that reason is still valid. Anything they might do to drive up interest costs on U.S. securities would lower the value of their own holdings. Their economies still depend on a healthy U.S. economy.

Even if one does not accept the notion that we need to act, it may be possible that it would be to our advantage to act. I have misgivings about the presumed benefits also.

The author promises this new economic bloc would allow us to specialize and become more efficient. We have already specialized! We export financial nightmares! We need to de-specialize before we start competing with better balanced economies and peoples who have demonstrated that their leaders are smarter than ours. We need time—and the will—to rebuild our economy. We need to plan how we should best allocate our resources in order to better compete with the rest of the world. We need to be careful about ceding advantage to any country until we have such a plan in place.

Rosecrance’s notion of an economic union between the U.S. and the E.U. might make sense someday, but that day is a long way off.

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