November 6, 2016    5 minute read

How Wallonia, CETA And Brexit Tie Together

Navigating A Post Brexit World    November 6, 2016    5 minute read

How Wallonia, CETA And Brexit Tie Together

 

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Before October, few market players had ever heard of Wallonia, a French-speaking region in Belgium. Now they have. On October 26th, Wallonia’s parliament rejected the Comprehensive Economic and Trade Agreement (CETA) that was due to be signed on the 27th by the EU and Canada. The region’s representatives cited fear that competition from Canadian goods and services would threaten Wallonia’s local farmers.

CETA’s main requires lifting customs duties, opening up services markets and – probably the most controversial part among locals – granting foreign companies the right to sue sovereign governments if companies find themselves being unequally treated. Some voices question the legitimacy of the this clause and whether it will jeopardise the interests of local people.

Brexiteers Vs The EU

This concern is in many ways similar to what worried the Brexiteers about the EU. Among their favourite arguments were that the EU entrenches corporate interests and prevents radical reforms, and thus threatens British sovereignty. Centralisation of power implies the possibility of anti-democracy.

Political and corporate elites in Brussels and Frankfurt control the economic engine and grapple the fruits produced by the whole society. As British journalist Paul Mason wrote in his article in the Guardian, the EU

“provides the most hospitable ecosystem in the developed world for rentier monopoly corporations, tax-dodging elites and organised crime.”

From the unfathomable politicians in Brussels to the wealthy bankers in Frankfurt, the ideal life peddled by the EU leaders seems too far away from the ordinary people. And potential competition from immigrants and companies connect Brexiteers’ animosity toward the EU with Wallonia’s rejection of CETA. This is a world of discrepancy, mistrust and disloyalty.

Brexiteers’ are understandable to chafe. Over the past three decades, since the Big Bang that liberated London from regulatory shackles, few people in the old industrialised regions benefited from the globalisation. Rather, it was the bankers and lawyers in Canary Wharf who transformed London into a global financial centre that enjoyed most of the profits. Brexiteers were left behind. However, the Wallonia incident means to EU leaders more than another discomfort within the establishment. The incident reflects a fundamental flaw in EU’s system: a monetary and trading union has its limits when there is no political union.

The Quagmire Of The Monetary Union

When the euro was introduced in the 1992 Maastricht Treaty, the agreement required EU member states to adopt the euro. This was once met with five convergence criteria:

  1. Exchange rate: Participate in the exchange-rate mechanism (ERM) for two consecutive years without devaluing the euro-pegged currency;
  2. Inflation: Within 1.5 percentage points of the unweighted arithmetic average of the three best performing EU members;
  3. Debt-to-GDP ratio: Must not exceed 60% at the end of the preceding fiscal year;
  4. Deficit: Annual deficit-to-GDP must not exceed 3% at the end of the previous fiscal year;
  5. Long-term interest rate: Nominal long-term interest rates must be within two percentage points of the three lowest inflation EU member states.

Nevertheless, the requirement was not strictly followed by fellow member states. Greece had never met the third requirement. Its debt-to-GDP ratio rose from around 70% in 1990 to a whopping 120% at the onset of the sovereign debt crisis. But it still got in the club.

It is hard, though, to ask Greece to do better. Compared to Germans, Greeks do not have a culture of saving, and therefore the government has more pressure to maintain its pension fund system. Germans take pride in their strong manufacturing industry, and it significantly contributes to the country’s export-oriented economy. Greece, in contrast, does not have a robust economic foundation that could have helped it through the Great Recession.

Therefore, from the very beginning of the most innovative ever monetary experiments, circumstances for the game’s participants were diverse and even opposite. And so they continue. Faced with distinct monetary and fiscal problems, and plagued with domestic politics, member states were unable to take collective actions when the crisis hit. The global disequilibrium in current accounts and government balance sheets between saving countries such as Germany and borrowing states like Greece exacerbates the policy discrepancy within the monetary union. Since the European Commission is not a supranational institution and the EU is not a political union, political disagreement cannot be quelled with more economic cooperation.

The global disequilibrium in current accounts and government balance sheets between saving countries such as Germany and borrowing states like Greece exacerbates the policy discrepancy within the monetary union. Since the European Commission is not a supranational institution and the EU is not a political union, political disagreement cannot be quelled with more economic cooperation.

Rethinking Trade

Trading faces a similar challenge. When one country in the bloc is actively seeking trading partners to broaden its exporting goods’ distribution channels or deepen its domestic services’ interconnections with the global markets, another may have a hard time rebooting its domestic production, suspecting that incoming foreign companies and investors may severely damage local employment and price stability. Wallonia is a member of the latter group.

The Wallonia incident, thus, not only boosts Brexiteers’ distrust in the EU but also prods European leaders to rethink their strategy in a world that is mired by globalisation and xenophobia. Wallonia is the first but will not be the last to disrupt the EU’s ambition to find new growth engines in this brave new world.

Even though Walloons compromised with Brussels at the very last minute and approved CETA, no country wants to spend time and money working on a project that may ultimately get overturned by a small and unrepresentative group. In Wallonia’s case, neither does anyone want a regional parliament representing 3.6 million people to thwart the will of institutions representing 545 million.

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