Fiscal Federalism and European Economic Integration (Routledge Studies in the European Economy)

Evropská secese: ekonomická integrace na cestě k politické desintegraci
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In the absence of any one-size-fits-all trade agreement, in most cases the EU negotiates comprehensive i. The case for these comprehensive trade agreements hinges on hitherto largely untapped benefits from abolishing non-tariff barriers to trade.

Those benefits are more difficult to quantify, as they are conditioned by the scope of the agreements in question, and they also have broader implications for society. Furthermore, what merely seems like a logical next step brings about an important qualitative change, as comprehensive economic and trade agreements are aimed at influencing global norms and standards.

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These come to interact with and feed back into the EU's economic order in a way that traditional trade agreements do not. As a result, they could either consolidate what is referred to as the European model or weaken it and risk eroding the trust of European citizens and economic agents. These comprehensive agreements crystallised popular concern with the effects of globalisation on society and the environment, and they were heavily contested.

The EU has over 50 preferential trade agreements and is currently negotiating an additional 20 trade agreements with 60 countries. The EU aims to step into the gap left by the US's non-ratification of the TPP to augment its weight in global trade and promote growth and employment. China has also signalled interest in an investment accord.

Conventional free trade agreements correspond to the lowest level of preferential trade. Coordination needs are straightforward concerning above all the abolition of tariff barriers to trade and do not raise issues of sovereignty. Conversely, comprehensive trade agreements like TTIP or CETA go much further by establishing rules that are to govern the bilateral trade relationship, which in turn shape the economic order in the parties to the treaty.

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Due to the limited progress to date with respect to the EU's modernisation agenda, the European model has not yet been consolidated, and some aspects of the EU's economic order — the rules of the game — are still not unanimously accepted and hence remain politically sensitive.

In bilateral economic and trade agreements, as in investment partnerships, bargaining power matters. For example, the EU seems to have been in a weaker bargaining position and with limited capacity to affirm the European model during TTIP negotiations. According to Winters, there are two reasons, both related to the TPP. Second, the TPP had been set up as a deep free trade area, extending to issues such as intellectual property right protection and investor-state dispute arbitration, and modelled on US preferences; TTIP was essentially a child of the TPP. The EU should have had a stronger initial bargaining position than Canada, and it is therefore somewhat puzzling that the EU seems to have made scarce use of it.

Indeed, it appeared more interested in simply demonstrating its capacity to make a trade deal rather than engaging in public discussions on the broader impact of the trade deal on European society and on the European model that derives from the small print of the agreement. While it is easy to understand that Canada would be eager to secure a deal — Canada is an open economy, but its population of about 36 million is almost 10 million less than Spain, to say nothing of the EU's almost million citizens — it is more difficult to understand what the EU stands to gain in return for providing greater access to the largest market in the world.

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CETA undoubtedly sets a precedent beyond the narrow case of trade with Canada, but it also highlights many of the key issues at stake in comprehensive trade agreements. The EU wanted TTIP to go even further than the TPP, with deeper agreement in three broad areas, namely market access, regulatory issues and non-tariff barriers, and rules. The CETA treaty establishes rules that concern issues as diverse and broad as access to goods and services markets, investments and public procurement, intellectual property rights, sanitary and phyto-sanitary measures, sustainable development, regulatory cooperation, mutual recognition, trade facilitation, cooperation on primary materials, and the resolution of disputes and of technical barriers to trade.

Contestation by civil society, and especially the refusal by the Belgian region of Wallonia to sign the original agreement, resulted in several amendments before CETA could be signed in late October Wallonia — and with it the entire EU — secured a number of important assurances, among others on investor-state dispute settlement which was replaced by the investment court system , regulatory cooperation to require common agreement by all member states , safeguards with respect to genetically modified organisms and a guarantee of the precautionary principle.

The case of Wallonia gave rise to a discussion on whether this precedent represents a weakening of the EU's capacity to make future trade deals or whether it strengthens public interest. The Namur Declaration argues that European values also need to be anchored and defended at the national or sub-national level, where competences lie. However, in accordance with the principles of subsidiarity and the theory of fiscal federalism, member state competences can function as checks and balances to uphold their diverse preferences in areas that are important for the European model.

The trade deal with Singapore was one of the EU's first "new generation" bilateral free trade agreements, and the judgment carries significant relevance for ongoing and future comprehensive trade agreements. The EU Advocate General's opinion was that the agreement cannot be concluded without the participation of all member states, since not all parts of the agreement fall within the EU's exclusive competence.

It follows that mixed agreements cannot take full effect until ratified by the EU's national and, where necessary, regional parliaments. The ECJ ruling clarified that sustainable development constitutes one of the areas of exclusive EU trade competences; however, it also strengthened the role of national parliaments in those external trade areas in which member states retain shared competences, namely non-direct investment and investment dispute settlement.

Sustainable development is held to now form an integral part of the common EU commercial policy. This means that important environmental issues and labour standards are no longer a grey area. In an area that is central to the European model, the EU has the exclusive competence to negotiate, subject to the condition that the signatories comply with their international obligations regarding the social protection of workers and environmental protection.

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It is noteworthy that the EU's new generation of deep trade agreements comes to magnify an issue — regulation — that already creates friction in the EU internal market in a context of market making versus market correction. Their development has been conditioned by the evolution of European regulation market correction that presupposes preference convergence; diverse preferences can be accommodated through the principle of mutual recognition of national standards.

Mutual recognition is a fundamental principle of internal market functioning, whereby national regulation is accepted as equivalent in the EU space market making. In practice, mutual recognition implies competition between regulatory systems. Trust is fundamental for facilitating mutual recognition and to counteract fears of a race to the bottom. A notion of similarity fosters trust between countries and thereby sustains mutual recognition of national market rules. It is of course challenging to distinguish truly heterogeneous preferences from technical or administrative differences, which create frictional barriers to trade that cannot be justified by diverse preferences.

What made regulation-based integration possible in the EU, economically and politically speaking, was a similarity of preferences. In the EU, truly diverse preferences justify subsidiarity, and the distribution of competences can uphold them. So while trade goods is an EU competence and the Lisbon Treaty also granted the EU competence on foreign direct investment affairs, competence in many areas remains with national governments and even some regions, for example access to services markets, including some public services.

The problem with deep free trade agreements like CETA is that they encroach on some areas of member state competence.

They also raise the question of why the European Commission, in the name of the EU, should grant a third country like Canada what it does not grant, for instance, Norway, which, as a European Economic Area member is more deeply integrated with the EU but has no say on the norms and rules of the EU internal market.

The proliferation of bilateral and regional free trade agreements in the world tends to distort global trade by favouring partner countries, to the detriment of third countries. However, there are also disadvantages for the EU. It also has the effect of excluding other countries and regions, notably China.

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EU bilateral trade agreements are then a second-best option, but their implications are complex. As Rodrik points out, economists have failed to contribute to a full picture on trade, tending to emphasise gains from trade and not to discuss more complex consequences such as the distribution of benefits and the impact of regulation. However, after having been signed and ratified at the EU level, CETA can now enter into force later in , if only provisionally. Following member state pressure, CETA became classified as a mixed agreement, which amounts to a recognition of the fact that comprehensive agreements can invade competences in the member state realm.

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It follows that all EU member states and some regions have veto power, as CETA must still be ratified by a total of 37 national and regional parliaments in what is expected to be a long, drawn-out process with an uncertain outcome. This veto power might be an important counterweight to any rush towards centralisation of member state competences at the EU level in contravention of the principle of subsidiarity. It assures a role for the European model in EU trade-focused negotiations.

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One may posit that the EU's failure to adequately contemplate the repercussions of international trade on the European model is even more problematic at a time when populists have turned against the EU project. There has been a general failure to communicate the globalisation-driven — rather than internal market-induced — need for economic and institutional modernisation at the member state level which the EU and all member states agreed under the Lisbon and Europe economic reform strategies.

This makes it even more important for the EU to be seen as conditioning globalisation by furthering European values in its trade agreements. The Commission defends comprehensive trade agreements as a vehicle to promote world trade in accordance with EU values and norms. It has called the CETA agreement a most progressive trade agreement.

An example of a possible conflict between high EU environmental standards and trade is provided by concerns over tar sands, the majority of which are extracted in Alberta, Canada. European standards on oil from tar sands which are more polluting than conventional hydrocarbons and accordingly attributed a higher carbon value were lowered during the CETA negotiations, in contradiction to ambitious EU sustainable development goals.

The theory of fiscal federalism and the principle of subsidiarity tell us that one should not centralise decisions at the supranational level that are better taken at the national or regional level when there are differing preferences among countries or regions. Critiques of TTIP and CETA in several EU countries centred on fears that they would lower environmental and labour standards and give multinational firms the power to challenge national laws. In a quest to attenuate opposition to international agreements, the Commission modified the principles that guide its trade talks, clarifying the importance of European values.

More than words, what is required are deeds. So what can be said about the likely effect of the new generation of EU trade agreements on the European model? Above all, addressing non-tariff barriers to trade and other issues such as investment protection interferes with political preferences regarding the role of the state in the economy and emphasises the role of regulation, which is intrinsically political since it is based on values and beliefs. Deep trade agreements will promote market making and may well come to constrain market correction.

Rather predictably, this creates friction, as there are many policy areas included in these agreements in which member states retained competences for market correction purposes. The assigning of competences to the member state or regional level is justified if preferences are truly heterogeneous.

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In that case, mixed agreements safeguard diverse preferences.