Globalization Brown Bag: Europeanization of Global Governance?
Event summaries from Globalization Week Spring 2004
Date: Friday, April 23, 12:30-2:00pm
Location: Strong Hall Piano Lounge, 620 21st Street
Event Summary
The discussion began with an introduction by Rita Maximilian, Program Manager at GWCSG. Then Professor Posner took the floor and opened up by putting forth his definition of global governance, defining it as "the rules that govern economic activity at the global level." He noted that his interest is specifically in the rules that govern competition among firms in the area of financial services and laid out three possible principles by which governance could be organized and undertaken:
- Reduction of tariffs
- Mutual recognition of standards/regulation
- Harmonization of standards/regulation
- The EU speeds up globalization
- The EU is a protective shield against globalization
- Mutual recognition: The EU adopted mutual recognition in its financial systems several years ago, and wants the US to do the same. The SEC (US Securities and Exchange Commission) wants to avoid this, as it is essentially a compromise of US sovereignty. The states in the EU are accustomed to giving up bits of sovereignty, and hence have less trouble with the concept.
- Harmonization: It would be helpful in the integration process if all states had the same accounting standards. The important question here is: Who's going to change their standards?
- Why does one area of financial regulation become an international issue? That is, how does it get on the agenda for discussion?
- Once an issue is on the agenda, why are some issues harder to manage than others?
- Finally, who wins and who loses for a particular issue, and why?
- The Europeans are doing quite a lot of agenda-setting while the US has not been as active; this is partly because the US simply assumed that others would adopt its standards.
- The European financial system is in constant motion—they are currently formulating their own standards in a number of areas. They have been purposefully avoiding adopting US standards—in accounting, they have adopted the International Accounting Standards instead of US standards.
- To a surprising degree, the EU is getting what it wants in its negotiations with the US. American firms are not dominant in all financial sectors at this point. When standards are different, firms often will adopt the more rigorous standard so that they are in compliance in both markets. EU regulators have been working on financial integration issues for 50 years; because of this experience, they have advantages over US regulators, who have had to deal with these issues much less frequently.
He then briefly discussed the context of his current project, noting that it takes place in the years after WWII, with the backdrop of two major historical developments: economic liberalization/globalization and the emerging EU/European polity/European market. Dr. Posner then noted that the debates about these two developments have been largely separate discussions, and his goal is to merge the two. There have been two major hypotheses about the EU, argued Dr. Posner:
His own hypothesis is that the EU integration process spills over into the international sphere.
He then shifted into a discussion of European financial integration, observing that many people have argued that globalization forces states to create more efficient national institutions. Dr. Posner then argued that to understand globalization and why states adopt certain financial standards and regulations, one must examine EU governance and its intersection with national level governance.
He emphasized that his focus is specifically on transatlantic financial sector relations. One of the most recent developments in this area is the US-EU "Financial Markets Regulatory Dialogue" (for more information on this process, please see (http://www.state.gov/p/eur/rls/fs/21921.htm). It was set up to manage the problems that arise with integration of financial markets. He noted that European firms operating in the US must act like other US firms; there is not currently mutual recognition of EU standards for EU firms operating in the US.
Dr. Posner then outlined two major problems:
To examine these problems, argued Dr. Posner, there are three types of questions that must be answered:
He noted that for a number of reasons—US financial power, US government power, and the sociological appeal of US practices—many people assume that US standards will be adopted by other countries and not the other way around. But in Posner's view, this is not what is happening, and to figure out why, we must look inside the processes of EU integration.
Dr. Posner then used the framework above to look at the area of transatlantic financial integration and standard- and regulation-setting. He argued that:
Dr. Posner then opened the discussion up to questions.
Question & Answer
Q: Two questions. The EU is a fusion of French bureaucracy and German economic practices. This doesn't fit well for finance, where the UK rules. The UK is more informal, which doesn't fit with either the US or the EU approach. How will this affect integration? Question two: The American accounting system isn't good with intangible values. So the US doesn't have an advantage here, and that's why it's up for grabs.
Posner: Things are really happening in EU finance. It started changing in the 1980s and 1990s, when all the countries had different strategies. The UK first tried to mimic the US SEC, and then made a mammoth SEC-type institution to regulate all financial services. Germany and France first tried to mimic the US, but then mimicked the UK. The euro was really the impetus for moving forward; there are still problems in the areas of taxation and corporate governance, but other areas are going forward. The EU system that is developing is a unique one. Regarding question two: it was only a few years ago that people realized that US accounting standards aren't the best. The difference between the US and the EU is that the US is rule-based and the EU is principle-based. There was actually a formal investigation into the prospect of switching to an EU-like system. It is likely that we'll see a harmonized transatlantic accounting system in the next ten years.
Q: Is there anything "European" about the new EU financial system? Is this new system substantially different than the previous national arrangements?
Posner: There was a fear on the part of Germany and France that it everything financial became integrated, that all financial activity would move to London. This is why the process has moved so slowly; the French were especially careful. It is true that the forms and rules are more market-based now. But the distinction between market-based systems and other types isn't really very helpful, because there is so much variation even within market-based systems.
Q: Markets don't like uncertainty. The process of EU financial integration is highly fluid and displays high levels of uncertainty; do you think this has hurt investment in Europe?
Posner: I don't really know what asset managers are thinking, and I don't have comprehensive knowledge of the direction of capital flows in recent years. Good question.
Q: Why aren't Canada and Mexico involved in these negotiations? It seems that their proximity to the US would lead them to provide input on these matters.
Posner: I'm not sure why they're not involved; I'm sure the Canadians are upset that they don't have a larger role. Also, this dialogue is only two years old.
Q: The SEC recently has turned its attention to more corporate governance-type issues, and isn't so much involved in accounting standards. Also, how much will these processes change when the EU admits a new batch of countries on May 1?
Posner: In Europe, there has always been a huge gap between the rules on the books and the implementation of those rules—it can take, literally, years. Some sectors are more integrated than others: retail banking is currently national, as is electricity, while telecommunications are highly integrated.
Q: The US is extremely powerful; why would it compromise with the EU at all?
Posner: Exactly. Why would it? We shouldn't expect any compromise, yet we're seeing it. And the mechanisms involved are rooted in EU processes. The US has compromised with the EU on a couple of notable occasions in the last few years, and it will likely happen again.
Q: While the EU and the US are negotiating, what will happen in the rest of the world?
Posner: It is interesting that this is so bilateral, between the US and the EU Commission. The EU did adopt the International Accounting Standards, which India and China have also adopted; this may be a play for more influence on a global financial scale.
Q: The effects of lobbying by the financial sector are very strong in the US; are they as strong in the EU? What is the involvement of the private sector there?
Posner: In the EU, the private sector is very active. There's old finance—national elites—and new finance, which are more globally oriented. Venture capitalists currently have a large voice, and this was deliberately given to them by the EU Commission in the interests of spurring economic growth. The process is quite open in Europe. But not all the firms agree with each other, and there is even disagreement on the part of different departments within firms.
Q: Could it be that we're seeing compromise on the part of the US simply because it wants to gain a greater foothold in the EU market?
Posner: US firms already dominate a number of areas in EU financial markets. So why is there conflict? Perhaps the US is compromising because they want to avoid endangering the operations of US firms already in the European market.
