Dis-integration, Unemployment, and Instability: Brought to Europe by TTIP

Timothy A. Wise

What could the Transatlantic Trade and Investment Partnership (TTIP) do to help Europe recover from its current economic crisis? According to a new study by my colleague, Jeronim Capaldo, the US-EU free trade agreement could make just about everything even worse than it is now. (See the executive summary here and the full paper here.) Using a new UN economic model that avoids some of the false positives that come with assuming away things like unemployment, Capaldo shows that TTIP would likely cause trade among EU countries to decline, unemployment to increase, and labor’s share of national income to fall. European countries would also open themselves up to greater financial instability, rising asset bubbles, and possible contagion from fluctuations in U.S. financial markets. Capaldo’s model and study suggest what will happen if policy-makers fail to reverse the austerity-fed decline in the purchasing power of working people.

The Trans-Atlantic Trade and Investment Partnership: European Disintegration, Unemployment and Instability

by Jeronim Capaldo

GDAE Working Paper 14-03
October 2014

GDAE Research Fellow Jeronim Capaldo, in a new GDAE Working Paper assessing the potential impact of the proposed Trans-Atlantic Trade and Investment Partnership (TTIP) between the United States and the European Union, finds that the agreement would have far-reaching negative consequences for most European countries. These include the loss of 600,000 jobs and a projected decline in worker incomes of at least 3,000 Euros/year and much more in some cases.

While most assessments of TTIP find small trade and income gains for both Europe and the United States, Capaldo finds a small decrease for Europe as a whole. More important, he finds that trade among EU countries would decline, unemployment would increase, and labor’s share of national income would decline. European countries would also open themselves up to greater financial instability and possible contagion from fluctuations in the U.S. economy.

Capaldo’s findings are in stark contrast with assessments endorsed by the European Commission.

“According to our study, TTIP will exacerbate, not solve, Europe’s economic problems: increasing unemployment, worsening inequality, reducing workers’ purchasing power, undermining the dynamism of intra-EU trade, and exposing European countries to asset bubbles and financial contagion from the United States,” says Capaldo. “At this fragile time in Europe’s economic recovery, TTIP looks like a mistake.”

Capaldo highlights the following negative TTIP impacts for Europe:

  • TTIP would lead to net losses in terms of net exports after a decade, compared to the baseline “no-TTIP” scenario. Northern European Economies would suffer the largest losses (2.07% of GDP) followed by France (1.9%), Germany (1.14%) and United Kingdom (0.95%).
  • TTIP would lead to net losses in terms of GDP. Consistently with figures for net exports, Northern European Economies would suffer the largest GDP reduction (-0.50%) followed by France (-0.48%) and Germany (-0.29%).
  • TTIP would lead to a loss of labor income. France would be the worst hit with a loss of 5,500 Euros per worker, followed by Northern European Countries (-4,800 Euros per worker), United Kingdom (-4,200 Euros per worker) and Germany (-3,400 Euros per worker).
  • TTIP would lead to job losses. We calculate that approximately 600,000 jobs would be lost in the EU. Northern European countries would be the most affected (-223,000 jobs), followed by Germany (-134,000 jobs), France (- 130,000 jobs) and Southern European countries (-90,000).
  • TTIP would lead to a reduction of the labor share of GDP reinforcing a trend that has contributed to the current stagnation. The flip side of this decrease is an increase in the share of profits and rents in total income, indicating that proportionally there would be a transfer of income from labor to capital. The largest transfers will take place in the UK (7% of GDP transferred from labor to profit income), France (8%), Germany and Northern Europe (4%).
  • TTIP would lead to a loss of government revenue. The surplus of indirect taxes (such as sales taxes or value-added taxes) over subsidies will decrease in all EU countries, with France suffering the largest loss (0.64% of GDP). Government deficits would also increase as a percentage of GDP in every EU country, pushing public finances closer or beyond the Maastricht limits.
  • TTIP would lead to higher financial instability and accumulation of imbalances. This is likely to lead to asset bubbles such as we have seen in other markets.

Capaldo’s results come from the innovative, and more realistic, United Nations Global Policy Model (GPM), which GDAE operates in collaboration with UNCTAD, the UN body specialized in international trade and finance. The results contrast with mainstream models of the TTIP because those generally use versions of the same Computable General Equilibrium model (CGE) that exclude by assumption effects on employment.

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