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Fortress Europe or open doorEurope? The external impact ofthe EU's single market in financialservicesAndreas DürPublished online: 11 Jul 2011.
To cite this article: Andreas Dür (2011) Fortress Europe or open door Europe? The externalimpact of the EU's single market in financial services, Journal of European Public Policy,18:5, 619-635
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Fortress Europe or open door Europe?The external impact of the EU’s singlemarket in financial servicesAndreas Dur
ABSTRACT I argue that the intra-European integration of services trade, even if itthreatens to impose costs on third countries in the short run, on average makes theEuropean Union (EU) more open to foreign service providers. The reasoning is thatthird countries are likely to respond to discrimination in ways that ensure continuedopenness of the EU. This may be achieved by (a combination of) concessions thatentice a change in the EU’s policies, unilateral policy changes, or threats that forceEU policy adjustments. Regional integration in the service sector thus does notresult in Fortress Europe but in Open Door Europe. I show the plausibility ofthis argument by analysing the external consequences of three steps towardscompleting the Single Market in the area of financial services.
KEY WORDS European Union; financial services; Single Market Programme;trade policy; transatlantic relations.
INTRODUCTION
Over the last two decades, as key part of the single market project, EuropeanUnion (EU) member states have agreed to a stepwise integration of the EU’sfinancial services markets (for studies of these developments, see Grossman andLeblond 2011; Mugge 2006; Quaglia 2007).1 One of the first steps in thisprocess was the Second Banking Directive of 1989, which introduced mutual rec-ognition of banking laws and banking licenses. A decade later, the EuropeanCommission presented the Financial Services Action Plan (FSAP), which con-tained 42 measures aimed at facilitating the intra-European provision of financialservices. A speedy implementation of the plan became possible once the Councilof Ministers decided that several directives included in the FSAP would beadopted under a new decision-making procedure, known as the Lamfalussyprocess. In 2005, the Commission followed up with an additional set of proposalsthat led to an even further integration of the EU’s financial services market.
Remarkably, as several indicators suggest, this internal liberalization has notmade the EU more protectionist vis-a-vis foreign providers of financial services.First, EU financial service imports from third countries increased rapidly overthe last two decades. Between 1996 and 2005, the EU-15’s financial services
Journal of European Public PolicyISSN 1350-1763 print; 1466-4429 online # 2011 Taylor & Francis
http://www.tandfonline.comDOI: 10.1080/13501763.2011.586792
Journal of European Public Policy 18:5 August 2011: 619–635
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imports grew from E8.7 billion to E21.7 billion, an increase by nearly 150 percent (Eurostat 2006: 45, 2007: 62).2 Financial services imports from the USA,the EU’s most important trading partner in this sector, even went up from E2.8billion to E7.4 billion over the same period, an increase by 164 per cent (Euro-stat 2006: 51, 2007: 68). Second, the EU has been pro-active in WTO nego-tiations to liberalize trade in financial services in parallel to theimplementation of the single market project (Dobson and Jacquet 1998: 84;Hoekman and Sauve 1994). Finally, the EU’s high degree of openness in thissector is also confirmed by recent reports on foreign trade barriers by theUnited States Trade Representative (2009), which do not list any trade barriersfor US exports of financial services to the EU.
My explanation of this outcome assumes that moves towards further inte-gration of service markets in Europe often have the potential to impose costson providers in third countries. These third-country providers react to thethreat, and ask their government for help in maintaining existing competitiveconditions. In response, the third country offers concessions to entice achange in EU policies, undertakes unilateral adjustments that reduce the costsfor their services providers, or uses a threat to force the EU to take intoaccount the interests of third-country providers. In any of the three scenarios,the expectation is that moves towards closer integration in Europe do notlead to the creation of Fortress Europe, but may even make the EU moreopen to firms from third countries. The analysis of the external consequencesof three moves towards European integration in the field of financial services– namely, the Second Banking Directive and two measures included in theFSAP – shows the plausibility of the argument.
In making this argument, I take issue with a literature that views regional inte-gration as a stumbling block for further liberalization (for the stumbling blockterminology, see Bhagwati 1991).3 Such a stumbling block scenario may resultbecause the internal market opening within a regional trade agreement imposescosts on import-competing interests, making them lobby for more protectionagainst competitors from third countries. Internal liberalization may alsosatisfy the demands of the more competitive parts of the economy for betterforeign market access, causing them to stop their lobbying for external liberal-ization. Finally, the decision-making rules in regional trade agreements may givecountries with restrictive policies the possibility to block regulations that areopen towards third countries. On the basis of these arguments, when witnessingthe implementation of the Single Market Programme in the late 1980s, manyobservers raised the spectre of a ‘Fortress Europe’, which would combineinternal free trade with a protectionist external trade policy (Aho 1994; Wolf1994). In the case of financial services, my paper contests this literature’s expec-tation that the preferential liberalization of trade nearly inevitably makes it moredifficult for third-country producers and providers to export to this market.
Beyond establishing this point, the paper makes several contributions tobroader scholarly debates. It adds to a growing literature on the external conse-quences of the Single Market project (Bach and Newman 2010; Hocking and
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Smith 1997; Posner 2009; Young 2004). While many of the more recent studiesin this field approach the topic from a politics-of-regulation perspective, thispaper builds on the trade policy literature to address the question of the EU’sopenness to third-country providers. The paper also provides a rare study ofthe EU trade policy in the services sector. That there is so little research inthis area of the EU’s external relations is astonishing, given that servicesaccount for 77 per cent of the EU’s economy (European Commission 2007),and that Europe is the largest importer and exporter of services in the world.
THE EXTERNAL EFFECTS OF A PREFERENTIALLIBERALIZATION OF SERVICES TRADE
The external economic consequences of the preferential liberalization of goodstrade are fairly straightforward (Panagariya 2000). Already in 1950, Viner(1950) realized that the preferential reduction of tariffs may impose costs onthird countries by way of trade diversion. To the extent that market integrationleads to an acceleration of economic growth in the member countries, preferentialtrade liberalization may also lead to an increased demand for some imports. Thiseffect is unlikely to offset the costs imposed by trade diversion, however, as it willbe felt in the longer term, and the benefits may not accrue to the same producersthat suffer the costs. In sectors with economies of scale, trade diversion is likely tohave more severe consequences than in other sectors, since producers sufferingfrom trade diversion may lose cost advantages as their production decreases.
Two particularities of services trade make an assessment of the external econ-omic consequences of the regional integration of services markets more difficult(Fink and Jansen 2009; Mattoo and Sauve 2007). First, since many servicescannot be transported easily, the provision of services often necessitates physicalproximity between the provider and the consumer of a service. In the terminologyof the General Agreement on Trade in Services, these services requireconsumption abroad, commercial presence, or the presence of natural persons(World Trade Organization 1994). Services trade thus cannot be neatly separatedfrom foreign direct investments (capital mobility) and the free movement ofpersons (labour mobility). In fact, according to World Trade Organization(2005: 8) estimates, commercial presence accounts for 50 per cent of all servicestrade (as compared with 35 per cent for cross-border supply). Second, servicestrade is affected by behind-the-border regulations rather than tariffs. Suchbehind-the-border regulations may be imposed to ensure policy objectivesother than protecting domestic providers of services. Protectionist barriershence may be incidental side-effects of policies that serve other primary objectives.
Despite these particularities, the conclusion that the preferential liberalizationof trade is likely to produce some (short-term) costs for third countries extendsto services trade (Mattoo and Fink 2002; Mattoo and Sauve 2007). In thewords of Mattoo and Fink (2002: 10), ‘The exemption from a wasteful regulationimplies reduced costs for a class of suppliers and hence a decline in prices in theimporting country. This decline in prices hurts third country suppliers who suffer
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reduced sales and a decline in producers’ surplus’. The costs for third country pro-viders arise independent of whether the member countries of a preferential ser-vices agreement pursue market integration by way of mutual recognition orharmonization. In the case of mutual recognition, third-country providers facethe fixed costs of setting up in all participating countries, while providers fromwithin the preferential trading area in which mutual recognition is applied facethese costs only once (Mattoo and Fink 2002: 11–12). In the case of harmoniza-tion, trade diversion may be even more significant since decision rules and politi-cal economy reasons often induce member countries to agree on strict new rules(Young 2004), hence increasing the costs of compliance for third-country provi-ders. Trade diversion in the services sector may also result from quantitativerestrictions on the number of third-country service providers (as in air transport)or the amount of services they may provide (as in audiovisual services); restrictionson the movement of capital (branching rights) and labour (immigration rules);and discriminatory domestic regulations (qualification requirements).
World trade rules impose relatively few restrictions on countries that considerincluding such discriminatory provisions in a preferential services agreement.Under the General Agreement on Tariffs and Trade (GATT), preferentialtrade agreements in goods have to cover ‘substantially all the trade between theconstituent territories in products originating in such territories’ (ArticleXXIV). By contrast, until 1994, the GATT did not deal with trade in servicesand thus there was no prohibition on discrimination in this sector. Under theGeneral Agreement in Trade in Services that has governed services trade amongmembers of the World Trade Organization since 1994, bilateral or regional ser-vices agreements are only required to have ‘substantial sectoral coverage’, whichmakes it relatively easy to design agreements in ways that discriminate againstthird countries. The authors of a recent study on the subject hence refer to a‘greater policy flexibility shown by WTO members towards preferential liberali-zation in services’ than towards preferential liberalization in goods trade (Mattooand Sauve 2007: 261). The reliance on behind-the-border barriers, moreover,means that governments possess many subtle means to discriminate againstforeign providers of services that are not available with respect to trade ingoods. Finally, the potential for discrimination is higher with respect to servicestrade because multilateral liberalization commitments in that area still are verylimited. The EU, for example, had multilateral liberalization commitments onless than 50 per cent of its services trade prior to the Doha round of trade nego-tiations that has been ongoing, since 2001 (Hoekman et al. 2007: 374).
So far, the discussion has established two points: that there are many ways inwhich the regional integration of the services markets can impose costs on third-country providers and that countries face few international restrictions to dis-crimination in the services trade. My explanation for the external politicaleffects of the preferential liberalization of services trade builds on these twopoints. It expects that many initiatives towards the regional integration ofservices markets initially include provisions that threaten to impose costs onproviders in third countries. This is so because for electoral reasons, decision-
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makers in the member countries of a regional integration agreement often havean incentive to be more attentive to the concerns of domestic constituenciesthan those of the foreign service providers.4
My reasoning is that when witnessing these discriminatory provisions, theforeign service providers will mobilize with the aim of defending the existingcompetitive conditions. Facing losses, they will engage in lobbying to convincetheir government to resolve the issues they are worried about. As long as theinterests concerned have enough political clout, the foreign government willrespond to the lobbying effort with an initiative aimed at alleviating their situ-ation. It will choose among one of three responses to the regional services agree-ment: threatening with retaliation to force the member countries to take intoaccount third-country interests; offering concessions to entice the membercountries to adjust their policies; or making unilateral policy changes thatoffset the policy choices of the members of the preferential agreement.
Powerful countries (where power is a function of both structural characteristics– a country’s market size, trade dependence, and ability to divert exports andinvestments to third countries – and issue-specific factors such as the extent ofthe costs imposed on the third country) will respond to discrimination with athreat that forces the members of the preferential agreement to adjust their pol-icies.5 A threat can even lead to the abortion of the attempt at creating or deepen-ing a preferential services trade agreement. A less powerful country, by contrast,will either offer concessions to achieve a negotiated solution or make unilateralpolicy adjustments. The former strategy may entail opening up the third-country market to firms from the preferential agreement in exchange for anend to discrimination. The latter strategy may involve the unilateral adoptionof standards and regulations that allow third-country firms to avoid discrimi-nation. This strategy is akin to the ‘trading up’ that has been observed in thefields of environmental and consumer regulation (Vogel 1995).6
As long as the response correctly reflects the distribution of bargaining powerbetween the members of the preferential agreement and excluded countries, theformer will accept a deal.7 The expectation hence is for preferential services tradeliberalization that imposes short-term costs on third countries to beaccompanied by a foreign reaction that aims at offsetting these costs. Servicessectors that are liberalized within a preferential trade agreement will also beopened to imports from those third countries that react to the discriminationcreated in this process. In the case of the EU, the expectation is that even if Euro-pean integration in the services sector potentially discriminates against providersfrom third countries, conflictive issues will be resolved in line with the politicalprocess set out above, ensuring that the creation of a Fortress Europe is avoided.
I use three case studies on the external consequences of EU-internal market lib-eralization in the area of financial services to assess the plausibility of my argument.Focusing on financial services has the advantage that the EU-internal liberalizationin this area started early and has progressed quite far. Liberalization in many otherservices sectors has started only recently or has been limited, making it unlikely thatthere are major external consequences. The cases that I look at are the Second
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Banking Directive of 1989, the Financial Conglomerates Directive of 2002, andthe International Accounting Standards Regulation of 2002. The aim of thesecase studies is to show that the argument is plausible and empirically relevant,without claiming that the argument captures the only causal mechanism thatlinks the preferential liberalization of services trade to external openness. Each ofthe three cases illustrates one of the three response strategies by third countries dis-cussed above: a threat in the case of the Second Banking Directive; unilateral policyadjustments in the case of the Financial Conglomerates Directive; and concessionsin the case of international accounting standards.
In all three cases, I focus on the US reaction to EU integration. The reason fordoing so is that the transatlantic relationship dwarfs all other bilateral relationshipsin the overall services trade and in financial services trade more particularly. Withrespect to the overall services trade, the USA is by far the largest trading partner ofthe EU: 40 per cent of all US services exports go to the EU-25 and 35 per cent ofall EU services exports to the USA (Hoekman et al. 2007: 371, FN 6). In absolutenumbers, US exports of services to the EU accounted for $143.3 billion in 2006(Cooper 2008). Many more services are directly provided by US companies inEurope. In fact, US foreign affiliates in Europe produced an output of $333billion in 2000 (Quinlan 2003: 4); this was nearly 3 per cent of EuropeanGross Domestic Product. The numbers are equally impressive with respect tofinancial services: in 2004, the EU-15’s financial services trade with Switzerlandand Japan (the second and third largest trading partners in this sector) onlyamounted to less than half and around one-sixth of transatlantic trade in financialservices, respectively, (Eurostat 2006). The empirical relevance of the argumentthus can best be established with a study of the US reaction to the singlemarket project in the area of financial services.
THE SECOND BANKING DIRECTIVE
European integration in the financial services sector started with the SecondBanking Directive of 1989, which created a single banking license – knownas ‘single passport’ – allowing banks to operate throughout the Union and toprovide a wide range of financial services. The main principles underpinningthis directive were mutual recognition and home country control. A bankthat is authorized to provide certain financial services in one member countrywould be allowed to do so throughout the EU. The directive also stipulatedthat there should no longer be capital requirements at the branch level, butonly at the bank level. This facilitated branching and thus enhanced bankingcompetition across the EU.
Of concern to foreign banks, the draft directive that the European Commissionpublished in February 1988 included a clause that asked for reciprocity from thirdcountries (Golembe and Holland 1990; Gruson and Nikowitz 1988; Smith andVigneron 1990). Article 7 of the draft directive explicitly stated that banks fromthird countries would only be allowed to benefit from the single passport, if EUbanks received reciprocal treatment in these third countries. The Commission
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would undertake the reciprocity examination for each bank applying to establish asubsidiary in the EU. While the directive was not very precise with regard to themeaning of reciprocity, initially the provision was interpreted as demandingmirror treatment and not only national treatment. For US banks, this interpret-ation created the threat of discrimination, since mirror treatment was clearly notgiven in the USA. Interstate regulations restricted access to the US market for allbanks, European as well as American. The Glass-Steagall Act (1933), moreover,limited the range of financial services that a bank could provide, and the Inter-national Banking Act of 1978 extended these restrictions to non-US banks. Con-sequently, if the EU had insisted on mirror treatment, US banks would have faceddiscrimination in the European market.
US banks had significant interest in the European market at that time. Nofewer than 33 US banks were active and 17 US banks owned subsidiaries inthe EU around that time (Story and Walter 1997: 279). As expected, inresponse to the Second Banking Directive, US banks and other financial insti-tutions with an interest in the European market such as the American ExpressCo. lobbied Congress and their government to take action that would help themavoid being disadvantaged in that market (Committee on Ways and Means,Subcommittee on Trade 1989a). The Bankers Association for Foreign Tradewas in the forefront of this lobbying effort, complaining that the SecondBanking Directive would discriminate against US banks (Evans 1989). TheBank of America feared ‘subtle’ discrimination that would force foreign banksto ‘compete as second-class citizens at least for the next decade’ (The WashingtonPost, 20 March 1989: 1). The American Bankers Association published a reportin which it criticized the lack of a precise definition of reciprocity in the directive(International Banking Report, 1 March 1989).
The US administration responded to the banks’ lobbying effort with onlythin-veiled threats of retaliation. The Deputy Secretary of State, JohnC. Whitehead, for example referred to the US’s ‘potent retaliation ability’(quoted in National Journal, 29 October 1988: 2729). In the presidentialcampaign between George Bush and Michael Dukakis, moreover, both candi-dates promised retaliation against discriminatory EEC measures (The Times, 27September 1988). The passage in August 1988 of the Omnibus Trade andCompetitiveness Act, which included strengthened retaliation provisions, pro-vided a further credible signal that the USA would be willing to strike backagainst European discrimination. In spite of these threats, initially the EUtook a tough stance. France even wanted to limit the rights of existing Europeansubsidiaries of American banks if the USA did not grant identical treatment(New York Times, 10 February 1989: IV, 2). A partial explanation for thisapproach can be found in the weak position of French banks, which had sub-stantially lower capital ratios than other banks (Story and Walter 1997: 286).In line with this position, the European Commissioner for External Relations,Willy de Clerq, stated: ‘We see no reason why the benefit of our internal liberal-ization should be extended unilaterally to third countries’ (quoted in Story andWalter 1997: 286). The European Commission also insisted that access to the
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Single Market for new entrants would be free only to ‘firms from countrieswhose market is already open or which are prepared to open up their marketson their own volition or through bilateral or multilateral agreements’ (Commis-sion of the European Communities 1988: 2).
The first months of 1989 saw further US threats with retaliatory action (Rock-well 1989). The mood in the USA is well illustrated by a quote from the Repre-sentative Richard T. Schulze: ‘We will not tolerate a Fortress Europe . . . if thatevolves, we are going to have to develop reciprocal legislation . . . we want togive [the administration] the arms, the ammunition, the ability . . . to makesure that we do not have that type of development in Europe ‘92’ (Committeeon Ways and Means, Subcommittee on Trade 1989b). The message was thatthe USA would impose restrictions on European banks operating in the USAequivalent to any restrictions imposed by Europe on American banks. Thesethreats, which worried internationally competitive European banks and madethem ask for a more cautious European approach (Mason 1997: 118), clearlycontributed to the EU’s decision to give in. In the decisive version of theSecond Banking Directive, which was adopted by the Council of Ministers on15 December 1989, the EU did not ask for mirror legislation, but only includeda national treatment test. The European side explained that, as EU banks receivednational treatment in the USA, US banks would receive national treatment in theEU. Moreover, the directive clearly stated that the reciprocity examination wouldnot apply to third-country banks already established in the EU.
As expected based on the argument outlined above, the Second Banking Direc-tive thus did not make the EU more protectionist. In fact, on average third-country providers found it easier to access the European market after implemen-tation of the directive. While before this step towards the integration of financialmarkets, the third-country banks faced costs in each EU member state in whichthey wanted to get established, in the wake of the Second Banking Directive, theyonly had to incur these costs once and then could service the whole Europeanmarket. Interestingly, this outcome came about in response to a threat ratherthan negotiations based on the reciprocity principle.
THE FSAP
Although in the late 1980s and early 1990s, progress was made in the inte-gration of financial services markets across the EU, and although the launchof the Euro gave further impetus to this process, some barriers to intra-EUtrade in financial services remained. In 1999, the European Commission pre-sented the FSAP with the objective of eliminating those barriers (EuropeanCommission 1999). The FSAP identified 42 measures that would allow forthe creation of a single wholesale and a single retail financial market acrossthe EU by the end of 2005. Some of the measures were also aimed at improvingthe supervision of the financial services provision. With respect to the liberaliz-ing features, the single market would allow market participants to buy and sellfinancial instruments freely across borders. Financial institutions would be
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allowed to provide services to EU consumers on the same terms and conditionsas they do domestically. Financial products authorized in one country could alsobe offered in all other EU countries.
The potential for discrimination against third-country providers from somemeasures that were considered as part of the FSAP was considerable. EvenBolkestein (2003), at that time the Commissioner for Internal Market andTaxation admitted that ‘it is impossible to contain all the effects of our measuresto the EU’. Foreign financial service providers, especially in the USA, reactedwith concern. The US Securities Industry Association even suggested a ‘USAction Plan’ to engage with European regulators about discriminatory effectsof the FSAP (Thornburgh 2004). This reaction by the US financial services pro-viders was a reflection of the size of their stakes in the European market: in 2003,Europe accounted for more than 50 per cent of total US foreign investments inbanking and finance (HM Treasury et al. 2004: 35). Thirty-four US banks wereactive in the EU, holding assets worth $747 billion (Bies 2004: 36). In the sameyear, US investors held about $947 billion of equity, $405 billion of long-termdebt and $152 billion in short-term debt in the EU (Almunia 2006). Grosstransactions by US investors in EU equities amounted to $1,937 billion in2000 (Steil 2002: 19). Among the legislative acts decided in the frameworkof the FSAP that had the greatest potential for discrimination against third-country providers were the Financial Conglomerates Directive and the Inter-national Accounting Standards Regulation. Below, I discuss how the USAreacted to these measures and how this reaction further opened the EU’smarket to US providers of financial services.8
The Financial Conglomerates Directive
The Financial Conglomerates Directive, which was proposed in March 2001and adopted in December 2002, determines that all parts of a financial con-glomerate have to be subject to supervision from the same regulator. Financialconglomerates are defined as large financial services groups that are engaged inboth banking or investment and insurance (for a precise analysis of whichgroups are covered by the directive, see Gortsos 2010). The directive alsocovers foreign financial conglomerates with subsidiaries in the EU, as long asthey are mainly (that is, more than 40 per cent of the balance sheet) active inthe financial sector. These foreign conglomerates have to accept EU supervisionin addition to their national supervision unless they can demonstrate that theyare subject to consolidated supervision of their worldwide activities. Only if theEU – or more precisely the national authority competent in this case, mainlythe British Financial Services Authority – deems their national supervisionequivalent to the supervision foreseen in the Financial Conglomerates Directive,does the foreign firm avoid double supervision.
This provision caused concern among US financial service providers, becausethey considered it probable that (parts of) US supervision would not be deemedequivalent under the directive (Vinualez 2006: 32–3). The USA had no
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consolidated supervision at that time, since parent companies of conglomerateswere unregulated and supervision of conglomerates was shared by a largenumber of different functional supervisors. For large financial service providersfrom the USA, this meant that potentially they would have to create a holdingcompany with the head-office in the EU and ring-fence their business activitiesin Europe from those conducted by the rest of the company (Gruson 2004: 28;Meyers and Ballegeer 2003; Vinualez 2006: 50). This would significantly add tothese companies’ costs of doing business in Europe and thus put them at acompetitive disadvantage vis-a-vis companies with head office in the EU. Theconsiderable uncertainty that existed about exactly what the directive wouldmean for individual US companies exacerbated the situation.
US companies started early with efforts to find a solution that would allowthem to avoid discrimination (Financial Times, 27 October 2003: 22; Posner2009: 687). The Securities Industry Association (SIA), a trade association repre-senting some 600 US securities firms, showed itself ‘troubled’ by the need for anequivalence judgment (Securities Industry Association 2002). As a result, theassociation was highly active in lobbying US decision-makers on this issue(Thornburgh 2004). The Securities and Exchange Commission (SEC)summed up: ‘Several US securities firms have communicated to the Commis-sion [the SEC] that they have serious concerns with the Proposed Directive.[. . .] They conclude that the Proposed Directive would not only increasetheir cost of doing business in Europe, but would also place them at a competi-tive disadvantage with European-based firms’ (Nazareth 2002: 72).
The first equivalence judgments were to be made in June 2004, but this dead-line was not met by European regulators. The delay further aggravated theconcerns of US companies that feared that they would be judged as being notin compliance with the Financial Conglomerates Directive. The Senior Mana-ging Director of Bear Stearns & Co., Alix (2004), thus stressed the need for anearly equivalence determination in hearings in the US House of Representatives.Lehman Brothers considered ‘of critical importance’ that SEC rules would bechanged in a way that they ‘are deemed to be equivalent to the rules imposedby E.U. [sic] financial supervisors’ (Polizzotto and DeMuro 2004).
In line with the concerns voiced by societal actors, already in 2002, the SECshowed awareness of the potential problem (Nazareth 2002). Similarly, thechairman of the Committee on Financial Services of the House of Representa-tives, Michael Oxley, when referring to ‘some concerns’ that existed in the USAwith respect to the FSAP, highlighted the issue of supervision of financial con-glomerates (Oxley 2002: 38). The USA then made unilateral policy adjustmentsto re-establish a playing field for US financial services providers in the EU(Vinualez 2006: 34–41). Most importantly, the SEC decided to movetowards consolidated supervision of financial conglomerates in proposals firstcirculated in October 2003. The final rules, which were published in July2004, made important changes to the US regulatory framework to make itequivalent with EU supervision for financial conglomerates. The main inno-vation was that large financial services companies were allowed to voluntarily
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opt for a new regulatory regime known as the Consolidated Supervised Entities.Moreover, the SEC allowed for the creation of the so-called supervised invest-ment bank holding companies. Both types of companies would be supervised atthe group-level as demanded by the EU legislation.
In July 2004, the Banking Advisory and the European Financial Conglomer-ates Committees, in a report on the equivalence of supervision of financialconglomerates in the USA, directly referred to these changes introduced bythe SEC. They came to the conclusion that after implementation of thesechanges, ‘on balance, there is broad equivalence in the US supervisoryapproaches’ (Banking Advisory Committee and Financial ConglomeratesCommittee 2004: 3). This decision largely eliminated the threat to US compa-nies from the Financial Conglomerates Directive.9 Again, an EU measure aimedat facilitating financial market integration in Europe initially caused fears ofdiscrimination among US providers. The US response (in this case, a unilateralchange in US policy), however, ensured that Fortress Europe could be avoided.In fact, the convergence of regulatory approaches made it easier for both EU andUS providers to access markets on both sides of the Atlantic.
The International Accounting Standards Regulation
The decision of the EU to adopt International Financial Reporting Standards(IFRS) for all publicly listed companies by 2005, which was first spelled out inthe International Accounting Standards Regulation of July 2002, was also ofrelevance to a large group of financial services providers from third countries(Regulation (EC) No 1606/2002, 19 July 2002).10 In 2007, no fewer than233 US companies listed on European stock exchanges using the US GenerallyAccepted Accounting Principles (GAAP) (Committee of European SecuritiesRegulators 2007: 21). For them, using IFRS standards in parallel to GAAPwas expected to be costly. The SEC, for example, estimated the costs of main-taining two sets of accounts to about $900,000 per year for an averagecompany (Securities and Exchange Commission 2008: 140). Clearly, carryingthese costs would put US financial service companies at a disadvantage in theEuropean market and hinder transatlantic trade in financial services.11
The Bankers’ Association for Finance and Trade, consequently, voiced uneaseabout the consequences of this EU decision for US banks (BAFT Newsletter,June 2004: 1). The prospect of being able to continue using GAAP in theEU, but with major adjustments to achieve equivalence, as was set out in anApril 2005 paper of the Committee of European Securities Regulators(2005), was not much more enticing. The Securities Industry Associationfeared that such a rule would ultimately force a US firm ‘to keep two sets ofbooks to ensure that it has identified all possible significant discrepanciesbetween the two sets of accounting standards’ (Lackritz 2005). To avoid sucha situation, some parts of the American financial industry asked the SEC toaccept IFRS in the USA in exchange for the EU accepting the US GAAP(Shadow Financial Regulatory Committee 2004).
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Responding to these complaints, already in 2002, the US Financial AccountingStandards Board reached an agreement with the International Accounting Stan-dards Board (the so-called Norwalk agreement) that stated that the two sideswould make IFRS and the US GAAP compatible with each other. When witnes-sing relatively little movement on this issue over the next few years, however,European Commissioner Charlie McCreevy felt compelled to make an implicitthreat. He stated: ‘[I]t is only reasonable for European companies to expectthat US regulators will make similar efforts to judge the equivalence of our inter-national standards with US GAAP and [. . .] to release companies from the costlyburdens of converting standards’ (McCreevy 2004). One year later, US–EUnegotiations resulted in the announcement that EU companies listed in theUSA would be able to use IFRS by no later than 2009 (The Guardian, 23April 2005: 26). The two sides would utilize the time until that date to achieveequivalence between the two sets of accounting standards.
Despite direct talks between CESR and SEC, however, initially the two sidesmade little progress. When the deadline of December 2006 approached, atwhich US companies would have been required to switch to IFRS, the EuropeanCommission decided to postpone the deadline by two years until the end of 2008.In November 2007, finally, the SEC announced that it would immediatelyremove the need for reconciliation for foreign companies listed on US exchangesusing IFRS (Financial Times, 16 November 2007: 22). This decision wasexpected to bring cost-savings for European companies in the region of E2.5billion (European Parliamentary Financial Services Forum 2008: 2). In mid-2008, the SEC even went a step further in allowing US companies to useIFRS. At the same time, the European Commission decided that US companiescould continue being listed in Europe under US GAAP. Finally, in August 2008,the SEC decided that the USA would most likely substitute IFRS for GAAP overthe next few years. Importantly, for the argument made here, these steps made theEuropean side desist from insisting on the conversion of the accounts of UScompanies that want to be listed in Europe. The EU’s move towards internalintegration thus again did not lead to the creation of Fortress Europe. On thecontrary, short-term discrimination caused the USA to make a significant conces-sion, which produced a liberalization of transatlantic trade in financial services.This was an outcome that was thought highly implausible only ten years earlier(Financial Times, 13 March 1997: 32; Trachtman 2000).
CONCLUSION
The intra-EU liberalization of financial services trade as a result of the SingleMarket Programme has not led to the establishment of Fortress Europe. Infact, the EU’s move towards greater integration in the financial services sectorover the last twenty years ended up making the EU more open to firms fromthird countries. I explained this outcome by arguing that the discriminationcaused by deeper integration in Europe makes third countries react with policiesthat re-establish the previous competitive situation. The recent EU–US debate
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about the negative effects of the EU’s Directive on Alternative Investment FundManagers, which introduces supervision of alternative investment funds at theEuropean level, provides a further illustration of the argument from withinthe financial services sector. Again, the USA responded to the threat of discrimi-nation, with the US Secretary of the Treasury Geithner (2010) complainingabout the threat to the US financial service providers in a letter to the financeministers of four EU member countries.
Although the empirical analysis has been confined to the interaction between theEU and the USA in the field of financial services, careful generalizations to otheractors and sectors seem possible. With respect to the geographic restriction, theEU’s interaction with third countries other than the USA seems to have followeda similar pattern as the one presented here. The EU, for example, used the SecondBanking Directive to get better access for European banks to the Japanese market(Mason 1997). Japan also responded to the requirement for companies listed inthe EU to use international accounting standards with efforts to reach convergencebetween Japanese and international rules. Switzerland reformed its arrangementsfor the supervision of financial conglomerates in response to the EU’s Financial Con-glomerates Directive. Cautious generalizations beyond the case of financial services toother service sectors also seem possible. For sectors such as telecommunications andair transport, where companies are large enough to overcome collective action pro-blems and to engage in lobbying, this paper’s expectation thus is for EU-internalservices trade liberalization to be accompanied by greater openness vis-a-vis third-country providers. In fact, in both of these sectors past intra-EU liberalization ledto EU–US negotiations that resolved conflicts between the two sides (for the caseof telecommunications in the 1980s, see Dur 2010: 159–84). Returning to thetitle of this paper, my expectation is for the European integration of servicesmarkets to produce Open Door Europe rather than Fortress Europe.
Biographical note: Andreas Dur is Professor of International Politics at theUniversity of Salzburg, Austria.
Address for correspondence: Andreas Dur, Department of Political Scienceand Sociology, University of Salzburg, Rudolfskai 42, 5020 Salzburg,Austria. email: [email protected]
ACKNOWLEDGEMENTS
I would like to thank Manfred Elsig, David Howarth, Sophie Meunier, TalSadeh, Alasdair Young, and the anonymous reviewers for helpful commentson earlier versions of this paper.
NOTES
1 Unless otherwise noted, throughout the paper the term ‘financial services’ is used torefer to banking, financial trading and investment, and insurance services.
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2 I provide the sum across financial and insurance services, which are listed separatelyin the source. The trend is the same in both subsectors.
3 In the context of services trade, trade liberalization does not necessarily mean dereg-ulation, that is, the withdrawal of government intervention. ‘Liberalization’ can alsooccur if two or more countries harmonize their regulations at a high level, as long asthis step facilitates cross-border trade and/or commercial presence.
4 These concerns by domestic constituencies do not have to be predominantly defen-sive for the expectation regarding discriminatory provisions to hold. Discriminationwill also result, for example, when decision-makers buy off a few firms voicing defen-sive demands or respond to offensive demands by prying open foreign markets.
5 This definition of power is similar to the one provided by Drezner (2007: 35).6 In this paper, as my focus is on showing that regional services integration often acts
as a stepping stone for further liberalization, I do not provide a full explanation forthe third country’s choice of response strategy. See Dur (2010) for a detailed discus-sion of this question.
7 An exception to this is the case of a third country that cannot offer concessions thatare valuable enough for the members of the preferential agreement to accept a deal.A small developing country will find it significantly more difficult to engage in nego-tiations with the EU than the USA did in the cases dealt with below.
8 Posner (2009) also provides an analysis of these developments. The two treatmentsare different, however, as Posner is interested in explaining the EU’s power relativeto that of the USA, while my explanandum is the EU’s openness to third-countryproviders of financial services.
9 Formally, the final decision on whether a company’s regulation is deemed equival-ent is to be taken on a case-by-case basis by the relevant national regulatory agency.The agencies’ decisions should take account of the Financial Conglomerates Com-mittee’s judgment, however; the conclusion of ‘broad equivalence’ is therefore likelyto weigh heavily in these decisions.
10 The need for third-country companies to use either international or equivalentaccounting standards was actually spelled out in the Prospectus (2003/71/EC)and Transparency directives (2004/109/EC).
11 While the conversion did not only affect the financial service sector, US companiesin that sector were particularly concerned because many of them did business in theEU, accounting standards are especially important for their sector, and they poten-tially faced indirect costs from the EU’s rules in that if US manufacturing firmsstopped listing in Europe, this would go to the detriment of the US financialservice companies that provided services to them.
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