FROM THE OFFICE OF PUBLIC AFFAIRS

This morning I’d like to offer a fresh perspective on U.S.-EU economic relations.  If you’ve been reading the financial press on a regular basis, you might think the U.S. and the EU were fighting a transatlantic trade war. 

Let me read you some recent headlines: “EU allowed to retaliate up to $4 billion dollars;” “Steel tariffs stir transatlantic trade unrest;” “U.S. farm bill coldly received in Europe.”  Fortunately, international economic relations are about more than just headlines. 

The facts tell a different story.  In the last decade, the U.S.-EU economic relationship, when measured as trade plus investment, has swelled into the largest and most complex on earth.  U.S. investors are deeply invested in Europe’s growth, and vice-versa.  You might not realize it, but more than 800 of Europe’s best companies choose to list their shares, in the form of American Depository Receipts, on U.S. stock exchanges. 

Sure, every so often, the U.S. and the EU experience “trade rows,” - as our British friends call them - but trade disputes are inevitable given the scope of our economic ties.  In any event, the real action today in international trade is not in the WTO dispute settlement process, but in the new Doha Round of negotiations.  There we have put on the table unprecedented proposals for the reduction of barriers in both agricultural and industrial products.  We propose to eliminate agricultural export subsidies and greatly reduce agricultural support payments, as well as to eliminate all tariffs on industrial products by 2015. 
 
The fact is that the overall U.S.-EU relationship is about more than just trade.  We have devoted new resources to fighting the financial war on terrorism, collaborating with our EU counterparts on new financial and regulatory changes, and working to find common ground on the issue of data privacy.

Therefore, while I am open to questions regarding U.S.-EU trade relations, I’d like to spend the next few minutes exploring some of the less sensational aspects of the U.S.-EU economic relationship.  Let’s start with the financial war against terrorism. 

The Financial War on Terrorism

Since September 11th, the U.S. and the EU have campaigned jointly to designate terrorist entities and their financial backers, and then to freeze their assets.  For example, nearly every terrorist individual and entity designated by the U.S. also has been designated by the EU or some of its member states. Moreover, the U.S. and the EU have established a fluid, informal mechanism for sharing information on terrorists and their supporters.  Action also was taken by the EU against the al-Aqsa Martyrs Brigade, a group that has taken responsibility for a number of suicide bombings in Israel.

Recent terrorist finance developments at the EU member-state level also are positive.  In September, we co-chaired with Spain an important meeting of the Financial Action Task Force to discuss international standards and measures being taken in the war against terrorist financing.  In August, Italy joined the U.S. in submitting to the UN 1267 Sanctions Committee the names of 25 individuals and entities linked to al Qaida for asset freezes.  The Dutch Government recently froze the assets of the “New Peoples Army” and its leader Jose Sison, both known to be responsible for the killing of American citizens in the Philippines.  Both France and Germany have submitted names in the past few months to the UN 1267 list. 
 
However, differences remain on key issues of process and implementation, and they need to be resolved. 

For instance, the EU’s “clearinghouse process” is too cumbersome, and it should be streamlined.  Given the threat we face, it still takes far too long for terrorist names to submitted and considered for designation by the EU. 

Equally troubling is the fact that under current EU treaty interpretation, the EU cannot direct member states to block the assets of individuals and entities of so-called “internal terrorists.”  Since not all of the fifteen EU countries have domestic blocking laws that allow them to block assets of terrorism-linked persons independent of EU action, the assets of “internal terrorists” are being left unblocked in a number of European countries.  The terrorist threat is too serious to be left unchallenged because of how the EU chooses to organize itself in the terrorist finance area. 

Separately, there also is a general reluctance throughout Europe to designate the social and religious arms of Hamas and Hizballah as terrorist entities.  The United States has rejected the notion that “firewalls” exist between the militant, social and religious arms of Hamas and Hizballah, and I urge our European counterparts to do the same.  Not only is money fungible, but no evidence has been brought forward to establish the existence of any such “firewall.”

Our EU counterparts should understand that Secretary O’Neill and I are committed to pressing for resolution on these critical issues.  In fact, we anticipate doing so again next week, when EU Commissioner Bolkenstein will be visiting the Treasury.  We welcome the generally good cooperation in the financial war on terrorism to date, and now is the time to confront the remaining issues.

During the meeting with Commissioner Bolkenstein, we also plan to discuss a host of financial and regulatory matters of mutual concern. 

U.S.-EU Financial and Regulatory Cooperation

As in the financial war on terrorism, we are working together on financial and regulatory changes that have transatlantic consequences.  A good example is Europe’s plans to introduce a single financial market in 2005. 

Ever since the idea of took shape, the United States has been very supportive of the EU’s Financial Services Action Plan (FSAP) for a single financial market.  If properly implemented, we believe the Plan will stimulate economic growth in Europe while facilitating international capital flows and providing advantageous opportunities to borrowers and savers.  Our most general concern is in seeing that the process of European capital market integration is well-managed and fair to all market participants. 

Specifically, we have made our EU counterparts aware of cases where newly proposed EU financial directives adversely impact non-EU companies operating in EU-regulated markets.  Recently, we voiced concerns that new EU directives under consideration governing the issuance of prospectuses, capital adequacy, investment services and financial conglomerates, for example, could discriminate against U.S. firms in unintended ways.      

Take, for example, the Financial Conglomerates Directive.  Under the directive, U.S.-based investment banks operating in Europe would be subject to supervision at the holding company level.  In the United States, however, investment banks are supervised by the SEC at the broker-dealer level – not at the holding company level.  Therefore, absent a finding of “equivalent” oversight by EU authorities, U.S.-based investment banks operating in Europe no doubt would face higher compliance and operating costs.  Presently, officials in Brussels have been supportive of our efforts to resolve this problem, and we are continuing to work with officials from the UK’s Financial Services Authority to try to address specific concerns they have raised.  

In order to manage these and other cases of regulatory “spillover” that crop up on both sides of the Atlantic, and more generally to have a two-way dialogue on key financial market issues of import to both sides, Treasury created an informal US-EU financial markets dialogue early this year.  Treasury and the European Commission chair the dialogue and are accompanied by our financial regulators. A number of informal dialogue meetings have been held in Brussels and Washington to date.  Next week, Commissioner Bolkestein who overseas the Internal Market Directorate will visit Washington and he plans to meet with Secretary O’Neill at that time for further discussions on these financial market issues.

While conflicts are inevitable given our varied experiences and attitudes toward financial regulation and oversight, the Financial Market Dialogue has been a successful forum for openly airing concerns on both sides.  Both sides share the same objectives: sound financial market supervision and regulation and efficient capital markets that generate real benefits to firms and investors on both sides of the Atlantic.   I have been impressed by the depth and professionalism of the talks thus far.

The Financial Markets Dialogue has also begun dealing with the issue of accounting.  Here, the general level of cooperation is high, and for the moment convergence between our respective standards of accounting seems a mid-range possibility. 

In June 2002, the EU called upon all 15 member states to move from national accounting standards to International Accounting Standards (IAS) by 2005.   This means that all 7,000 firms listed in the EU soon will be adopting the same accounting standards.  Only a month later, President Bush signed the Sarbanes-Oaxley Act, which introduces stricter government oversight of the audit process for public companies, in accordance with Generally Accepted Accounting Principles (GAAP).  Though we share common goals on better corporate disclosure, both actions – as you might imagine – raised eyebrows on the opposite side of the Atlantic, as corporations feared that the costs of reconciliation and compliance would increase significantly. 

Fortunately, how these more muscular regulatory schemes will be implemented and enforced is being discussed openly by U.S. and EU regulatory officials, with market input.  This needs to continue.  The SEC recently even indicated its willingness to reconsider accepting IAS for firms listed on U.S. exchanges without reconciliation to U.S. GAAP, provided there is consistent interpretation and enforcement at the EU level, across all member countries.  Convergence needs to be about not just reducing differences in treatment, but also about optimizing the respective advantages of each approach to ensure the best reporting and specific guidance on particular kinds of transactions. 

I also understand that the Financial Accounting Standards Board (FASB), which mandates accounting standards in the United States, recently added convergence to its formal work agenda.  This is a positive development, as is the FASB’s and IAS’ recent “Norwalk Agreement,” which acknowledges a commitment to the development of high-quality compatible accounting standards that could be used for domestic and cross-border financial reporting.  After all, capital markets are rapidly becoming a worldwide feature and regulations need to keep pace. 

Data Privacy

Finally, my discussion of U.S.-EU economic relations would not be complete without a brief word or two on data privacy. 

Last July, Peter Fisher, Treasury’s Under Secretary for Domestic Finance led a group of financial regulators to Brussels for a set of talks on the issue.  Initial meetings with EU Commission officials and with EU member state data protection commissioners were highly educational, for both sides.

Even on this complex issue, we hope to continue to work toward understanding the concerns of our EU counterparts, so that we may explain best how U.S. laws and regulations provide adequate protection under the EU directive.  After all, we have a common interest in privacy on both sides of the Atlantic, and it is not so important what we term the resolution of our differences, but that we recognize that both sides’ interests can be accommodated when we make doing so our primary objective.  

Thank you.