Europe’s fragmentation endangers a vital Trans-Atlantic pact (1)


First of two parts

THE Trans-Atlantic Trade and Investment Partnership (TTIP), a trade agreement between the European Union and the United States, appears to be faltering after 18 months of negotiations. If a deal is not reached, or if it is watered down so much that it has little effect, then internal divisions within Europe will have yet again prevented the Continent from following the course that would aid it the most. The ongoing slide into stagnation will continue to fuel the fire of Euroskeptical parties offering an alternative to the European Union.

An incident during the European Parliament’s approval hearing for the new European trade commissioner seems to have foreshadowed the demise of the TTIP. Three days earlier, incoming Trade Commissioner Cecilia Malmstrom’s pre-hearing written comments caused a stir by including the suggestion that investor state dispute settlement, the much-maligned investor protection clause, would be removed from the far-reaching trade agreement. Malmstrom subsequently denied that she had written the words. At the hearing, one of her interrogators — a Dutch member of the European Parliament — stated that she believed Malmstrom, because the document the parliament member had received showed tracked changes, revealing that a member of European Commission President Jean-Claude Juncker’s staff had altered the text. It was thus unsurprising when reports appeared Oct. 16 claiming that Juncker was planning to remove the clause from the pact and that Malmstrom had threatened to resign over the issue (though she has not done so yet).

Clearly Juncker’s staff wanted to corner Malmstrom’s position on this issue, feeling that her own responses were not sufficiently forthright. A TTIP without the investor protection clause would be at serious risk of collapse, because the United States values it highly. Such a failure would deprive Europe of a potential source of revenue and growth in the immediate future.

The trade pact’s significance
The TTIP emerged at a time when Europe was at its lowest ebb to date. In 2011 and 2012, the euro crisis was raging, and Spain and Italy appeared to be on the verge of a disastrous default that could have caused them to leave the eurozone, possibly collapsing the currency bloc. In July 2012, European Central Bank President Mario Draghi said he would be willing to do “whatever it takes” to save the euro and created a bond-buying mechanism called Outright Monetary Transactions, which calmed the markets. In March of that year, the nations of Europe signed a new Fiscal Compact treaty that introduced guidelines designed to bring wayward states onto the fiscal straight and narrow. In June of the same year, calls emerged for an ambitious and comprehensive trade agreement to be created between Europe and the United States.

Taken together, these three approaches seem to make up a grand plan to solve Europe’s growth problems: Solve the immediate sovereign debt crisis with Outright Monetary Transactions, change the unsustainable fiscal behavior of member states with the Fiscal Compact, and create a new avenue for growth with an EU- US free trade agreement. After several more months of working out details, on Feb. 12, 2013, US President Barack Obama used his State of the Union address to announce the launch of negotiations for the TTIP.

A successful TTIP would be the largest treaty of its type in the world. The European Commission projects that it could directly benefit Europe’s economy by 119 billion euros ($150.6 billion) per year, with car exports — a key sector — set to rise by 149 percent. Spillover effects could lead to increased demand in other parts of the world; steel exports could rise 12 percent, chemicals by 9 percent and other manufactured goods by 6 percent, according to an independent EU report (all increases are estimates based on projections of the global economy for 2027). The new partnership would entail a removal of tariffs and non-tariff barriers (such as the “Buy American” policy used in US government procurement contracts) that hinder trade between Europe and the United States. Since tariffs between the two countries are not high, it is the removal of the second category of trade barriers that would engender the greatest gains. The process would also lead to the creation of an international standard for many products that could then be used globally (the United States and European Union account for almost half the global market), leading to greater efficiency and thus greater savings.

Projections from a second independent study suggest that Europe’s biggest beneficiaries would be Spain (which would see a 6.6 percent long-term gain in per capita gross domestic product), Sweden (a 7.3 percent long-term gain in per capita GDP), the United Kingdom (a 9.7 percent long-term gain in per capita GDP) and various smaller countries such as Latvia, Estonia and Lithuania. For example, Spain would benefit from being able to replace expensive EU imports with cheaper US substitutes, and in smaller countries where exports normally make up a higher percentage of GDP, more trade would mean more income. France is one of the EU countries with the least to gain from a successful TTIP — its potential long-term gain in per capita GDP is just 2.6 percent — because of its relatively low levels of trade with the United States. High-exporting Germany might seem to be an obvious beneficiary, but many of its gains would be offset by losing some of its European domestic markets to US competition, leaving it with a more modest 4.68 percent gain.

Concluded tomorrow Monday Oct. 27

Publishing by The Manila Times of this analysis is with the express permission of STRATFOR Global Intelligence.


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1 Comment

  1. Europe’s fragmentation, because ti will negate the moves to strengthen the eurozone economy and halt the pact with the US, which would boost both the EU and the USA, will affect the Philippines (and the ASEAN countries) because the USA and Europe are the Philippines’ and the Asean countries main markets,