March 2011
Paper Series
Summary: Political
disagreements, the financial
crisis, and the emergence of
new powers have called both
the economic dominance
and the political relevance of
the transatlantic alliance into
question. Given these existing
challenges and expected longer-
term shifts in economic power,
there has been much debate
about how the transatlantic
alliance can best ensure the
future longevity of a Western-led
international economic system.
The conventional wisdom is that
socializing rising powers into
existing international norms
and institutions will be the most
important determinant of the
stability of the existing liberal
economic order. Though this
approach has many benefits,
in and of itself, this strategy
is fundamentally incomplete.
In order to cement its central
position in the global economy,
the alliance needs to draw on
its tradition of institutional
innovation to strengthen
transatlantic competitiveness
and define the economic rules of
the game for the 21st century.
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New Institutions for a New World:
The Transatlantic Alliance and the Future
of the Global Economic Order
by David Post and Pierce O’Reilly
Introduction
Historically, the trajectory of
international relations has been
shaped by the golden rule of world
politics — the countries that have
possessed the most economic and
financial clout have shaped the rules
and institutions around which the
international system is based. Since
the likelihood of war between the
great powers has decreased due
to a range of factors, including
the spread of nuclear weapons,
increased economic interdepen-
dence, the diffusion of democracy,
and the proliferation of interna-
tional institutions, it seems safe to
say that wealth and soft power —
not guns and bombs — will be the
primary drivers of geopolitics in the
21st century.
At this point, it is not clear whether
this paradigm shift will reduce or
increase the transatlantic alliance’s
influence. As well as highlighting
structural weaknesses in Western
economies, the aftermath of the
financial crisis has demonstrated
that the distribution of economic
power is decisively shifting South
and East. While the transatlantic
alliance cannot and should not
stop this economic power shift, it
should proactively take measures
to enhance its position and pursue
its interests during this transition.
Given the fleeting nature of power
in international politics, the key
challenge for the next generation of
policymakers will be to leverage the
transatlantic alliance’s current power
advantages to establish new interna-
tional rules, norms, and institutions
that solidify the alliance’s long-term
economic strength.
The Future of Transatlantic
Alliance Primacy in Context
Transatlantic cooperation in the
context of multilateral institu-
tions has been a defining feature
of international politics for the
last 50 years. Faced with a world
devastated by war and threatened
by communism, the transatlantic
alliance was the driving force
behind the institutionalization of
international politics. Blending
together power and legitimacy, the
international institutions forged by
the transatlantic alliance during the
post-World War II period have been
remarkably durable.1 In addition to
promoting global stability during
the tumultuous ebbs and flows of
international politics, norms such
as free trade and institutions like
1
See John G. Ruggie (1982). “International regimes,
transactions, and change: Embedded liberalism in the
postwar economic order.” International Organization,
36(2), 379-416.
 the World Bank, World Trade Organization, and Inter-
national Monetary Fund have provided the United States
and Europe with enhanced economic and political influ-
ence on the international stage.
While the challenges posed by the post-World War II
era and post-financial crisis world differ in both scope
and magnitude, today the transatlantic alliance is once
again facing a world in tumult and a variety of internal
and external difficulties. With a relationship strained in
recent years by the wars in Iraq and Afghanistan and
disagreements in multilateral forums, the United States
and Europe have struggled to identify a common focal
point for bilateral collaboration. Moreover, the persis-
tent unemployment and economic stagnation caused by
the financial crisis in the West — coupled with the rise
of China and other emerging economies — have raised
questions about whether members of the transatlantic
alliance will have the same capacity to define interna-
tional politics in 2045 that they possessed in 1945.
Lost in the pessimism that
dominates the public discourse
is the fact that the United States
and Europe will remain the
world’s predominant economic
powers in the short- to medium-
term.
Given these existing challenges and expected longer-term
shifts in economic power, there has been much debate
about how the transatlantic alliance can best ensure the
future longevity of a Western-led international economic
system. The conventional wisdom is that socializing
rising powers into accepting existing international norms
and institutions will be the most important determinant
of the stability of the extant liberal economic order.2
Though the benefits of many ideas that have been
2
See Daniel Drezner (2007). “The New New World Order.” Foreign Affairs, March/
April.
2
proposed to achieve this objective — including giving
rising powers more of a voice in international financial
institutions and reforming the United Nations Security
Council — are widely recognized, a strategy of merely
adapting existing institutions to accommodate rising
powers is fundamentally incomplete.
From a strategic point of view, the institutions established
by the transatlantic alliance after World War II have been
particularly valuable because they have allowed the alli-
ance to “lock in” its long-term influence and establish a
more predictable pattern of inter-state interactions by
binding other states — even those that may become more
powerful than the United States and Europe in the long
run — to alliance-friendly rules and norms.3 Instead
of sitting back and focusing solely on integrating rising
powers into existing institutions, the transatlantic alliance
needs to draw on its tradition of institutional innovation
to proactively establish institutions that will continue
to define the economic rules of the game for the 21st
century long after the transition period has passed.
The Way Forward
Lost in the pessimism that dominates the public
discourse is the fact that the United States and Europe
will remain the world’s predominant economic powers in
the short- to medium-term. Europe and the United States
accounted for roughly 40 percent of world GDP in 2009,
more than the cumulative economic weight of the next 22
countries combined.4 The gap between the transatlantic
alliance and emerging economies in per capita income
is even larger and will remain so for the foreseeable
future even as the alliance’s overall share of world GDP
decreases. In addition, the United States and Europe
continue to be the world’s predominant sources of “soft”
power and influence, providing support for international
institutions and taking a leadership role in the interna-
tional sphere on prominent global issues such as public
health, human rights, and democracy.
Given the alliance’s existing power advantages, the time
is ripe to create new institutions that will ensure that the
world’s international economic infrastructure continues
to remain a source of competitive advantage on both
sides of the Atlantic. To achieve this objective, transat-
3
See G. John Ikenberry (2001). After victory: Institutions, strategic restraint, and the
rebuilding of order after major wars. Princeton: Princeton University Press.
4
International Monetary Fund (2009). GDP by Purchasing Parity Power. World Eco-
nomic Outlook Database.
 Though socializing rising powers
into the liberal international
order should be a key part of
the transatlantic agenda, the
United States and Europe must
proactively take measures to
cement their positions as central
players in the global economy.
lantic cooperation should proceed among three primary
dimensions in the coming years: boosting trade, stabi-
lizing the global financial system, and securing access to
natural resources.
First and foremost, the transatlantic alliance should
establish a Transatlantic Free Trade Area (TAFTA) to
strengthen the transatlantic economy and ensure that
Western economic norms continue to serve as the back-
bone of the international economic system in the future.
Members of the transatlantic alliance are facing increased
economic competition from rising powers, and the trend
toward regionalism in recent years means that alliance
members’ large domestic markets will not provide the
same degree of economic clout in the future as in years
past. Establishing TAFTA would help the alliance over-
come these challenges.
To begin with, the agreement would provide incen-
tives for companies on both sides of the Atlantic to do
business inside the free trade area, generating jobs by
boosting trade and opening up new markets for North
American and European producers. As rising powers’
markets become more attractive over time, TAFTA would
also have the effect of ensuring that the gains of transat-
lantic trade — which currently accounts for one-third of
the total global trade in goods5 and more than 40 percent
of the world trade in services6 — continue to accrue to
5
European Commission (2010) External Trade Statistics. Eurostat
6
European Commission (2005) External Trade in Services. Analytical aspects: Data
1997-2005.
3
the United States and Europe. Finally, TAFTA would
attract more foreign direct investment to the transatlantic
alliance by providing companies from the developed and
developing worlds alike with incentives to locate in what
would be the world’s largest market.
Not only would TAFTA produce economic benefits, but
it would also help diffuse Western economic norms.
Given that a transatlantic common marketplace would
be the largest in the world, other countries would be
incentivized to adopt American and European standards
in order to access the TAFTA market. As such, TAFTA
would form a regulatory “hub” of sorts, promulgating
standardized norms among American and European
trading partners on issues ranging from property rights
to contract enforcement and governmental trade prac-
tices. As well as leveling the playing field for Western
firms, the widespread adoption of these standards would
incentivize rising powers to play the economic game by
alliance-friendly rules.
In addition to taking bilateral steps to boost their
economic power, the United States and Europe should
also pursue multilateral initiatives aimed at promoting
financial stability in the international economy. The
fallout from the financial crisis has demonstrated that
transatlantic economies remain enormously vulnerable
to global financial instability. Given the importance of the
financial system to Western prosperity, the transatlantic
powers should work to transform the Financial Stability
Board into a new International Financial Authority (IFA).
The new IFA should have a similar level of authority, legal
stature, and resources as other international financial
institutions — such as the World Bank and the Interna-
tional Monetary Fund — and encompass the existing
troika of global regulators.7 Functionally speaking, the
IFA should act as a regulator and an international reso-
lution mechanism for large financial institutions with
a fund that would insure depositors (an international
Federal Deposit Insurance Corporation) and provide
resources in financial liquidity crises. Just as countries
must adhere to stringent conditions when receiving loans
from the IMF, strict requirements for accessing IFA funds
would promote financial stability internationally without
a major risk of moral hazard.
7
This includes the Basel Committee on Banking Supervision, the International
Organization of Securities Commissions, and International Association of Insurance
Supervisors.
 As with TAFTA, the establishment of the IFA would
provide the transatlantic alliance with material and
strategic benefits. The international financial system is
too interconnected to be adequately dealt with through
the plethora of existing international regulatory orga-
nizations, and cross-border financial institutions have
become both too big to fail and too complex to be
regulated by individual countries; this has left the United
States and Europe acutely vulnerable to a repeat of the
2008 crisis. The establishment of an IFA would secure the
economies of the United States and Europe — increas-
ingly dependent on finance — from another financial
meltdown while solidifying international finance as a
source of competitive advantage for the alliance.
Moreover, an IFA would increase the likelihood that
rising powers would continue to function within the
context of a liberal capitalist framework. In addition to
leaving Western economies weakened and governments
heavily indebted, the financial crisis has also caused enor-
mous reputational damage to the liberal capitalist system,
lending credence to those who advocate more controlled
market economies. Given that the United States and
Europe have achieved global prosperity by competing
within the context of this framework, a widespread shift
toward other economic models would present the alli-
ance with serious challenges. The establishment of an IFA
would decrease the likelihood that this shift would occur
by simultaneously infusing the international economy
with rules to prevent future crises from occurring and
increasing other countries’ confidence in the existing
system.
An empowered IFA would also cement the centrality
of existing financial hubs like London, New York, and
Frankfurt in the global financial system. Traditional hubs
of financial power are increasingly being challenged by
newer financial centers in emerging economies. These
markets threaten the dominance of Western financial
centers — as well as global financial safety — by adopting
light-touch regulation and little prudential supervision,
making firms more and more likely to locate elsewhere
and increasing the risks posed to Western economies
through contagion. While every country in the world
would be invited to join the IFA, only financial institu-
tions in countries that upheld the IFA’s regulatory stan-
dards would be able to tap into IFA deposit insurance
and receive liquidity during financial crises. Even if some
countries refused to join, the weight of the IFA’s standards
would not only encourage businesses in nonmember
4
countries to abide by its rules, but also create important
incentives for firms to lobby their governments to adhere
to IFA regulations.
As well as pursuing the two initiatives presented above,
the transatlantic alliance should also use its influence to
push for the establishment of Global Resource Reserves
System (GRRS). As examples ranging from oil embargos
in the 1970s to China’s current near monopoly on rare
earth minerals demonstrate, natural resource power
plays have the potential to provide rising powers with
a significant bargaining chip in their interactions with
members of the transatlantic alliance. A GRRS would be
modeled on the IMF’s Special Drawing Rights. A supply
of resources such as enriched uranium, oil, and rare earth
metals would be created, with the condition that member
countries could only access the reserve if these resources
were being used for political purposes (the reserves could
not be accessed under normal market conditions). In
short, the GRRS would prevent resource-based economic
power plays, making sudden strategic supply cut-offs
and price hikes ineffective. As with an IFA, strict rules
governing access would prevent moral hazard problems.
The existence of a Global
Resource Reserves System
would mean that other
potentially valuable commodities
that were discovered could
simply be “slotted in” to an
existing institutional framework.
The GRRS would particularly benefit the United States’
and Europe’s long-term competitiveness as their highly
carbon- and manufacturing-dependent economies tend
to demand much and supply little of these resources,
making them vulnerable to supply shocks. A GRRS
would provide members of the transatlantic alliance with
reliable access to important resources while enhancing
their bargaining power in relation to natural resource-
rich states. Even if some resource-rich countries refused
 to join, the benefits provided by the GRSS would be
enticing to many resource-rich states while the mere
existence of the institution would have the effect of stig-
matizing the use of natural resource power plays at the
global level. In the security realm, this type of an institu-
tion would ensure that countries could not use the excuse
of a lack of access to resources — as Iran has done with
enriched uranium — to bolster their military capabilities.
Perhaps more importantly, the GRRS would be adaptable
to the economics of the future. In the past, oil and coal
have been global resource desiderata, but it is impossible
to foresee what resources the technology of the future
will require, and thus which countries will win the lottery
of who controls the supply of tomorrow’s most valuable
bargaining chips. The existence of a GRRS would mean
that other potentially valuable commodities that were
discovered could simply be “slotted in” to an existing
institutional framework. In short, the establishment of
the GRRS would promote a predictable set of norms and
rules regarding the management of natural resources that
would minimize the potential for resource-based shocks
and benefit the transatlantic alliance as the global power
shift proceeds.
While the process of establishing these new institutions
will be both politically and logistically challenging, the
hurdles that exist are not insurmountable. For example,
the majority of states in the world would benefit greatly
from enhanced financial stability and freedom from
politically motivated natural-resource-supply shocks at
the international level. Assuming that the GRRS and IFA
were able to attract widespread support, the norms and
rules embodied in these institutions would exert a strong
compliance pull even on non-members. Similarly, certain
domestic constituencies would certainly oppose TAFTA.
However, given the relative parity in wealth between the
two blocs, adjustment costs from TAFTA would likely be
much lower than with other free trade agreements.
Conclusion
Political disagreements, the financial crisis and the
emergence of new powers have called both the economic
dominance of the western world and the political rele-
vance of the transatlantic alliance into question. Though
socializing rising powers into the liberal international
order should be a key part of the transatlantic agenda, the
United States and Europe must proactively take measures
to cement their positions as central players in the global
5
economy while the opportunity to do so still exists. Given
the expected shifts in the global distribution of power
in the coming years, a failure to capitalize on the alli-
ance’s extant economic advantages now may significantly
undermine its interests in the future.
As it currently stands, however, neither side of the
Atlantic has the clout necessary to translate these insti-
tutional ideas into reality on their own. As such, the
alliance’s success in leveraging its collective strength to
drive the global agenda will be the primary determinant
of European and American influence on the world stage
in the long-run. By implementing a joint program of
institution building, policymakers can take a major step
toward laying the groundwork for enhanced economic
strength — and ultimately more leverage— on both sides
of the Atlantic.
About the Authors
Pierce O’Reilly is a doctoral candidate in political science at Co-
lumbia University in New York City, where he majors in compara-
tive Politics and minors in economics. Dr. David Post is a senior
consultant in IBM’s strategy and innovation practice, where his
work focuses on economic competitiveness, sustainability, and
business model redesign. This paper represents the authors’ opin-
ions and not those of IBM.
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