Fortress Europe or open door Europe? The external impact of the EU's single market in financial services

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<ul><li><p>This article was downloaded by: [University of Connecticut]On: 07 October 2014, At: 23:49Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK</p><p>Journal of European Public PolicyPublication details, including instructions for authors andsubscription information:http://www.tandfonline.com/loi/rjpp20</p><p>Fortress Europe or open doorEurope? The external impact ofthe EU's single market in financialservicesAndreas DrPublished online: 11 Jul 2011.</p><p>To cite this article: Andreas Dr (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</p><p>To link to this article: http://dx.doi.org/10.1080/13501763.2011.586792</p><p>PLEASE SCROLL DOWN FOR ARTICLE</p><p>Taylor &amp; Francis makes every effort to ensure the accuracy of all the information(the Content) contained in the publications on our platform. However, Taylor&amp; Francis, our agents, and our licensors make no representations or warrantieswhatsoever as to the accuracy, completeness, or suitability for any purposeof the Content. Any opinions and views expressed in this publication are theopinions and views of the authors, and are not the views of or endorsed by Taylor&amp; Francis. The accuracy of the Content should not be relied upon and should beindependently verified with primary sources of information. Taylor and Francisshall not be liable for any losses, actions, claims, proceedings, demands, costs,expenses, damages, and other liabilities whatsoever or howsoever caused arisingdirectly or indirectly in connection with, in relation to or arising out of the use ofthe Content.</p><p>This article may be used for research, teaching, and private study purposes.Any substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to anyone is expressly</p><p>http://www.tandfonline.com/loi/rjpp20http://dx.doi.org/10.1080/13501763.2011.586792</p></li><li><p>forbidden. Terms &amp; Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and-conditions</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Uni</p><p>vers</p><p>ity o</p><p>f C</p><p>onne</p><p>ctic</p><p>ut] </p><p>at 2</p><p>3:49</p><p> 07 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p><p>http://www.tandfonline.com/page/terms-and-conditionshttp://www.tandfonline.com/page/terms-and-conditions</p></li><li><p>Fortress Europe or open door Europe?The external impact of the EUs singlemarket in financial servicesAndreas Dur</p><p>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 EUs 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.</p><p>KEY WORDS European Union; financial services; Single Market Programme;trade policy; transatlantic relations.</p><p>INTRODUCTION</p><p>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 EUsfinancial 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 EUs financial services market.</p><p>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-15s financial services</p><p>Journal of European Public PolicyISSN 1350-1763 print; 1466-4429 online # 2011 Taylor &amp; Francis</p><p>http://www.tandfonline.comDOI: 10.1080/13501763.2011.586792</p><p>Journal of European Public Policy 18:5 August 2011: 619635</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Uni</p><p>vers</p><p>ity o</p><p>f C</p><p>onne</p><p>ctic</p><p>ut] </p><p>at 2</p><p>3:49</p><p> 07 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p></li><li><p>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 EUs 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 EUs 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.</p><p>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.</p><p>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 literatures expec-tation that the preferential liberalization of trade nearly inevitably makes it moredifficult for third-country producers and providers to export to this market.</p><p>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</p><p>620 Journal of European Public Policy</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Uni</p><p>vers</p><p>ity o</p><p>f C</p><p>onne</p><p>ctic</p><p>ut] </p><p>at 2</p><p>3:49</p><p> 07 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p></li><li><p>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 EUsopenness 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 EUs external relations is astonishing, given that servicesaccount for 77 per cent of the EUs economy (European Commission 2007),and that Europe is the largest importer and exporter of services in the world.</p><p>THE EXTERNAL EFFECTS OF A PREFERENTIALLIBERALIZATION OF SERVICES TRADE</p><p>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.</p><p>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.</p><p>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</p><p>A. Dur: Fortress Europe or open door Europe? 621</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Uni</p><p>vers</p><p>ity o</p><p>f C</p><p>onne</p><p>ctic</p><p>ut] </p><p>at 2</p><p>3:49</p><p> 07 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p></li><li><p>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: 1112). 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).</p><p>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 agreater 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).</p><p>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 rest...</p></li></ul>