TTIP's IP Chapter: Nothing to be Gained (Part 2)

It would not be difficult to convince the various constituencies arrayed against the expansion of intellectual property rights to support the removal of the IP chapter from the projected U.S.-European Union free trade agreement (known as TTIP, the Transatlantic Trade and Investment Partnership). Open source advocates, First Amendment partisans, pirates and free riders, as well as ordinary American consumers, see little to be gained from yet another international commitment to strong IP. Eliminating the IP chapter from TTIP should appeal to the U.S. IP industries as well. There is little to gain, and perhaps much to lose, in including an IP component to TTIP. IP zealots (and I'm talking to you, Hollywood) might be better served to await a better day.

As I argued in part 1 of this essay, there is little ground the European counterparty is politically willing or able to give in any TTIP IP negotiations. The TTIP IP chapter is a lightning rod for anti-globalists - and the European Parliament will guard the populist victory it won in quashing ACTA. And neither the United States nor the European Union seem ready to undertake the extremely difficult task of harmonizing substantive IP law across the Atlantic. The Americans and the Europeans seem to share a resignation to let "vivre la différence” in substantive IP rules; each of course would be satisfied by a wholesale capitulation to its respective IP model, yet each recognizes the impossibility of such an outcome. Impending EU substantive IP harmonization - in patent and copyright - pursued through the EU legislative process might be a more favorable opportunity to highlight (with a light touch, of course) the gains to be achieved through transatlantic IP convergence (admittedly moving EU IP law closer to U.S. models).

Leaked reports suggest some Europeans see possibilities for U.S. movement in TTIP with regard to geographical indications (GIs). Perhaps. But the United States clearly recognizes the intense desire of certain European interests for a stronger GI regime (especially with regard to wines). The United States will likely make painful demands of the European Union before making concessions on GIs.

In the end, there is not much new nor important that can form the IP chapter of TTIP beyond simply restating the ongoing general commitment of the United States and the European Union to a high standard of IP protection. And there is a downside to a modest agreement (again from the perspective of those U.S. industries seeking a global advancement in the protection and enforcement of IP rights).

TTIP’s IP Chapter: Nothing to be Gained (Part 1)

President Obama announced in his 2013 State of the Union address that negotiations for the Transatlantic Trade and Investment Partnership (TTIP), a United States-European Union free trade agreement, were on. There is something silly about calling a trade agreement a 'partnership;' the on-going Trans-Pacific Partnership uses this same label. But the folks in Washington are more clever than you and me: they know that the older style ‘free trade agreement’ (FTA) would be DOA in Congress.

TTIP’s central features follow the FTA model. Little thought seems to have been applied to fixing the provisional TTIP agenda: TTIP would provide for zero-level tariffs for U.S.-EU trade, an address various non-tariff barriers between the United States and the EU, introduce a misbegotten investor-state arbitration mechanism, and include an intellectual property chapter. It appears now that little positive can be achieved from inserting an IP chapter into TTIP. It is at best a waste of time -- and could undercut U.S. and EU IP efforts in other fora. What were they thinking?

In this first post, I examine the constraints faced by European Union negotiators. The EU has precious little room for maneuver on the IP front; IP provisions can only attract and intensify opposition to the entire TTIP package. These political limits are clear to the Europeans; they are perhaps underappreciated by the U.S. proponents of TTIP's IP coverage.

Euro Money as Euro Language

This is the first of a series of reflections on the social meaning of the Euro.

Investigations of the social character of money often feature an analogy to language. Like words, money forms intelligible signs. Money, like language, is a critical medium of social exchange. Money, like language, is constitutive of identity: the particular kind of money we use, in part, makes us who we are. And money, like language, is both stable and unstable over space and time.

The architects of the European Monetary System (EMS) anticipated that the Euro would serve as an institution around which a European consciousness could be built. The Euro (at least in its material forms) functions like the EU flag or the EU passport to construct a new identity that plays on commonplace nationalist expectations. That is, when we see flags or passports or money, we have been acculturated to expect national sponsorship. The European Union thus displaces the traditional state in presenting itself through these institutions; if not precisely declaring itself to be a state, the European Union is, at a minimum, asserting that it is like a state for various intents and purposes.

But notice the peculiarly assertive case of the Euro. The EU flag often flies alongside the traditional flags of the EU Member States. The EU passport is formally issued by the respective member states: while it prominently features “European Union” on its harmonized cover, it also bears the name of the relevant member state. The EU passport in fact overstates the EU nature of the document. A passport begs the admission of a members state’s nationals into another state’s territory; it is only secondarily evidence of nationality (and in the case of EU passports, evidence of the bearer’s status as an EU citizen). Through flags and passports, the EU and the relevant EU member state co-occupy a space in the EU citizen’s imagination that had been occupied by the state alone.

The Lost Continent by Gavin Hewitt

The challenge with European democracy is its constantly shifting notions of demos - who are the people who should exercise political determination. The current Euro crisis - and the ensuing imposition of austerity policies on Greece and Ireland, Spain and Italy - demonstrate a democratic irony. As Gavin Hewitt points out, there is nothing democratic about the adoption of austerity; austerity is not a lifestyle choice struggling countries freely assume. The Euro crisis precipitated changes of government (left to right and right to left) in the affected Member States and fierce popular backlash. Yet Angela Merkel, the physician prescribing austerity to faltering countries, responds to democratic signals given by her German electorate (who balk on bailing out their neighbors). Hewitt constructs a story where the democracy of Germany is pitted against the democracy of Southern and Peripheral Europe. 

The Lost Continent focuses on national stories - and national leaders - and so at times has the feel of a tell-all. Silvio Berlusconi, to no-one’s surprise, comes off the worst. His cynical disregard for anyone’s interest saves his own marks, a new low in post-War Italian politics. Imagine how Angela Merkel felt upon receiving his ‘political’ advice to take on a lover. And even more respectable characters, such as Sarkozy, engage in behind-the-back smirkiness with regard to Merkel. But much of the focus falls on Merkel herself; we’re never quite sure whether she is (as she claims) acting just like a Swabian housewife, guided by common-sense and prudence, or whether she is the instrument of peculiar German obsessions outside her control.

And so The Lost Continent is to a great extent a German story of Europe (the UK barely figures). Germany is able to impose austerity on its EU partners because it is German resources that largely fund the rescue. Germany’s economic primacy permits it an outsized influence in contemporary European affairs - Hewitt and various of his informants note that Germany may be more powerful than ever. Germany has benefited from this new Europe; its products are consumed throughout. Its economic success permitted the reunification of Germany, an enormous political and social success (ironically, Merkel developed her political skills in the East).

Austerity: The History of a Dangerous Idea by Mark Blyth

There is nothing ambivalent about Mark Blyth’s view of austerity: he is against it. Blyth’s Austerity is more than a brief against today’s accepted form of treatment for all that ails a slumping economy - it is an intellectual history of a powerfully attractive idea, though in Blyth’s view, a dangerous one. Austerity fails for a number of reasons: it is unfair (it hurts the poor), it cannot be pursued simultaneously by all (someone must spend to ignite economic expansion), and (most damning) history shows it doesn’t work.

Blyth admits to being a Keynesian. There is no shame in that: many neo-Keynesians are calling for an end to austerity. Blyth states, however, that he need not prove Keynes right (“for what it’s worth, he was right, but that’s in another book”); his goal here is simply to prove austerity wrong.

While austerity figures in contemporary U.S. politics, it is predominantly a European fix and fixation, famously imposed on Greece, Spain, Ireland and Portugal as a condition for European and IMF support in response to the Euro Crisis. Blyth begins the book by correcting the dominant narrative: Greece aside, the Euro Crisis did not originate by reckless government spending, but in private irresponsibility. Excessive private sector lending (provoked by cheap borrowing costs associated with the adoption of the Euro) sank the banks in Ireland and Spain (and their respective economies); the states became indebted in attempting to clean up the mess. Setting this history right is important -- as part of the moral authority for the imposition of austerity is a judgment of state fault. Austerity is not merely an economic prescription -- it is a punitive response. As Blyth points out, there was little else Spain or Ireland could have done. Their banks were not only too big to fail; they were "too big to bail" -- that is, their liabilities were beyond the state’s capacities to absorb. Hindsight suggests the better course might have been to abandon the banks -- but that course would have presented other grave difficulties. By shouldered bank indebtedness, several European states wildly exceeded the European limits on budget deficits and overall indebtedness. So why, Blyth asks, is the Euro crisis consistently described as a sovereign debt crisis? One must blame the state in order to justify the imposition of austerity.

European Parliament Approves Implementation of Basel III

On April 16, the European Parliament approved the packet of legislation known as CRD IV, which largely implements the Basel III banking reforms. This completes the political phase of the European legislative process -- formal adoption of CRD IV by the Council of Ministers is expected to occur in June. Assuming the schedule is met, CRD IV will become law effective January 1, 2014. Consultations on the form of detailed regulations ('technical standards') have now been launched.

CRD IV implements Basel III -- and does more. The term 'CRD IV' signals that this is the fourth generation of the EU's Capital Requirements Directive. The name is no longer precise: CRD IV is comprised of a Regulation (law that is uniformly applied throughout Europe) and a Directive (which requires national implementation and admits a certain degree of variation).

CRD IV increases the quantity and quality of regulatory capital a financial institution must hold. In most cases, transitioning to CRD IV requirements will place pressure on European banks to retain earnings, raise additional equity capital, dispose of assets or change their respective asset mixes. Under the existing version of the Capital Requirements Directive (which were adopted immediately prior to the onset of the 2007/2008 financial crisis), many European banks reduced their capital to extremely low levels. Reportedly some European banks had leverage ratios of over 40 to 1 -- that is, maintaining less than 2 percent of effective capital. Many of these same banks remain in crisis now -- a problem that in turn has infected the balance sheets of several EU Member States. CRD IV acknowledges the insufficiency of bank capital during the financial crisis. The new requirements are complex -- and involve a stack of charges and buffers. A minimum of 8 percent capital will now be mandated, computed with regard to a bank's risk-adjusted assets. Left undetermined for the time being is the overall leverage cap -- it is this simple metric that may prove to be the most meaningful limit on a bank's level of debt.

ECB's new role as eurozone bank regulator

Early Thursday morning (December 13) eurozone finance ministers agreed to take a first step toward establishment of a banking union. The agreement will grant supervisory powers to the European Central Bank (ECB) - at least with regard to the 200 or so largest banks headquartered in the eurozone. Large European banks located outside the eurozone (chiefly UK banks) will continue to answer to national authorities. With the accretion of these new powers and responsibilities, the ECB will come to resemble the Federal Reserve which functions as both as a monetary authority and as the chief regulator of large banks operating in the United States.

The political accord reflects a compromise between the competing visions of France and Germany. France had desired a complete transfer of bank supervision to the ECB, effectively extinguishing national regulation. Under this approach all banks located within the eurozone would become 'European' in character. Germany resisted; Germany has been desirous of sheltering its politically powerful regional banks from European control. A reported late-night compromise between France and Germany has resulted in a mixed system - with the eurozone's 200 largest banks falling under the authority of the ECB and the remaining 5,800 or so smaller banks (including virtually all of Germany's regional banks) continuing under the oversight of national regulators.

Still the eurozone finds itself a good distance away from a true banking union. As conventionally understood, a banking union involves three features: common and centralized supervision, a common deposit insurance scheme and a centralized mechanism for taking over insolvent banks. The current decision achieves at best only the first element. Moreover, the EU summit determined to postpone action on the remaining items - deposit insurance and insolvency scheme - for at least six months. These missing features involve politically touchy sharing of financial burdens.

Abandoning the Euro, Saving the Euro

The Euro crisis tests more than the viability of the current currency arrangements. The sovereign debt crisis affecting Greece and Ireland, Italy and Spain is also testing the limits of wider European democracy. The status quo will likely be abandoned. The open question is whether the Euro crisis will lead to deeper integration among the EU Member States (as an artifact of a Euro rescue) -- or whether a collapse of the Euro will signal a retreat from the past achievements of the European project.

The European Union began as a common market for goods and services. A common European currency space is a more recent development -- the Euro serves as the currency of most (but not all) EU Member States. Adoption of the Euro has reduced trading costs, and has led to more transparent prices.

The Euro crisis is first and foremost a sovereign debt crisis, initially affecting a handful of EU Member States running unsustainable deficits. The sovereign debt crisis is itself an artifact of the establishment of the Euro -- neither Greece nor Spain would have been able to borrow as much in their former currencies (or on such favorable terms) as they were able to using the Euro. Prior to the Euro crisis, the financial markets valued Euro-denominated Member State obligations similarly. As the crisis developed, lenders became far more discriminating, demanding much higher Euro interest rates from weaker Member States (such as Greece and Spain) than from others.

European Limits on Banker Bonuses

The EU's Council has prepared its draft legislative package implementing the Basel III banking reforms -- known as CRD IV. Attention now shifts to the European Parliament for its response, expected this autumn. A complex process of reconciliation will follow. On one point the Parliament has drawn a line in the sand: the eventual CRD IV must contain significant limits on contingent compensation paid to bankers. The Parliament's starting point is a one-to-one ratio cap: bankers' bonuses cannot exceed annual salaries.

Basel III did not impose any limits on bankers' compensation -- although several European members of the Group of 20 had sought bonus restraints during the negotiation. Nor does Basel III restrict the ability of Europe -- or any other Basel party -- from imposing additional requirements on its banks. Europe's imposition of bonus limits in CRD IV may be described as "Basel III Plus" -- an additional term beyond the basic Basel III mandates.

There is a broad perception that the bonus culture of New York and London contributed to the 2007 financial crisis. Bankers seduced by the prospect of large contingent payments caused their firms to undertake inappropriate levels of financial risk. New limits on bonuses, in this telling, are needed to eliminate the distortion in risk appetite generated by prevalent compensation practices. But bonuses have their defenders -- and not just the bankers who receive them. There remain policymakers (albeit more likely those overseeing markets in New York and London) who continue to believe that bonuses are necessary to attract the creative talent that will drive economic growth.

European Politics and the Regulation of Bank/Insurance Firms

On prior occasions, European implementation of the Basel bank regulatory system had proceeded rather mechanically. The Europeans actively participated in the Basel II process, reached agreement with the world's other major banking powers, and then faithfully enacted Basel norms into EU law. This has not been the case with the latest product of Basel: Basel III. While Europe once again exerted its influence during the negotiation, it has been decidedly less determined to give full effect to its Basel III undertakings in EU legislation. And the reason -- it should be no surprise -- is politics.

The linkage between Basel III and the European implementation (known as CRD IV) involves three levels of politics: global, European and national. The uncharacteristic European reluctance to carry out the Basel III mandates to the letter results from the varying distributions of influence at each level of the lawmaking game. A case in point: so-called 'bancassurance' -- financial conglomerates that are part bank, part insurance company. France's Societe Generale and Credit Agricole are two large examples of 'bancassurance'.

The treatment of bancassurance was a sticking point in the Basel III negotiations. The United States and others (including the United Kingdom, an EU member state) identified the problem of 'double counting' equity capital in bancassurance. Basel III requires banks to maintain adequate amounts of high-quality (Tier 1) equity capital. This capital acts as a loss-absorbing buffer, protecting depositors and other bank creditors. In a similar spirit, insurance regulators demand that insurers maintain adequate equity to protect policyholders in the event insurers experience losses.

Euro Collapse or European Banking Union

The implementation of the Basel III banking reforms in Europe has spanned two financial crises. And the European legislation is haunted by two specters: a possible collapse of the Euro; and -- in the alternative -- a blind leap into a European banking union.

The first crisis of course was the 2007 global financial meltdown that led to significant bank failures and costly bank bailouts. The Basel III reforms were designed to prevent a re-occurrence of this kind of banking crisis through various new mandates and disciplines. The Basel III response was negotiated within the Group of 20, where Europe had a substantial presence and an important influence. Based on the past record of enthusiastic adoption of Basel norms by Europe, one might have expected the passage of Europe's CRD IV legislative package to be largely a technical exercise. It has not proven to be one.

This is due in part to the timing. The complex European legislative process -- extending well over a year -- coincided with the outbreak of the second severe crisis, one more specifically centered on Europe. This second -- and ongoing -- crisis is the sovereign debt crisis (or the Euro crisis). Initially involving Greece, the sovereign debt crisis has spread to Italy and Spain, sharply raising borrowing costs of these seriously indebted countries and miring their respective populations into social misery.

Bank Capital Reform in the Shadow of the Euro Crisis

European banking reform continues to develop alongside of - and perhaps in spite of - the ongoing Euro crisis. A significant EU reform package - involving a new directive (Capital Requirements Directive IV, or CRD IV) and a new regulation (Capital Requirements Regulation, or CRR) - is making its way through the EU legislative institutions. These reforms are driven in large part by Europe's undertakings within the global Basel system: Europe has committed to implement much of the most recent Basel package of reforms (known as Basel III) by January 2013.

One of the chief requirements of the Basel III reforms is to increase both the quantity and quality of the 'regulatory capital' banks must hold. This capital is intended to operate as a financial shock absorber in the event of large losses - assuring a bank's continued solvency and sparing shareholders (and - in a worse case - taxpayers) pain. Basel III is a system of minimum standards - countries are expected to comply with Basel III's requirements but are free to impose higher standards. And several countries (Switzerland, for example) have determined to require their banks to maintain even more regulatory capital than what Basel III demands.

The combination of common minimum standards and regulatory flexibility is familiar to the EU Member States: it is a feature of most EU-level regulation, known as "harmonization". But in its most recent drafts of CRD IV and CRR, the EU proposals called for "maximum harmonization," a design where the Basel III minimum standards serve to fix mandatory standards for the implementing EU Member States. Basel III requires that national regulators impose a minimum capital requirement for so-called Tier 1 capital ratio of 6 percent. By its terms, the Basel III framework permits countries to impose higher Tier 1 capital ratio requirements. But to permit each EU Member State to impose its own Tier 1 capital ratio requirement (so long as it exceeds the Basel III minimum) would introduce competitive and operational stresses within the somewhat unified European banking market. These concerns in turn have motivated EU officials to prefer "maximum harmonization" whereby all EU Member States would enact identical Tier 1 capital ratio obligations.