By Jacob Comenetz
Special Correspondent

Washington - Less than one month before the summit of the Group of 20 (G20) major economies in Seoul, South Korea, the United States and European Union are facing a critical test of their will to agree on financial issues critical not only to their own economies, but to the rest of the world too.

In October 2008, at the peak of the financial crisis, world financial leaders agreed to take "exceptional action" to stabilize the global financial system.

The United States and major EU countries went on to cut interest rates, provide financial assistance to major banks, and stimulate their economies with public funds. These actions not only averted a more severe downturn, but also demonstrated the capacity for trans-Atlantic cooperation under duress, economists say.

But two years later, economists meeting at the Peterson Institute for International Economics in Washington to discuss U.S.-European economic cooperation see what they call the "unprecedented convergence" as having dissipated, replaced by a tendency toward differing macroeconomic priorities. In recent months, trans-Atlantic differences have emerged over the appropriate scope and timing of fiscal stimulus measures, implementation of reformed banking regulations, and the governance of international financial institutions, among other issues.

C. Fred Bergsten, director of the Peterson Institute, said this is unfortunate, given that U.S.-EU financial cooperation could serve as an important example to countries with fast-growing economies, or "emerging markets." As emerging markets grow in power, coordination in financial regulation is needed more than ever, given the tendency of money to flow to the least-regulated jurisdiction, a tendency that puts individuals' and institutions' investments at risk.

Some of the divergence in economic policies among U.S. and European countries is due to different political and economic structures and post-crisis developments on the two sides of the Atlantic.

"The point of a convoy is to get all the ships in the flotilla to their destinations safely, and our economies are not yet fully out of the dangerous open waters," write Adam Posen of the Peterson Institute and Jean Pisani-Ferry of the Brussels-based Bruegel research group in a recent paper, presented at an October 8 conference in Washington. The U.S.-EU "convoy" should at a minimum coordinate a few key objectives, including not intervening to depreciate their currencies and planning "exit strategies" from fiscal stimulus plans in the medium term.

The most critical area for EU-U.S. economic coordination is the longstanding issue of China's undervaluation of its currency, according to Bergsten. As countries with trade deficits, especially the United States, but also the United Kingdom and France, try to increase exports to boost growth, rebalancing trade accounts with China has become increasingly urgent.

But an agenda for trans-Atlantic cooperation includes more issues, such as financial regulatory reform and reform of the International Monetary Fund and the Financial Stability Board (FSB), established after the 2009 London G20 summit.

Various factors, from the transition to a new U.S. administration and a new European Commission to the European sovereign debt crisis, have complicated coordinated regulatory reform, according to Sharon Bowles, who chairs the Economic and Monetary Affairs Committee in the European Parliament. She acknowledged that implementing financial regulatory reform in Europe is going more slowly than some anticipated, but said that European legislators are "getting better at it as they go along."

Europe still "has the chance to have a good crisis," said Marco Buti, director-general for economic and financial affairs at the European Commission. He defined a good crisis as one in which "the policy response is not just adequate, damage-limiting in the short term, but leaves foundations for better response in the future and reduces the likelihood of similar crises in the future."

A less rosy picture of trans-Atlantic economic cooperation was painted by Mohamed El-Erian, head of PIMCO, the world's largest bond investor. Big companies and households in the United States and in major European economies are "self-insuring" by accumulating cash reserves, he said, because people no longer trust the financial systems. Financial services in the "muddled middle" neither serve the real economy, nor have regained strength themselves. How much longer "core Europe," defined as Germany and the European Central Bank, will underwrite problems of debt and competitiveness in the eurozone is unclear, he said.

According to El-Erian, the major challenge facing the world is how to accommodate the rise of systemically important emerging economies. He said national and global economic realignments will unpredictably redefine the trans-Atlantic relationship, unless the EU and United States have a "common analysis and a common objective," in addition to well-functioning, credible institutions that take into consideration the rising power of developing countries.

(This is a product of the Bureau of International Information Programs, U.S. Department of State. Web site: http://www.america.gov)