Foreign Policy Blogs

Formalizing a U.S.-EU Financial Regulatory Protocol?

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The EU has proposed that it join with the United States to formally coordinate their financial regulatory activities, as part of the Transatlantic Trade and Investment Principles (TTIP).  U.S. officials reportedly oppose the proposal because such an agreement might dilute Dodd-Frank and other new American regulations.  It is more important that they it for reasons of deep principle, and economics. First world executives and regulators already exercise considerable financial market power informally. Inserting a financial regulatory protocol in TTIP signals that American and European regulators aim  to set officially-sanctioned global financial norms.

The financial sector is already hampered by uncertainty over new regulations’ contents.  On both continents, concepts have been adopted but not fleshed out, as with Dodd-Frank. Debate over implementing rules highlights the mutual incomprehension between market practitioners, regulators, and, last but not least, politicians.  

Before 2008, regulatory uncertainty was a question of when old rules would be dismantled.  The resulting crisis reversed the psychology, and markets now risk running afoul of new rules that may come into effect.  Adding another layer of negotiations among regulatory bodies will lengthen the uncertainty that inhibits finance and constrains economic growth.

A matter of principle is also in play.  Taking into account the long history of financial regulatory dialogue among first-world governments, the EU proposal discusses the deficiency of ad hoc, last minute coordination, which left the system vulnerable in 2008.   It also reflects fears that firms will  gravitate to places with the weakest regulations.  But mandated dialogue neither guarantees harmonized rules, nor ensures wisdom on the part of any regulator.  Giving an official status to U.S.- EU dialogue would only suggest an exclusive first world governance.

Such a move will confront emerging markets operators and governments with a political issue.  Rather than deal with a global order that has informal first world power centers, they would have to choose whether to accept a system that explicitly enshrined those powers, or to develop other markets, rules, and mechanisms.  The option for developing nations to fashion separate trade systems has already been noted by a European study.

Potential elements for an alternative financial order exist, including a functioning, if small, Islamic finance sector, China’s  investments in Africa, and the concentrations of oil in the Middle East and Russia.  An attempt to build on them becomes more tempting, however difficult it would be to carry out, if the EU proposal goes forward.  Any such move would serve to circumvent the current global financial system.  The politics driving it would most likely reject first world liberal tenets.

Economics, trade and finance should be arenas where affluent free societies reach out to help others grow and develop, guided by the liberal ethos.  The point for America is for development to enable human yearnings for freedom.  Regional trade pacts, TTIP in particular, are geopolitical groupings at least as much as trade liberalizing arrangements.  True trade talks are properly pursued in the WTO.

Formal enshrining of first world collaboration in finance further taints the trade agenda with geopolitical stakes.  It raises a real potential the third world disillusion with the liberalism that made the first world wealthy.  

 

 

Author

George Paik

George F. Paik is a former political affairs officer in the U.S. Foreign Service, as well as a twenty year veteran of U.S. capital markets. He is a current board member and former chair of the World Affairs Forum (a sister to FPA in the World Affairs Councils of America network) in Stamford, CT. His work as a diplomat straddled the fall of the USSR, and included political analysis, human rights, trade affairs, and environmental policy, in postings were in Brazil and Trinidad, and in the Department of State. Financial experience includes stints with Mellon Bank, Manufacturers Hanover Trust Co. and People’s United Bank. He currently holds the position of Managing Director at Lord Capital, LLC, a firm focused on international trade finance.

Paik graduated from Harvard University with a BA in Social Studies; he also holds an MBA in Finance from the Wharton School of the University of Pennsylvania. He counts ten years playing Rugby, with club mates from countries around the globe, as part of his international experience.

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