The recent roller coaster in the markets reflects more a concern about the health of European banks than the U.S. downgrade by Standard & Poors. It also underscores a fundamental weakness in U.S.-European Union relations — the lack of a platform for discussing economic and financial difficulties across the Atlantic in a way that parallels NATO.
The NATO comparison is relevant, as the NATO participants in the Libya campaign prepare for life after Moammar Gadhafi. But despite the Libya success, NATO no longer serves its original purpose of defending against the Soviet Union. But now, the “Red Army” refers not to Russia’s military but to Gazprom, Russia’s largest company and the largest extractor of natural gas in the world.
The transatlantic issues of concern are now economic and financial. If they are not addressed, neither side will be able to pay for any military. The G-7 or the G-8 is neither appropriate nor large enough to encompass the interests of the eurozone, let alone the larger European Union. The G-20, while an essential body, is too broadly based to allow the EU and the U.S. to focus first on their own economic sphere, which, after all, is more than 50 percent of world GDP, 40 percent of world trade and 70 percent of world financial flows.
The failure to construct an economic platform is not for lack of trying. Back in 2006, when German Chancellor Angel Merkel held the EU’s rotating presidency (the union now has four presidents), Germany proposed establishing the “Transatlantic Economic Council” to deal with regulatory, nontariff barriers to transatlantic trade — including banking, financial, energy, environmental and consumer-safety issues involving such matters as new drug approvals and food safety.
The council consisted of a cabinet-level chairman for each side and six or seven cabinet secretaries (or commissioners for the EU). It was initially successful, but it effectively disappeared for two years, during which time some critical ground was lost in solidifying an agreement for mutual recognition of accounting standards across the Atlantic. The problem was that there were two basic standards — Generally Accepted Accounting Principles (GAAP) in the U.S. and International Financial Reporting Standards (IFRS) in Europe and much of the rest of the world.
The initial agreement was for each side to give the other a choice, so that the U.S., which moved first, would recognize the IFRS standard for Europe-based companies, and the EU would then recognize GAAP for U.S.-based companies. The French resisted, apparently because both regimes had elements of mark-to-market accounting that French banks opposed. The council held firm, however, much to the quiet delight of the German sponsors of the Transatlantic Economic Council.
Sometime later, however, a funny thing happened on the way to another TEC meeting. The French took advantage of their turn in the EU presidency to undermine another tentative TEC agreement involving import of American chickens, which the EU had in fact agreed to some years before. An ugly — and for the watching world, an apparently trivial — fight ensued about how chickens were washed in the U.S., with the French claiming that the washing technique harmed the environment (never mind that if there was any harm, it was to the U.S. and not the EU).
The spectacle had the (intended) effect of seriously weakening the TEC as both the EU and the U.S. entered into their respective election cycles. The damage has been subsequently repaired to some extent, but the accounting agreement never revived. The result was too little transparency about European bank balance-sheet weakness, which could have been addressed much more effectively years ago than today.
It was an early example of a German/French disconnect which the U.S. did not adequately counter. The EU, for its part, has seen similar weaknesses on our side, with no effective way to communicate them. Let’s hope the latest crisis will produce better coordination between these two essential partners on economic issues.
• C. Boyden Gray served as White House counsel in the administration of President George H.W. Bush.
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