What Biden’s European Diplomacy Means for Transatlantic Financial Regulation
America is back. President Joe Biden traveled to Europe and got immediate results. The Atlantic Charter of 1941 is renewed. Transatlantic alliances have been repaired.
For the moment. A furtive glance at Foreign Affairs, and it is obvious that European leaders have “concerns about the nature and longevity of American commitments.” Likewise, an overview of Atlantic reveals a strong European fear: “The United States is simply between the eruptions”.
Fair enough. After all, in the words from another US president: “Deceive me, you can no longer go wrong. There is a long way to go before the United States has convinced its partners that it can count on their commitments in areas such as Paris Agreement. This hesitation probably applies to Rebuilding a better world, or B3W, as the administration insists on calling its new challenger to China’s global infrastructure plans. But when you scan the horizon for weaknesses in the transatlantic relationship, it is too easy to fall into a simple trap. You could imagine that all formal agreements between America and Europe reduce tensions between America and Europe.
Consider financial regulation, one of the most formalized and extensive aspects of the relationship between the United States and the European Union. After the global financial crisis of 2007-2008, the G20 demanded a much stricter approach to the regulation of the world’s largest banks. It made sense. These banks had, after all, almost destroyed said world. But the result was a triple whammy of new demands: more capital, less leverage and better liquidity. Banks then abandoned all kinds of risky market activity, leaving the field to unregulated entities and lending less to the real economy. Ask any senior banker how they’ve spent the past decade, and there’s a good chance they’ll tell you they’re looking to comply with a plethora of new requirements. At midnight. Without sandwiches. And in tears.
You may have no sympathy for overwhelmed bankers. But that’s the point: post-crisis regulation was internationally derivative. After the G20 made its wishes known, the details of the new banking rules were debated by the Basel Committee on Banking Supervision. After that, the US and EU agreed to sign, each then incorporating the new regulatory framework known as Basel III into their respective legislation. In America, this task was given to the Bumper Dodd-Frank Act of 2010. In Europe, to a series of different legislative efforts. The general idea was a holistic approach, or what people in the financial industry call a level playing field. This proverbial area guarantees fairness in the international financial system. If all banks face the same rules, no bank can unfairly outsmart the others.
But are the level playing fields really that flat?
While formal agreements are meant to be the opposite of formal tensions, it should be noted that post-crisis financial regulation has in fact caused a lot of disagreement. Basel III has its dissatisfaction. The repression of banks has not, in practice, produced a level playing field. Rather the opposite. One jurisdiction, the EU, has only banks while the other, the US, also has thriving capital markets. This alone has been of benefit to Uncle Sam. In addition, there have always been smoldering discussions between the US and European authorities about the mutual tendency to interfere in each other’s regulatory affairs. Remember the epic spat on cross-border derivatives between the European Commission and the United States Commodity Futures Trading Commission. In this context, Basel III raised, and not lowered, the regulatory temperature. It’s a good indicator of the reality of the renewed transatlantic sentiments and a reminder that those who have made deals can still disagree.
For the most part, however, the two giants made it work. Even though America is a free financier, and Europe is not, a transatlantic financial system exists and, for the most part, works.
Or a. Get into Brexit. The UK location was very convenient for all manner of American interventions, an English speaking refuge for sending various commandos, students and bankers. Brexit will remove some of this function, instead introducing an inevitable degree of UK-EU market fragmentation. The political path between Europe and America has been a straight line for decades. Brexit adds a point to geometry. The shape of the new triangle of transatlantic jurisdictions remains undecided: isosceles, scalene or equilateral. As the UK decides how far away from the US or the EU it will land, Washington and Brussels need to look at each other directly.
The post-Brexit Atlantic may well see a regulatory deadlock between the US and the EU. No longer restrained by pro-market Britons, Europeans could lean on their restrictive, top-down regulatory instinct, doing so just when the United States feels the greatest need to free up its financial system to compete with it. China. Brexit could therefore present the United States with a delicate choice. Make a big fuss about the growth of European interventionism and protectionism and undermining Biden’s diplomacy in the G7. Or swallow both in the name of good understanding, only then to witness the development of a European financial system that is much less favorable to the United States. Neither scenario is ideal. Neither confirms B3W’s background music. Both are possible.
Eurozone demands may negate these visions. Europeans may choose, or even need, to develop an open financial system, designed to create the kind of deep and liquid markets that the euro is likely to need. But President Biden may also have come too late, the combined shock of Brexit and former President Donald Trump setting in motion an unstoppable trajectory in Europe towards a more cautious and closed financial and economic bloc. It would be a shame. The Anglo-Saxon and European financial systems are very different. But, compared to the alternative of ever greater transatlantic fragmentation, finding a way for them to come to an understanding is surely preferable.
The Pacific Mariana Trench is the deepest ocean crevice in the world. But the Atlantic has its own rival fissure. It is the potential for the US and the EU to disagree not only in the absence, but also in the presence of their various formal agreements. Hopefully this crack does not turn into a chasm, in which the consistency of the market, if overwhelmed, is almost lost.
Edward Price, a former British economic official, teaches political economy at the Center for Global Affairs at New York University.