ANALYSIS/OPINION:
The recent arragement from the European Union summit for saving the euro involves a couple of important factors that have received little or no attention in the U.S. but that have potentially serious consequences for the U.S. economy.
The first is an understanding of the reservations that the United Kingdom asked for as a condition of its supporting the “Merkozy” deal to have the 27 EU countries establish financial enforcement mechanisms by treaty. The “spin,” apparently promoted by the French, is that the U.K. was seeking to protect the U.K. banking sector in London, which constitutes a far higher percentage of the United Kingdom’s gross domestic product than banking does for any other EU country, from EU-wide financial supervision emerging from the Brussels regulatory machinery. Included in the potential regulations is a transactions tax, which would hit the U.K. far worse than any other country.
The impression conveyed was that the U.K. financial giants wanted special exemptions from responsible regulations. But the reality is very likely the precise opposite - namely, that what the U.K. wanted and the French rejected was to be able to keep and extend to the Continent the U.K.’s much tougher (than the EU’s) proposals for ending “too big to fail,” in part by imposing much higher bank capital standards and a Glass-Steagall wall to keep government-insured commercial banking from subsidizing riskier investment banking. Developed by the Vickers commission, these measures to terminate bailout possibilities generally have not been reported in the U.S. either as stand-alone measures pending in the U.K. or as a factor in the recent summit.
The Vickers recommendations are important, nevertheless, for both Europe and the United States, which has its own too-big-to-fail problem. Both continents need to address this issue if they are to have any hope of jump-starting economic growth across the Atlantic, which is an absolutely essential component of any plan to stabilize the euro and tackle the debt problem in the U.S.
This raises a second underreported issue involving competitiveness. Though not well reported, the Merkozy package apparently included regulatory reforms in addition to spending enforcement measures. These reforms center on labor liberalization to unleash growth opportunities in the so-called peripheral countries. Hopefully, these will not get lost in the shuffle, because the constraints on growth triggered by overregulation are as great as those imposed by overspending.
It was not that long ago that Germany was the “sick man of Europe,” growing at a slower pace than the peripheral states. The Germans bit the bullet at the end of Chancellor Gerhard Schroeder’s term, however, and engaged in a bout of Reagan-like reforms, primarily of its labor markets. After a couple of bad years, the German export machine then took off as Chancellor Angela Merkel arrived on the scene. As the beneficiary of this reform, she has every right to look south and say, in effect, what is driving the German economy is recent competition reform that slow-growth countries can adopt just as Germany did.
When Germany held the rotating EU presidency in 2006, Mrs. Merkel asked the U.S. to join in establishing a joint platform for reducing regulatory barriers to trade and investment called the Transatlantic Economic Council. The project worked well until the end of the Bush administration, when the French took steps to undermine its effectiveness. The French actions, combined with elections in Europe and the U.S., reduced the Transatlantic Economic Council’s appeal to the incoming White House, which has not given it high priority and thus has not pushed the Europeans to increase the competitiveness of the EU (or the U.S. itself, some might add).
It finally should be noted that the French have always been the most skeptical of the EU’s strong competition policy. The U.K., in fact, blocked French efforts to dilute it seriously in 2007. Maintaining competition in the EU single market is an essential precondition to renewed growth - as is the key role of the U.K. in defending free markets.
• C. Boyden Gray served as White House counsel in the administration of President George H.W. Bush.
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