The Transatlantic Partnership and the Monetary Sovereignty of Europe

The Transatlantic Partnership and the Monetary Sovereignty of Europe

On 20 April, the ninth round of negotiations between US and EU representatives on the Transatlantic Trade and Investment Partnership (TTIP) began in New York. Officials on both sides of the Atlantic are referring to the figure of $100 billion as the main argument in favour of the agreement. Apparently, this is the amount that the combined GDP of the US and the 28 EU member countries will increase by. So far, nobody has given any clear explanations as to where this estimate has come from. Even if it was true, $100 billion in relation to the combined GDP of the US and the EU in 2014 ($17.4 trillion + $18.5 trillion) is less than 0.3 per cent. In other words, the magnitude of the expected effect is at the level of a technical error. It would seem that the Transatlantic vegetable garden is being fenced off for entirely different reasons. 

Traditionally, Europe has a large and stable trade surplus with the United States ($86.5 billion in 2012 and $92.3 billion in 2013). Washington is probably hoping it will get its hands on the virtual $100 billion, or that there will be at least a partial reduction in America’s trade deficit with Europe. Washington is the driving force behind the negotiation process. A European not well-versed in politics does not yet understand what to expect from the TTIP. But on the other hand, there are already enough apprehensions. They are primarily related to a reduction in quality standards and product safety, including because of the GMO products that are expected to flood the European market. 

But even that is not all, however. The fact is that what is left of European states’ national sovereignty will be dealt a final blow. 

Firstly, the agreement under discussion covers investments as well as trade. Transnational corporations (TNCs) will be able to file lawsuits against governments should the latter adversely affect TNCs in their desire to maximise profits. For example, TNCs will be given the right to dispute the legality of decisions adopted by European countries such as tougher environmental standards, regulations to protect the social rights of workers, tax rate increases and so on. The claims will not be considered within the framework of national legislation, but in accordance with international law. 

Secondly, if the Transatlantic partnership agreement is signed, Europe will lose its financial and monetary sovereignty once and for all. This refers to the fact that Washington will be given the right to dispute many of the decisions taken by the EU’s monetary authorities on the basis that these decisions are allegedly aimed at manipulating the euro exchange rate, leading to violations in the sphere of international trade. European experts are justifiably concerned that the ECB and the European Commission will have to coordinate everything they do with Washington, or simply carry out orders coming in from across the ocean. 

The exchange rate of a national currency is a potential weapon of competition, and this weapon is in the hands of the central banks. Having said that, it was used relatively rarely in the 19th and 20th centuries. The gold standard existed in one form or another, which served to limit, or even make impossible, currency manipulation. In addition, the main instruments of competition were customs tariffs, export subsidies, dumping and, more recently, non-tariff barriers to trade (quotas, technical standards etc.); conventional instruments of trade and economic wars, in other words. 

The opportunity for currency manipulation only appeared after the dismantling of the Bretton Woods monetary and financial system (the gold dollar standard) in the 1970s and the abolition of central banks’ fixed exchange rates. Agreements were also reached under GATT/WTO that restricted how these conventional instruments of trade and economic wars could be used.

An artificially low exchange rate gives additional benefits to exporters and makes imports more expensive at the same time (if the value of imports is denominated in national currencies). Ultimately, the country’s trade balance will even out or, at the very least, the negative balance of foreign trade will decrease. 

If a large number of countries resort to currency manipulation (with some attempting to move into global markets and others protecting themselves from currency dumping), then it is a currency war. According to experts, there was a de facto large-scale currency war during the 2007-2009 financial crisis. In September 2010, Brazil’s finance minister, Guido Mantega, complained that between 2009 and 2010, the Brazilian real had strengthened by 30 per cent against leading global currencies and that it was not a result of natural market forces, but was a deliberate policy of advanced countries issuing global currencies. The Brazilian minister referred to this policy as «a currency war». In October 2010, IMF chief Dominique Strauss-Kahn confirmed that a global currency war was underway. 

It goes without saying that the heads of the central banks and the governments of advanced countries in the West never say, never even hint, that the decisions made with regard to monetary relations are aimed at foreign trade expansion, the levelling out of trade balances and the protection of national companies. There is an unwritten rule to refrain from recriminations during a currency war. Officials prefer to discuss currency wars on the sidelines, while journalists still refer to them as a ‘beggar-thy-neighbour’ policy. 

This ‘beggar-thy-neighbour’ policy is often concealed behind a formal objective of monetary policy like the fight against deflation. While money depreciates with inflation, with deflation its purchasing power grows. Bankers are afraid of deflation, which panics them, incentives to lend and borrow money on credit disappear, and the usurious banking system developed over centuries collapses. The fight against deflation and the policy of undervaluing a currency’s exchange rate involve the same methods – pumping additional cash money into the economy and lowering interest rates, even adopting negative interest rates. These measures may also be supplemented with currency interventions. 

All the same, a currency war has to be discussed at an official level. Otherwise, the world could plunge into a state of uncontrolled currency chaos. Japan, for example, has been resorting to the printing press and the zero interest rates of its Central Bank for several years now in its fight against deflation. And it is doing it much more aggressively than a number of other countries. As a result, Japan managed to reduce the yen’s exchange rate against the SDR basket by almost 20 per cent in the period from October 2012 to February 2013. This has angered many of Japan’s trade partners. At the G20 financial summit in Moscow in February 2013 (Russia was the chair of the G20 that year), finance ministers and the heads of central banks solemnly swore not to resort to currency war tactics. 

Everything soon went back to normal, however. Washington continued its programme of quantitative easing (QE), which did not have a particularly stimulating effect on the American economy, but did help to undervalue the dollar. In doing so, the US set a bad example to others, including its own European partners. 

Finally, in 2015, the US set about easing its QE programme. At the exact same time, however, the ECB began its own programme of quantitative easing. In addition to this, it is introducing negative interest rates on deposit accounts and making loans almost interest free. The currency see-saw has dipped sharply towards the euro, whose exchange rate against the dollar had begun to fall. Even without this, Europe has had a strong trade surplus with the US and it could reach an all-time high in 2015. Yet there were moments five or so years ago when the euro’s exchange rate against the US dollar was more than $1.50. At the end of 2014, it was a little more than $1.20, and by April 2015 it had fallen to $1.06. Experts believe that there could be parity between the euro and dollar by early 2016. 

Washington is taking it all very seriously. In 2014, the US trade balance deficit was $505 billion, which is 6 per cent higher than the deficit of the previous year. In recent years, EU countries have accounted for nearly 20 per cent of America’s total trade balance deficit. In 2015, America’s trade deficit with Europe could turn out to be a record. Washington cannot prohibit the European Central Bank from carrying out its programme of quantitative easing, but if the Transatlantic Trade and Investment Partnership is concluded, the US will be able to interfere in the EU’s monetary policy on legal grounds, so to speak. It is my belief that this is one of the main reasons why a ninth round of TTIP negotiations has been necessary, i.e. the process is proving to be an extremely complex one. 

In truth, abolishing customs barriers in mutual trade is not a serious problem, since these barriers were low before the negotiations began. But if Washington establishes control over Europe’s monetary and exchange rate policy, it would mean the complete loss of European countries’ sovereignty once and for all. European politicians and public figures understand this perfectly well. Many are surprised that one of the main driving forces behind Transatlantic integration in Europe is ECB president Mario Draghi. After all, if the TTIP is signed, the European Central Bank will become a subsidiary of the US Federal Reserve System. However, maybe that is exactly what Mario Draghi, who is well-known for his pro-American stance, has been driving towards – it was not for nothing that he spent several years as the executive director and vice president of US bank Goldman Sachs. 

Tags: European Union  US