Germany and the Euro Zone Balance of Power: Transatlantic Trade to the Rescue?
The Transatlantic Trade and Investment Partnership (TTIP) launched by President Barack Obama, European Council President Herman Van Rompuy, and European Commission President José Manuel Barroso at the G8 Summit in Northern Ireland this month marks a crucial step by the United States and the European Union to deepen their bilateral relationship, assert their trade policy leadership, and advance a rules-based system of global economic governance that reflects their shared values and interests. Fifty years after President John F. Kennedy’s speech at Independence Hall in Philadelphia, the U.S. and the EU are finally on the verge of making good on the idea of a “Declaration of Interdependence” that Kennedy foresaw.
This transatlantic geo-economic alignment is taking place at a time of a changing balance of power on the European side of this equation, with Germany now the clear primus inter pares among the 27 (soon to be 28) EU member states. In principle, the relations among the EU member states should not matter to transatlantic trade, since it is the European Commission which has sole responsibility for conducting the TTIP negotiations with its counterpart, the Office of the U.S. Trade Representative. But given the politically contentious nature of a number of regulatory matters that the TTIP is likely to address—such as those stemming from deeply-imbedded attitudes about how to protect cultural industries, food safety, or national security—the strong support of a cross-section of European leadership at the national level will be a prerequisite for success.
Much of this shift in the EU’s internal political dynamic can be traced to the creation of the euro zone and the subsequent debt crisis in which it currently finds itself. Although it was expected that a common currency would lead the EU countries to converge toward common levels of economic growth, inflation, and employment, ten years later Germany has benefited from a relatively undervalued euro (paired with important cost-cutting by business and structural reforms) to become the undisputed economic champion of Europe. Meanwhile, Italy, Spain, Portugal, Ireland, and Greece have experienced slow or negative growth, high rates of unemployment, and are struggling to borrow on international markets.
The euro zone’s approach to bridging these divergences between Germany (and other successful but smaller euro zone countries such as Austria, Finland, and the Netherlands) and the indebted peripheral economies has generated some fractious moments across the Atlantic. The Obama administration has sought more growth in the near term to help the global economy emerge from its doldrums, while the Europeans themselves have focused on spending cuts, tax hikes, and other austerity measures aimed at shoring up the fiscal position of the debt-ridden countries.
Now something resembling a consensus has emerged in the European Union that in order to jump-start the economies of the peripheral countries and reach the still hoped-for convergence of performance in the euro zone, a more balanced approach combining growth with austerity is needed. In return for commitments to reform labor markets and pensions polices, Spain, as well as France (whose economic position is beginning to cause concern), have been given more time to meet their budgetary goals, for example, and there is new discussion of boosting economic activity through loans to small businesses guaranteed by the European Investment Bank, the EU’s development finance agency.
Deeper transatlantic economic relations in the form of the TTIP will lift economic growth, but will it help or hurt the goal of reducing disparities in the performance of the euro zone economies? A recent study on TTIP by the Munich-based Ifo Institute for Economic Research commissioned by Germany’s Bertelsmann Foundation offers important reasons to be optimistic but also suggests a note of caution.
It needs to be said first of all that trade is the pro-growth policy par excellence—without having to empty the government purse for fiscal stimulus or test the limits of central bank monetary policy easing, eliminating barriers to trade boosts companies’ sales through increased exports and reduces costs to consumers through cheaper imports. Indeed, the Ifo study shows that with comprehensive trade and investment liberalization the U.S. and the EU together would see an 18 percent increase in per capita income and the creation of up to 2 million jobs. But that’s at the level of the overall economy. Different effects could be seen in each EU member state.
Importantly for the perspective of convergence within the euro zone, the Ifo study shows that all EU countries will benefit from TTIP, but that the more indebted, peripheral countries will be among those experiencing the strongest gains both in terms of economic growth and job creation. So transatlantic economic integration through TTIP will be a force for euro zone cohesion, and should thus benefit from vigorous support at the highest levels of government across the EU. Another politically important conclusion from the study is that the UK will post particularly impressive gains from TTIP. The British government has been one of TTIP’s biggest boosters in the EU, but Prime Minister David Cameron faces anti-EU sentiment from the right of his Conservative Party and from the UK Independence Party. As there is virtually no chance that the UK would achieve free trade with the U.S. if it left the European Union, the Ifo study strengthens Cameron’s hand vis-à-vis the Eurosceptics.
The Ifo study also shows, however, that Germany’s trade within the euro zone (and with a number of trading partners outside the EU such as China) will decline as it is replaced by trade with the United States. So Germany and the U.S. will become more integrated economically as a result of TTIP, but Germany and the EU will be less integrated. It is unlikely that Berlin’s emerging political and economic leadership of the EU will be reversed in the short term because of these shifts in the direction of its trade—particularly as greater intra-EU convergence in standards of living will take some of the sting out of the euro zone crisis and quiet complaints that have been voiced in the poorer euro zone countries about Germany’s policy prescriptions. But if over the longer term the country’s prosperity lies to a lesser degree with its European partners, it is not impossible that the domestic consensus about Germany’s European vocation could weaken.
Fortunately, trade is not a zero sum game. If alongside TTIP the EU pursues greater deepening of its own internal market through, for instance, lifting barriers in its services sector, Germany’s economic relationships with its euro zone partners would deepen further—and Europe would receive a much-needed further impetus to economic growth. A twin-track approach to economic integration—both transatlantic and European—is what Germany and its euro zone partners need right now.