For recovery, Europe needs to support labour not trade
The March issue of the Government Gazette features a balanced and evidence-based overview of the Transatlantic Trade and Investment Partnership (TTIP) negotiations, with opinion and analysis from both sides of the debate. Here, Jeronim Capaldo from Tufts University reveals that TTIP, if successfully concluded, would result in job losses, wage decline and fiscal instability for Europe.
In the coming weeks and months Europeans are likely to hear a great deal about the benefits of trading with the US. The EU and the US have just resumed negotiations of the Trans-Atlantic Trade and Investment Partnership (or TTIP), an agreement that would further liberalize trade between the two Unions. In fact, EU-US trade is already quite free from tariffs but TTIP aims at reducing or eliminating residual barriers, mostly related to differences in regulations, in order to facilitate exchanges even more. To those who expect trade liberalisation to always bring economic opportunities and jobs this seems like a good idea, while those concerned about the distribution of the costs to different social groups remain scpetical.
Unfortunately, official projections of TTIP’s effects offer no certainties. At first glance, the main studies seem to leave little doubt about TTIP’s economic benefits. All of them point to an increase of GDP in the EU, although of negligible amount (less than one percent after fifteen years). However, if we look deeper into those studies, including those endorsed by the European Commission, things soon appear less reassuring.
The first thing to note about existing projections of TTIP is that most of them use a version of the same economic model, a fact that makes the convergence of their results unsurprising. Using the same assumptions about the way economies work and often using the same data, the variety of results that researchers can expect is clearly limited. Secondly, a central assumption in many of those studies is that actual markets function so smoothly that no resources are ever underutilized, including labour. Since this is clearly at odds with a European reality of persistent unemployment, it is important to understand how projections would change if we removed that unrealistic assumption. In a recent Tufts University working paper I investigated this alternative by projecting the effects of TTIP with the United Nations Global Policy Model, an economic model in which employment falls if total demand decreases I obtained dramatically different results.
Projected with the more realistic United Nations model, the effects of TTIP appear decidedly negative for Europe. Although total exports might increase, the overall trade balance is projected to decrease leading to a slight contraction of GDP and the loss of approximately 600,000 jobs across the EU. At the same time, labour incomes are projected to decrease (by 4,200 Euros per worker in the United Kingdom), which would lead to higher inequality between wage and profit incomes. This adds to other negative consequences on government revenues and overall economic stability.
These alternative projections point to bleak prospects for EU policymakers. Faced with higher vulnerability to any crises coming from the US and unable to coordinate a fiscal expansion, they would be left with few options to keep the economy afloat: favoring an increase of private lending, with the well-known risk in terms of financial instability, seeking short-lived competitive devaluations or a combination of the two. In other words, projections based on the United Nations model indicate that seeking a higher trade volume, via TTIP or other similar agreements, is not a sustainable growth strategy for the EU. Instead, the projections suggest that any viable strategy to rekindle economic growth in Europe would have to build on a strong policy effort in support of labour incomes. Seen from this perspective, TTIP appears to be a step in the wrong direction.
Jeronim Capaldo is a Research Fellow in the Global Development and Environment Institute at Tufts University.