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Any US move to exclude regulation of financial services is unlikely to prove fatal to the process, although it would seriously diminish it. Regulation of financial services—as opposed to issues of market access, which are uncontroversial—has never formed a part of any US free- trade agreement before.
But the EU believes that it is this element above all that elevates the TTIP into something beyond a typical free trade agreement, providing the element of ambition necessary to underpin a deal between two economies that account for a combined 50 per cent of global GDP and comprise almost a billion people. It sees the TTIP as crucial to break down barriers to the free movement of capital at a time when the global reform effort appears to have run into the sand, leaving the financial system increasingly fragmented.
Indeed, the EU believes that including financial services in the TTIP could aid the global reform agenda. EU officials—along with regulators in other developed countries—are alarmed at the way US regulators are seeking to apply US rules extraterritorially, which creates significant financial, operational and legal risks for EU institutions.
And EU officials are frustrated by the fragmented US regulatory system, where rule-making is devolved to powerful independent bodies, making it hard to reach international agreement. They believe the TTIP could inject much needed pressure into stalled negotiations on sensitive areas such as regulation of cross-border derivatives and mutual recognition of regulatory standards.
But the US Treasury takes a different view. It sees financial fragmentation as largely the result of the unresolved eurozone crisis and the EU's failure to implement the global regulatory agenda fully. US officials cite a long list of vital financial reforms that the EU has yet to implement such as regulation of derivatives, resolution and recovery rules and rules governing central clearing. They worry about a European financial system still dominated by oversized banks that national governments can't backstop—as Cyprus showed. Indeed, the greatest fragmentation is within the eurozone. If European supervisors are ring-fencing banking systems, is it any wonder US regulators are too?
The Treasury believes the surest way to reverse this fragmentation is for the eurozone to complete its adoption of globally-agreed rules without the distraction of a parallel set of negotiations. "At best, the TTIP is unnecessary, at worst it could be used to delay or postpone the regulatory agenda", says someone familiar with the Treasury's thinking.
How this bureaucratic stand-off is resolved hangs in the balance. Unlike the EU, US trade negotiators don't need a detailed mandate to start talks. Unless Congress votes for a specific carve out, which looks unlikely, talks could open under the broad terms set out by President Barack Obama to Congress in March.
What's clear is that the US and EU must find a way to reverse financial fragmentation—or any TTIP will fall far short of an Economic NATO.
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