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Oct 23, 2014 | 09:30 GMT

Europe's Fragmentation Endangers a Trans-Atlantic Pact

Protesters take part in a demonstration against the Trans-Atlantic Trade and Investment Partnership in Madrid on Oct. 11.
(CURTO DE LA TORRE/AFP/Getty Images)
Summary

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-U.S. free trade agreement. After several more months of working out details, on Feb. 12, 2013, U.S. 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 U.S. 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 U.S. 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 U.S. competition, leaving it with a more modest 4.68 percent gain. 

Opposition Arises

The trade pact has yet to materialize because numerous hindrances have emerged that have complicated negotiations. The NSA spying scandal in June 2013 created mistrust between Berlin and Washington at an unfortunate moment, and various protest groups have been effective in gathering opposition to the pact. Environmental and civil society groups have warned that the agreement would undermine environmental and food safety standards, while British demonstrators have been mobilized over fears that the TTIP might undermine the sacred National Health Service — a threat guaranteed to raise emotions in the United Kingdom. Anti-TTIP demonstrations were held Oct. 11 in several cities around Europe, though they were more notable for their number than their size.

The strongest resistance has centered on the investor state dispute settlement clause, which allows an investor company to take a host country to international arbitration if it feels it has been treated unjustly. The clause has raised objections particularly in Germany, where Vice Chancellor Sigmar Gabriel told the Bundestag that the clause would give multinationals unfair advantages. Ironically, Germany was the first country to use an investor state dispute settlement clause in a trade agreement, when West Germany signed the world's first bilateral investment treaty with Pakistan in 1959. In fact, EU countries have many more bilateral investment treaties that include this clause than does the United States. Moreover, EU investors (particularly from Germany, the Netherlands and the United Kingdom) represent more than half of the complaints registered at international investment tribunals in the past decade. However, a case in which a Swedish energy company is suing the German people following Germany's decision to discontinue using nuclear energy after Japan's Fukushima disaster has created public antipathy toward such clauses.

Some 55 percent of German respondents to a recent poll still backed the TTIP, with only 25 percent against, but the volume of the anti-pact movement's complaints has been deafening. Outgoing European Trade Commissioner Karel de Gucht has been muttering about Berlin and Washington's failure to take political leadership over negotiations. De Gucht has suggested that this failure could lead to the agreement's collapse and has been quoted as saying that without the investor state dispute settlement clause, the TTIP will fail. Initially, hopes were that the negotiations would conclude by the end of 2014, but it looks more like talks will continue into late 2015, if the project survives that long.

While TTIP negotiations have continued, Europe's economic situation has deteriorated further. During the crisis of 2012, there was a clear sense that the end of the eurozone could come any day, taking the entire European project with it. Slow atrophy has followed 2012's urgency, with Europe's growth and inflation levels slipping inexorably downward and an artificially low bond yield environment sedating politicians and the public into complacency and bickering. Slowed German production and exports in August suggested that even the great giant at Europe's center was tottering. Moreover, low prices for energy and food prices caused by low global prices and Russian sanctions have pushed Europe very close to outright deflation. That the new crisis lacks the fervency of the last one makes it no less deadly for the eurozone. In fact, this crisis is hard to combat, because its slow nature makes it difficult to focus on the problem and take cohesive action.

The Political Implications of Stagnation

This buildup of pressure is finding an outlet in the political sphere. Europe's populations are gradually warming to the idea that perhaps a better future lies outside the eurozone, and Euroskeptical parties are gaining support. Instead of sudden default, the fear now is that economic stagnation will help a Euroskeptical party — or a leader heavily influenced by Euroskepticism — rise to power in France or Italy, resulting in a eurozone country removing itself from the union rather than falling out, as was the main danger in 2012. As Stratfor has noted before, the European Union functions smoothly in times of prosperity, but during its current economic weakness the fault lines have become evident. If Europe is to return to a path of convergence and contentment, it is imperative that it returns to a period of economic growth as quickly as possible. A free trade agreement creating more than 100 billion euros of GDP would clearly help to kick-start the eurozone. Thus, the TTIP's potential collapse should be seen as a considerable threat to Europe's future.

When it appeared, the TTIP seemed to be a welcome solution for Europe's strained economies — a relatively painless way to create huge gains on both sides of the Atlantic and strengthen the geopolitical ties that bind the two continents. However, this view underestimated the power of vocal lobbies around the European bloc. While Europe's governments have largely supported the treaty, social forces within member states have undermined and politicized the agreement to the point that it now appears unlikely to succeed. Juncker's insistence that a treaty containing an investor state dispute settlement clause is unworkable because the clause is a lightning rod for dissent indicates the power of social organizations in Europe. However, it also shows that Europe's national governments do not feel secure enough to be able to force through a trade pact they all agree would help solve the European Union's problems (as with other EU foreign policy matters, a negotiated treaty would need unanimous approval from the bloc's member states to be signed).

The investor state dispute settlement clause is a relatively small hurdle that the European Union and the United States should be able to reach an agreement on. Their failure to do so betrays the unwillingness of Europe's leaders to expend political capital on an issue that does not aid their immediate futures. If TTIP falters or is weakened to the point that it only removes tariffs, then Europe will have failed to grab a rope which could have helped pull it out of the mire in which it is laboring. Continuing economic stagnation merely fuels the fire of Euroskepticism, and makes the rise of anti-Europe national governments in the Continent more likely. 

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