* EU seeks financial regulation in biggest trade deal
* Washington opposed, wants to keep control
* EU and U.S. account for 60 pct of global banking
By Robin Emmott and John O'Donnell
BRUSSELS, Oct 6 Aqua or water? These words mean
the same thing, and yet illustrate a divide that European and
U.S. negotiators must bridge in free-trade talks to integrate
half the global economy.
From fragrances to finance, creating common rules is vital
for reaching a deal between the European Union and United States
that officials say can boost economic output by more than $100
billion a year on each side of the Atlantic.
For example, EU law requires water be labelled "aqua" in
Latin as an ingredient of perfume. When the same bottle is sold
in the United States, regulations demand a living language be
used: water must be labelled as "water".
Such relatively minor obstacles, which add to the cost of
transatlantic business, will probably be ironed out at
negotiations on the Transatlantic Trade and Investment
Partnership, the second round of which begins on Monday.
But nowhere is the challenge more difficult or pressing than
in finance as both sides struggle to restore stability to their
economies and markets. The EU wants financial regulation to be a
central part of an agreement whereas Washington is resisting,
worried this will bog down the already complex talks on the
world's biggest trade agreement.
"We are taking a pragmatic approach," EU trade chief Karel
De Gucht said last month, backing the inclusion of finance. "We
will try to make the technical aspects of EU and U.S.
regulations more compatible."
After five years of crisis, both see a deal as a way to
reinvigorate their economies and create jobs when China's rising
might threatens to eclipse their global standing.
Since tariffs between the EU and United States are already
low, around 80 percent of the gains of any agreement will come
from creating common rules for businesses.
Both sides hope the talks, which began in July, can finish
by the end of this year. It is an ambitious goal for countries
that together produce half the world's economic output.
The great, hoped-for benefit is that by agreeing one shared
financial regulatory standard, many costs and hurdles hindering
transatlantic finance will be removed, making the sector even
more dynamic and speeding the wheels of trade and industry.
EU negotiators will push the finance issue in the latest
talks but disagreement threatens to undermine the trade pact's
ambitions, with France having already won concessions that mean
cultural industries will be excluded from any deal.
U.S. resistance follows French demands that European movies
and online entertainment be shielded from Hollywood and Silicon
Valley. One former U.S. official has warned that exempting
industries will be "death by a thousand cuts" for the talks.
Europe's exemptions could embolden Washington to pursue
opt-outs for its shipping industry on security grounds, or
restrict access to the vast U.S. government procurement
Financial ties between Europe and the United States are
already huge, accounting for 60 percent of world banking. EU
investors own $2.7 trillion of U.S. stocks and bonds, while U.S.
residents hold almost as much in Europe.
However, the United States and European countries regulate
banks, insurers and traders in very different ways, particularly
in the $630 trillion derivatives industry.
Never was the difference more evident than during the
financial crisis, when Washington moved quickly in 2008 to
tackle problems at its banks with a compulsory scheme to take on
new capital, reassuring investors.
Five years on, Europe and its uneasy alliance of 28
countries is still struggling to impose order on its financial
system and has had to give emergency aid to five countries.
This is mirrored in regulation, where the two sides have
also clashed over the control of derivatives, with Washington
demanding that global trading involving U.S. firms be subject
only to U.S. rules, regardless of where it happens.
Europe wants a pact that spells out which regulators are
responsible for what activities, and how the rules should apply.
Some EU officials talk about creating new EU-U.S. institutions
to oversee finance, such as jointly tackling any future
transatlantic banking crisis.
Banks hope for less duplicated regulation. "In derivatives,
without an agreement ... banks will have to comply with both
U.S. and EU rules, which is costly," said Konstantinos
Karountzos at the European Banking Federation.
U.S. Trade Representative Michael Froman, a former economic
adviser to President Barack Obama, has expressed Washington's
reluctance. "There has been an explosion of regulatory
activity," Froman said in Brussels on Sept. 30, making clear
Europe and the United States could not merge their financial
regulation. "That work should continue in parallel," he said.
If financial regulation is left out, the deal will still
have huge scope, setting standards in areas from chemicals to
car safety, while opening up agricultural markets. But given
finance's central role in business, the pact would arguably be
weaker and its longer-term scope limited.
Both sides have struggled to regulate finance at home and
this is discouraging Washington from seeking any transatlantic
imitative. U.S. officials fear a deal with Europe could reopen
their main reform since the financial crisis, the 848-page
Dodd-Frank Act, introduced in 2010 to discourage risk-taking,
and lead to the act being watered down.
In Europe a cacophony of voices advocates differing
approaches to regulation, despite Brussels' efforts to impose a
"In the United States, there are strong federal regulators,"
said Anthony Belchambers, chief executive of the Futures and
Options Association, which represents investment banks and
others involved in derivatives in Europe.
"Here in Europe, supervision and enforcement remain a matter
for each of the member state's regulatory authorities. That is
not going to change any time soon," he said.
European officials realise they may have to scale back their
ambitions. "The most Europe can hope for is that there will be
something (in the agreement) about the close relationship
between the U.S. and the EU on financial services," said one EU
official involved in the issue.