The scandal engulfing the Volkswagen Group goes well beyond Germany, and even beyond the European Union. The fact that the car group managers were able to cheat on emission tests on 11 million cars in multiple countries calls into question public powers’ ability to regulate industry and services globally.
The notion that regulatory and supervisory capacity lies at the heart of a well-functioning global economy embodies the real bone of contention in the two major trade agreements under negotiation: the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP). Those two agreements, if successful, will form the legal platform of the global economy of the future.
Before the VW scandal broke, the European negotiators involved in the TTIP negotiations with American colleagues could claim the moral high ground. Europeans charge American regulators with being less aware of the need for environmental protection and public health concerns. They accuse Americans of being more inclined to raise invisible barriers to trade through a myriad of standards and procedures organized in different ways in the 50 states.
After a scandal centered around the largest European automotive group, everything could change. Not only does it call the supposedly morally superior position of the Europeans into question, but it was discovered through a regulatory verification process in the United States.
In the TTIP negotiations, regulatory standards are probably the most controversial issue, and the VW scandal’s consequence is already established. The European system of regulation and supervision was flawed, and so the American system had to address the problem.
The Volkswagen affair reveals yet again the endemic weakness of the EU regulatory system. Common rules are applied in many fields by the national authorities, without the supranational European Commission controlling and sanctioning. It is for the commission to verify the integrity of national control systems, but the issue is so politically sensitive that the controls are often softened. In the case of the car industry, the German automotive lobby is so powerful that it inhibited the controls.
There are several examples of the toothless bite of European supervision powers, dwarfed by national governments and lobbies. The most blatant was the outbreak of mad cow disease. The English authorities closed their eyes to the local food industry practices. The European Commission was only able to intervene after the damages became intolerably high.
The recent reform of financial market regulation arose for similar reasons. National regulators applied European rules unevenly to protect national financial industries, and they were eager to hide the banks’ flaws rather than counter them.
The outcomes of European regulation don’t match the rhetoric extolling the strength of business controls in Europe. Germany led the way in Europe to impose stricter environmental rules. The very fact that Volkswagen, the largest German industrial firm, cheated on emission tests undermines the entire European position.
All this will severely affect the European position in the TTIP negotiations. The sudden shift in the balance of power could make it even harder than it already is to reach an agreement before the end of the Obama presidency.
The problematic consequence is that a transatlantic agreement will follow, rather than precede, the parallel negotiation that the Americans are conducting with Pacific countries. While Europe has managed so far to sign a bilateral trade agreement only with Vietnam, the United States can close a deal with the entire Pacific basin, excluding China, establishing a new trade platform that will influence all future agreements.
Originally, the grand strategy of the two transoceanic treaties was exactly the opposite. In one of her last speeches as secretary of state, Hillary Clinton said Europe and the United States needed to reach an agreement quickly so as to constitute the critical mass necessary for their regulatory standards to spread globally. It was, Clinton said, probably the last opportunity for the western democracies to establish their influence on the future of the global economy. Now it is probably too late.
European delays in sharing sovereignty are causing enormous damage to Europe’s economy and to its citizens. Europe risks slipping into the second rank in the future global system of economic regulation.
Carlo Bastasin is a nonresident senior fellow at the Brookings Institution, a Washington-based think tank. As an economist and editorialist, Bastasin’s work focuses on European political and economic analysis.