A FEW NEW CHALLENGES FOR EUROPE: TPP AND CMU

The Trans-Pacific Partnership – What implications for the EU

After five years of negotiation, one of the most significant trade and investment agreement in history has been signed on October 5, 2015 between the US, Japan and 10 other economies: the Trans-Pacific Partnership (TPP)—a game-changing agreement according to Michael Froman (World Economic Forum).

Covering 40 per cent of global trade and 800 million people, the TTP is economically relevant, with a focus extending to issues such as intellectual property, investment, labor and environmental common standards. American trade negotiators and researchers predict that by 2025 the TPP will make the world $285 billion a year richer, adding roughly 1% to global GDP. The greatest impact will be felt in the less developed members (Peterson Institute). An Asia-Pacific Economic Cooperation study finds that, in the five years after an agreement, participants’ exports increased on average by nearly 50% relative to the five prior years.

Yet, opposition to the TTP is strong. Joseph Stiglitz and Adam Hersh consider that it is evident that the TPP is not about “free” but managed trade, “on behalf of each country’s most powerful business lobbies” (Project Syndicate). Paul Krugman adds that this agreement is much “about strengthening intellectual property monopolies and corporate—both arguably bad things.” The TPP deal also underscores the shift away from global agreements under WTO regulation, excluding big players such as China and Europe (The Economist).

So, what should be the Europe’s answer to the TPP?

The TPP is expected to challenge Europe’s competitiveness and to have a negative impact on Europe’s economies, according to ECIPE. Possible policy responses include:

1. The Transatlantic Trade and Investment Partnership (TTIP)—the proposed trade deal between the US and the EU would be a natural response, with a positive economic impact on the EU according to an analysis by Carnegie Europe. Daniel Hamilton and Jacques Pelkmans (CEPS estimates) that the TTIP could raise the US’ GDP by 0.4% and the EU’s by slightly more.

2. Bilateral FTAs with Asian-Pacific countries that are part of TPP, to potentially strengthen the inclusion and competitiveness of the EU on TPP market—illustrated by the recent bilateral agreement signed with Singapore and Vietnam (ECIPE).

3. A China—Europe Agreement. For A. Garcia-Herrero (Bruegel), both economies outside of the TPP could join in a common answer, and are negotiating a Bilateral Investment Agreement. As the momentum for a US-China Bilateral Investment Agreement seems lost, “Europe could become a frontrunner in the negotiations with China.”

The outstanding question is whether trade agreements remain politically attractive. While negotiations are progressing with a new generation of trade agreements such as the TPP, TTIP and TiSA (Graphic Details), political ratification is in doubt. Opposition is picturing trade agreements as a threat to job creation and firms’ competitiveness, both in the election campaigns of both the US and Canada, as well by trade unions, environmental and consumer protection groups (The Economist).

The Capital Market Union – EU under construction

An ambitious action plan was announced by European Commissioner Jonathan Hill on September 30 to implement the EU Capital Market Union (reviewed by Nicolas Veron at Bruegel, to be discussed at a forthcoming event)—with the objective of diversifying funding in an overly bank-based eurozone, according to Langfield and Pagano. While this seems to have created momentum to overcome the lack of depth and fragmentation of Europe’s capital markets (CEPS), some major obstacles to capital markets integration remain untouched according to Veron, and unintended consequences could be economically costly (FT).

SME funding: a major stake for the CMU. A European CMU could benefit EU growth and stability by reducing the systemic risk induced by the financial markets and by opening up larger, cheaper and more efficient pools of funding to firms as argued by Raoul Ruparel (Open Europe). SMEs play a major role in Europe since they account for 99.8 per cent of businesses and 67 per cent of private sector employment in the EU as assessed by Jon Danielson and others (LSE Blog). Costs associated with capital market funding are often prohibitive for SMEs, e.g., public offerings costs can reach 15% of the deal value (Raoul Ruparel). With banks under regulatory pressure, SMEs are facing funding issues. The Action Plan intends to review and improve regulations such as Solvency II, facilitating infrastructure investment and simplifying regulation (on securitization). The CMU can improve access to finance and deliver innovation, competitiveness, reduced systemic risk and, ultimately, growth, according to Nicolas Véron (VoxEU)

Is the CMU really needed? On a theoretical basis, there is no inherent reason to believe that banks are fundamentally any less efficient than the alternative forms of intermediation –and they certainly have strong advantages, not least through relationship banking according to Danielson and others. Siegfried Mehring and Ralf Barkey claim that a larger capital market is unlikely to improve the financing of SMEs in Europe (FT), and could even put at a disadvantage small local banks that better serve SMEs, according to V. Ekpu and A. Paloni.

The short view… Angus Deaton was awarded the Nobel Prize in Economics, as a triumph for real evidence-based economics, for his work on poverty, inequality, and getting the evidence right, according to Foreign Policy.

Post-election uncertainty in Portugal. The elections in Portugal opened a governing impasse as no coalition emerged to form a government. According to Diario Economico, the president Cavaco Silva is trying to broker a deal and market analysts expect he will give Coelho a mandate for a minority government (hat-tip EuroIntelligence). Political uncertainty resulted in market volatility, according to the FT. However, the country has built significant buffers, having nearly covered its funding needs for 2015, while benefiting from the ECB's QE.