FROM THE OFFICE OF PUBLIC AFFAIRS

This evening 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 United States and the EU were fighting a transatlantic trade war.
Consider these 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 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 United States 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.  Any major reform of the Common Agricultural Policy naturally presents a challenge to the EU’s internal processes.  Our agricultural proposal is far more forward-looking and more beneficial to the developing world than anything under consideration in the EU.  The same may well prove true with respect to our proposals for industrial and other non-agricultural products.
The fact is that the overall U.S.-EU economic relationship is about more than just trade.  We have both devoted new resources to fighting the financial war on terrorism and collaborating with our EU counterparts on new financial and regulatory changes.
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 publicized aspects of the U.S.-EU economic relationship.  Let’s start with the financial war against terrorism.
 
U.S.-EU Cooperation in Combating Terrorist Financing
 
Since September 11th, the United States 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 United States also has been designated by the EU or some of its member states.  Moreover, the United States 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.  In December, the EU designated an Algerian terrorist organization with operations in Italy and Western Europe, and 17 of its key operatives.
Recent terrorist finance developments at the EU member-state level also are positive.  Last 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 United States in submitting to the UN 1267 Sanctions Committee the names of 25 individuals and entities linked to al Qaida.  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, there is room for improvement on both substantive and procedural issues.
 
First, it still takes far too long for terrorist names to be submitted and considered for designation by the EU.  Although the EU has established a so-called "clearinghouse" based on unanimity to streamline the process, it remains too cumbersome.  Given the threat we face, this process must be improved.
 
Second, the assets of “internal terrorists” are being left unblocked in a number [VGC1]of European countries.  This is because under current EU treaty interpretation, the EU cannot direct member states to block the assets of individuals and entities of so-called “internal terrorists.”  Member countries must rely on their own domestic law to block the assets of "internal terrorists."  Unfortunately, not all of the fifteen EU countries have the necessary domestic laws.  Our European friends need to close this loophole.

Third, it is time the EU joined the United States in labeling Hamas and Hizballah as what they are -- terrorist organizations.  Thus far, most European countries have dodged this issue, on grounds of a supposed distinction between the "charitable" or “political" wing of Hamas and Hizballah and the terrorist wing.  The United States has rejected the notion that “firewalls” exist walling off the terrorist activities of Hamas and Hizballah, and we 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.”  Nor is their any reason to suppose that terrorists within either organization respect such niceties.   We are beginning to see some progress.   Recently, for example, Denmark seized the assets of the Al Aqsa [VGC2]Foundation -- a fundraiser for Hamas -- and arrested three individuals affiliated with that organization.  This is movement in the right direction, but we have a long way yet to go.
Our EU counterparts know that the United States is pressing for resolution on these critical issues, which we believe will enhance the EU’s ability to combat terrorist financing more effectively.  We welcome the generally good cooperation of the EU in the financial war on terrorism to date.  Now is the time to confront the remaining issues.
U.S.-EU Financial and Regulatory Cooperation
As in the financial war on terrorism, the United States and the European Union have been actively working together over the past year on financial and regulatory changes that have transatlantic consequences.  A good example is Europe’s plan to introduce a single financial market in 2005.
Ever since the idea took shape, the United States has been very supportive of the EU’s Financial Services Action Plan for a single financial market.  If properly implemented, we believe the Plan will stimulate economic growth in Europe, facilitate international capital flows, and provide 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 that the process of formulating new legislation and rules is transparent and fair to all market participants.  We have made our EU counterparts aware of concerns where newly proposed EU financial directives could adversely impact non-EU companies operating in EU-regulated markets.  For example, we have voiced concerns that new EU directives under consideration governing the prospectuses, capital adequacy, investment services and financial conglomerates could discriminate against U.S. firms in unintended ways.
Take one such directive -- 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.  Officials in Brussels have been supportive of our efforts to resolve this problem, and we are continuing to work with officials from the U.K.’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 U.S.-EU Financial Markets Dialogue in early 2002.  European issues of concern include the Sarbanes-Oxley Act and the draft rules that the SEC has been promulgating to implement sections of that Act.  In addition, a request by the Frankfurt Stock Exchange is now pending before the SEC to allow the former to place its trading screens in the United States.
 
Treasury and the European Commission chair the dialogue and are accompanied by financial regulators on both sides.  A number of informal dialogue meetings have been held in Brussels and Washington to date.  Later this month, Commissioner Bolkestein, who oversees the Internal Market Directorate, will visit Washington.  He has asked to meet with Secretary Snow 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 Markets Dialogue has been a successful forum for openly airing concerns on both sides.  Both sides share the same objectives: sound financial markets 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 will soon be adopting the same accounting standards.  Only a month later, President Bush signed the Sarbanes-Oxley 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 between the two standards – IAS and GAPP – as well as 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 participants’ input.  This needs to continue.  The SEC has indicated a willingness to consider 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 to give specific guidance on particular kinds of transactions. 
I also understand that the Financial Accounting Standards Board (FASB), which sets accounting standards in the United States, has added convergence to its formal work agenda.  This is a positive development, as is the FASB’s and IAS’ recent “Norwalk Agreement.”  This agreement acknowledges a commitment to the development of high-quality compatible accounting standards that could be used for both domestic and cross-border financial reporting.  After all, capital markets are rapidly becoming a worldwide feature and regulations need to keep pace. 

EU Enlargement
My discussion of U.S.-EU economic relations would not be complete without a brief word on the EU's continued enlargement.  This enlargement highlights both the opportunities and challenges in the relationship.
The prospect of EU membership has been a key factor in motivating economic and political reform in the countries of Central Europe and the Baltics, enabling them to make rapid progress from centrally planned to market economies.  Over the past twelve years, these countries have shown a consistent and sustained commitment to reform.  This includes actions to create attractive and competitive investment climates.  These actions include selling off state-owned enterprises, simplifying regulatory procedures, creating predictable tax regimes, establishing secure property rights, promoting good governance, and providing basic infrastructure. 
 
These reforms have not been without costs:  Privatizing state enterprises, for example, has often led to massive layoffs.  Some governments have been forced to cut generous but unsustainable benefit programs.  The “carrot” of joining the EU has facilitated the implementation of difficult policies, enabling these countries to avoid the pitfalls of reform limbo that have afflicted other transition economies.  As a result, most of these economies are enjoying the benefits of reform in terms of prolonged macroeconomic stability and robust, private-sector led growth. 
 
Despite the natural economic linkages created by close proximity with Western Europe, U.S. investors have benefited significantly from the opportunities offered in the EU accession countries.  U.S. investment in Hungary, for example, accounted for 29 percent of all Hungarian FDI between 1989 and 2002.  (To see how significant this figure is, consider that next-door Germany came in second to the United States.  The United States also has 130 firms operating in Poland, second only to the Germans.  In total, the U.S. firms have invested over $7.5 billion in Poland since 1993.
 
The United States stands to gain further from opportunities that are arising because of the accession process.  The Central European accession countries are harmonizing with EU standards on a broad range of issues, from the environment to financial services.  The upgrades and reforms that are being undertaken will provide additional opportunities for U.S. investors, as U.S. firms can assist in technological upgrading, investment in manufacturing equipment, and financial sector servicing.
 
In addition to these specific opportunities, development of a larger internal market will offer a bigger consumer base and greater economies of scale, which can only promote trade and investment.  Administrative simplification at the borders through an extension of the internal market will also facilitate trade and investment.
 
To ensure that U.S. businesses can fully capitalize on new opportunities, it is important that they are not disadvantaged by EU integration.   No doubt we will hear more about this issue in the future.
 
We are particularly concerned, that the vast potential that this new market will offer could be undermined by the structural rigidities that have already dampened growth in the EU, especially labor market rigidities.  Some EU accession countries – especially those in the Baltics – are actually surpassing current EU member states in development of open, flexible market economies.  We fear they will be required to impose regulations that will reduce competition and could obstruct growth in order to comply with EU standards.  The EU needs to hasten implementation of reforms that support deregulation and labor market flexibility if its current and future members are to benefit fully from the opportunities of integration. 
Conclusion
The U.S.-EU economic relationship continues to evolve.  It is characterized by deep cooperation on common public goals and complex integration of private pursuits.   While important challenges remain, I expect the relationship to be a source of strength, stability, and opportunity in the years to come.