Global Euro: Testing Times for Transatlantic Ties? EUMA Papers, Vol. 4 No. 9, April 2007

Theories of international cooperation (TIC) predict that deeper economic integration raises the costs of policy conflicts and promotes coordination. As the US-EU economy makes up 60 per cent of the world GDP, policymakers on the two sides of the Atlantic are expected to assign highest priority to joint policy action. Angela Merkel‘s resumption of TAFTA with the objective of fixing some regulatory issues, offers comfort to TIC’s tenets. Though, the correction of the global imbalances and especially the huge US external deficit does not add as much of comfort to TIC’s tenets. A likely overshooting of dollar’s exchange rate vis-à-vis the euro will bring huge consequences on euro zone economies. While TIC’s supporters would call for transatlantic mechanism to arbitrate and coordinate monetary policy to offset potentially huge spillover effects, this paper would suggest EMU institutions to prepare for exchange rate shock adopting a policy of risk management, rather than banking on implausible transatlantic coordination.