Split on finance overshadows Europe-U.S. trade talks

Reuters

* 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 (Reuters) - Aqua or water? These words meanthe same thing, and yet illustrate a divide that European andU.S. negotiators must bridge in free-trade talks to integratehalf the global economy.

From fragrances to finance, creating common rules is vitalfor reaching a deal between the European Union and United Statesthat officials say can boost economic output by more than $100billion a year on each side of the Atlantic.

For example, EU law requires water be labelled "aqua" inLatin as an ingredient of perfume. When the same bottle is soldin the United States, regulations demand a living language beused: water must be labelled as "water".

Such relatively minor obstacles, which add to the cost oftransatlantic business, will probably be ironed out atnegotiations on the Transatlantic Trade and InvestmentPartnership, the second round of which begins on Monday.

But nowhere is the challenge more difficult or pressing thanin finance as both sides struggle to restore stability to theireconomies and markets. The EU wants financial regulation to be acentral part of an agreement whereas Washington is resisting,worried this will bog down the already complex talks on theworld's biggest trade agreement.

"We are taking a pragmatic approach," EU trade chief KarelDe Gucht said last month, backing the inclusion of finance. "Wewill 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 toreinvigorate their economies and create jobs when China's risingmight threatens to eclipse their global standing.

Since tariffs between the EU and United States are alreadylow, around 80 percent of the gains of any agreement will comefrom creating common rules for businesses.

Both sides hope the talks, which began in July, can finishby the end of this year. It is an ambitious goal for countriesthat together produce half the world's economic output.

The great, hoped-for benefit is that by agreeing one sharedfinancial regulatory standard, many costs and hurdles hinderingtransatlantic finance will be removed, making the sector evenmore dynamic and speeding the wheels of trade and industry.

EU negotiators will push the finance issue in the latesttalks but disagreement threatens to undermine the trade pact'sambitions, with France having already won concessions that meancultural industries will be excluded from any deal.

U.S. resistance follows French demands that European moviesand online entertainment be shielded from Hollywood and SiliconValley. One former U.S. official has warned that exemptingindustries will be "death by a thousand cuts" for the talks.

Europe's exemptions could embolden Washington to pursueopt-outs for its shipping industry on security grounds, orrestrict access to the vast U.S. government procurementindustry.

Financial ties between Europe and the United States arealready huge, accounting for 60 percent of world banking. EUinvestors 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, particularlyin the $630 trillion derivatives industry.

COLD SHOULDER

Never was the difference more evident than during thefinancial crisis, when Washington moved quickly in 2008 totackle problems at its banks with a compulsory scheme to take onnew capital, reassuring investors.

Five years on, Europe and its uneasy alliance of 28countries is still struggling to impose order on its financialsystem and has had to give emergency aid to five countries.

This is mirrored in regulation, where the two sides havealso clashed over the control of derivatives, with Washingtondemanding that global trading involving U.S. firms be subjectonly to U.S. rules, regardless of where it happens.

Europe wants a pact that spells out which regulators areresponsible for what activities, and how the rules should apply.Some EU officials talk about creating new EU-U.S. institutionsto oversee finance, such as jointly tackling any futuretransatlantic banking crisis.

Banks hope for less duplicated regulation. "In derivatives,without an agreement ... banks will have to comply with bothU.S. and EU rules, which is costly," said KonstantinosKarountzos at the European Banking Federation.

CACOPHONY

U.S. Trade Representative Michael Froman, a former economicadviser to President Barack Obama, has expressed Washington'sreluctance. "There has been an explosion of regulatoryactivity," Froman said in Brussels on Sept. 30, making clear Europe and the United States could not merge their financialregulation. "That work should continue in parallel," he said.

If financial regulation is left out, the deal will stillhave huge scope, setting standards in areas from chemicals tocar safety, while opening up agricultural markets. But givenfinance's central role in business, the pact would arguably beweaker and its longer-term scope limited.

Both sides have struggled to regulate finance at home andthis is discouraging Washington from seeking any transatlanticimitative. U.S. officials fear a deal with Europe could reopentheir main reform since the financial crisis, the 848-pageDodd-Frank Act, introduced in 2010 to discourage risk-taking,and lead to the act being watered down.

In Europe a cacophony of voices advocates differingapproaches to regulation, despite Brussels' efforts to impose afederal-style system.

"In the United States, there are strong federal regulators,"said Anthony Belchambers, chief executive of the Futures andOptions Association, which represents investment banks andothers involved in derivatives in Europe.

"Here in Europe, supervision and enforcement remain a matterfor each of the member state's regulatory authorities. That isnot going to change any time soon," he said.

European officials realise they may have to scale back theirambitions. "The most Europe can hope for is that there will besomething (in the agreement) about the close relationshipbetween the U.S. and the EU on financial services," said one EUofficial involved in the issue.

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