[Senate Hearing 113-199]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-199

 
                  EUROPEAN UNION ECONOMIC RELATIONS: 
                         CRISIS AND OPPORTUNITY

=======================================================================



                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS

                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 23, 2013

                               __________

       Printed for the use of the Committee on Foreign Relations


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                COMMITTEE ON FOREIGN RELATIONS         

             ROBERT MENENDEZ, New Jersey, Chairman        
BARBARA BOXER, California            BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland         JAMES E. RISCH, Idaho
ROBERT P. CASEY, Jr., Pennsylvania   MARCO RUBIO, Florida
JEANNE SHAHEEN, New Hampshire        RON JOHNSON, Wisconsin
CHRISTOPHER A. COONS, Delaware       JEFF FLAKE, Arizona
RICHARD J. DURBIN, Illinois          JOHN McCAIN, Arizona
TOM UDALL, New Mexico                JOHN BARRASSO, Wyoming
CHRISTOPHER MURPHY, Connecticut      RAND PAUL, Kentucky
TIM KAINE, Virginia
               Daniel E. O'Brien, Staff Director        
        Lester E. Munson III, Republican Staff Director        

                              (ii)        



                            C O N T E N T S

                              ----------                              
                                                                   Page

Brainard, Hon. Lael, Under Secretary for International Affairs, 
  U.S. Department of the Treasury, Washington, DC................     4
    Prepared statement...........................................     5
    Response of Under Secretary Robert Hormats and Under 
      Secretary Lael Brainard to Question Submitted for the 
      Record by Senator Christopher A. Coons.....................    38
Corker, Hon. Bob, U.S. Senator from Tennessee, opening statement.     3
Hormats, Hon. Robert D., Under Secretary for Economic Growth, 
  Energy and the Environment, U.S. Department of State, 
  Washington, DC.................................................     7
    Prepared statement...........................................     9
    Response to Question Submitted for the Record by Senator 
      Jeanne Shaheen.............................................    38
Kolbe, Hon. Jim, Senior Transatlantic Fellow, the German Marshall 
  Fund of the United States, Washington, DC......................    21
    Prepared statement...........................................    23
Menendez, Hon. Robert, U.S. Senator from New Jersey, opening 
  statement......................................................     1
    Prepared statement...........................................     2
Rediker, Hon. Douglas, visiting fellow, Peterson Institute for 
  International Economics, Washington, DC........................    26
    Prepared statement...........................................    28

                                 (iii)


       EUROPEAN UNION ECONOMIC RELATIONS: CRISIS AND OPPORTUNITY

                              ----------                              


                         THURSDAY, MAY 23, 2013

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Robert 
Menendez (chairman of the committee) presiding.
    Present: Senators Menendez, Shaheen, Murphy, Corker, and 
Johnson.

          OPENING STATEMENT OF HON. ROBERT MENENDEZ, 
                  U.S. SENATOR FROM NEW JERSEY

    The Chairman. Good morning. This hearing of the Senate 
Foreign Relations will come to order.
    This hearing is on the economic relationships between the 
United States and the European Union. And I want to thank our 
witnesses who will provide the committee with a deeper 
understanding of the realities behind the headlines.
    Last week, a headline in The Guardian said: ``Eurozone 
Suffers Its Longest Downturn Ever As France Sinks Back Into 
Recession,'' the latest reminder that the economies of many 
European remain quite fragile.
    More than 5 years after the start of the worst financial 
crisis and recession since the great depression, 9 of the 17 
Eurozone countries are in recession. The Eurozone as a whole 
contracted for the sixth straight quarter, the longest in the 
history of the euro, and the broader 27-member European Union 
has now also slipped back into recession.
    This continuing weakness in Europe clearly has implications 
here in the United States and not just at a macroeconomic level 
but for the welfare of banks, businesses, consumers, and 
workers.
    Our cooperation with the EU also has broader national 
security and foreign policy implications. For decades, our 
interdependent partnership with EU members has been a key 
component of efforts to counter global security threats, 
promote greater democracy, economic openness, human rights, and 
ensure nations adhere to basic norms and standards. A Europe 
that is economically compromised and increasingly inward-
focused could have grave repercussions for these broader 
issues.
    So I am going to have the rest of my statement entered into 
the record since we are going to be having votes in a little 
bit. But I do appreciate two extraordinary individuals to help 
us with their assessment of the economic turbulence in the 
Eurozone, the implications for the fragile global recovery, the 
effectiveness of the EU and multilateral responses, including 
the critical role the International Monetary Fund has played in 
supporting fragile European economies.
    [The prepared statement of Chairman Menendez follows:]

             Prepared Statement of Chairman Robert Menendez

    Thank you for attending this hearing on the economic relationship 
between the United States and the European Union and thank you to our 
witnesses who will provide the committee with a deeper understanding of 
the realities behind the headlines.
    Last week a headline in The Guardian said: "Eurozone Suffers Its 
Longest Downturn Ever As France Sinks Back Into Recession," the latest 
reminder that the economies of many European countries remain quite 
fragile.
    More than 5 years after the start of the worst financial crisis and 
recession since the Great Depression and nine of the 17 Eurozone 
countries are in recession.
    The Eurozone--as a whole--contracted for the sixth straight 
quarter, the longest in the history of the euro and the broader 27-
member European Union, has now also slipped back into recession.
    This continuing weakness in Europe clearly has implications here in 
the U.S., and not just at a macroeconomic level, but for the welfare of 
banks, businesses, consumers, and workers.
    Our cooperation with the EU also has broader national security and 
foreign policy implications.
    For decades, our interdependent partnership with EU members has 
been a key component of efforts to counter global security threats, 
promote greater democracy, economic openness, and human rights, and 
ensure nations adhere to basic norms and standards.
    A Europe that is economically compromised and increasingly inward-
focused could have grave repercussions for these broader issues.
    The United States and Europe have together formed the core of the 
world economy for at least the last century, and we continue to have 
the largest trade and investment relationship in the world, with annual 
flows between the United States and the EU of roughly 1\1/2\ trillion 
dollars of trade in goods, services, and income receipts from 
investment, responsible for millions of American jobs.
    Together we have been the driving force for shaping global 
standards and regulations, liberalizing world trade, and prioritizing 
labor, environmental, and intellectual property rights.
    And while U.S. foreign policy priorities evolve to account for a 
changing world, our relationship will keep growing and our futures will 
be even more intertwined and integrated.
    In my view, the EU--and world economies would be in much worse 
shape were it not for the coordinated regulatory and policy 
interventions of the G20, IMF, and the Federal Reserve Bank and 
European Central Bank, and--as I said last week at the Bretton Woods 
Conference--supporting these efforts was crucial to preserving our own 
interests.
    Faced with enormous challenges in the world we engage, we don't 
shrink back into our shell, we fix problems, and we find solutions. We 
realize that we can make a difference on the issues that affect all of 
us: the interconnectivity of people and nations; the clash between 
internationalism and isolationism; adapting global economic governance 
structures to an ever-changing world; and the confluence of economic 
and national security; and the importance of fostering new democracies.
    I think we all would agree that every so often, the United States 
faces defining moments in foreign policy--when the old order gives 
way--sometimes painfully, often searchingly--when old rules no longer 
apply and a new, if unfamiliar, order arises from the chaos.
    We and the EU have faced such circumstances in recent years, and we 
have refused to shrink from our responsibilities.
    Today we have four witnesses to help us understand this incredibly 
complex and vital transatlantic economic relationship.
    We have asked them to provide their assessment of the economic 
turbulence in the Eurozone, the implications for the fragile global 
recovery, and the effectiveness of the EU and multilateral responses, 
including the critical role the International Monetary Fund has played 
in supporting fragile European economies.
    We also anticipate hearing from them on opportunities for greater 
economic and commercial cooperation.
    To start the conversation this morning we have: Robert Hormats, 
Under Secretary of State for Economic Affairs and Lael Brainard, Under 
Secretary of Treasury for International Affairs.
    Both are extraordinarily talented and experienced individuals with 
distinguished records of public service, and I want to thank both of 
you for your many years of dedication to advancing the vital national 
economic interests of the United States. We are thankful to you both 
for joining us today and look forward to your insights.
    Let me remind everyone that after this session we will continue the 
discussion with two distinguished members from the think tank world, 
both of whom are experts on the subject of U.S.-EU relations and well-
known in their own right--The Honorable Jim Kolbe and Douglas Rediker.

    The Chairman. To start the conversation this morning, we 
will have Robert Hormats, the Under Secretary of State for 
Economic Affairs and Lael Brainard, the Under Secretary of the 
Treasury for International Affairs. Both are extraordinarily 
talented and experienced individuals with very distinguished 
records of public service. And I want to thank both of you for 
your many years of dedication to advancing the vital national 
economic interests of the United States.
    And we will have a second panel as well, which is also very 
distinguished.
    With that, let me turn to Senator Corker for his remarks.

                 STATEMENT OF HON. BOB CORKER, 
                  U.S. SENATOR FROM TENNESSEE

    Senator Corker. Mr. Chairman, thank you and thank you both 
for being here. I, too, will be brief. I know we want to try to 
gauge it so we finish this first panel, vote, and come back.
    But thank you for being here.
    I know that we all understand the financial crisis had a 
huge impact around the world, not only here but also certainly 
in Europe. Since that time, they have had economic stagnation. 
It is my view they really have not addressed the many 
structural issues that need to be addressed. It has mostly been 
dealt with through central bankers and other mechanisms. They 
have really not addressed the things that they need to do. We 
have some of the same problems here.
    But this TTIP is an incredible opportunity for us, and for 
the transatlantic partnership. I know both of our witnesses on 
this panel are involved in that. This is an opportunity for all 
of us. I know my own State and I am sure the States represented 
here on the dais benefit tremendously from trade between the 
European Union and the United States. And if we can lower 
tariff and nontariff barriers, I know it will be good for both 
entities and it will create stronger alliances.
    We thank you for being here today and look forward to your 
testimony.
    The Chairman. With that, let me welcome you both. Secretary 
Brainard, we will start with you.

     STATEMENT OF HON. LAEL BRAINARD, UNDER SECRETARY FOR 
    INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE TREASURY, 
                         WASHINGTON, DC

    Secretary Brainard. Chairman Menendez, Ranking Member 
Corker, and other distinguished members of the committee, thank 
you very much for the opportunity to be with you today.
    The risk of protracted stagnation in Europe is one of the 
most important challenges currently confronting the global 
economy. Real domestic demand in the euro area is lower today 
than at the low point of the global crisis in 2009. 
Unemployment has reached the highest level in at least two 
decades, with over half of young people out of work in 
countries like Spain and Greece.
    Euro area leaders deserve credit for the difficult steps 
they have taken to restore financial stability and address the 
risk of cascading defaults and exit. Spain and Italy are now 
able to borrow at rates that are significantly lower than just 
a year ago.
    But one of the lessons of our own crisis is that restoring 
financial stability, while vital, is just the first step for 
the economy to heal. Decisive action is needed now to restart 
demand and avoid the risk of protracted stagnation in Europe.
    We welcome discussions at the ECB about additional measures 
to unclog credit channels for small businesses in places like 
Spain and Italy. The severe credit crunch in southern Europe is 
undermining economic activity and weakening the key engine for 
growth of small businesses.
    Second, events in Cyprus only serve to underscore the 
importance of moving forward now with full banking union to 
restore confidence and restart credit to starving local 
economies. An effective, credible banking union should include 
not only a single supervisory mechanism but also common 
resolution authority, recapitalization capacity, and credible 
deposit insurance.
    Our experience here in the United States suggests that a 
strong backstop enhances the credibility of stress tests and 
permits capital to be built without further damaging 
deleveraging. Our experience also suggests that orderly wind-
down of banks is easier when there is a well-established legal 
framework for resolution that clearly prioritizes deposits, 
buttressed by a strong system of deposit insurance and 
sufficient loss absorption capacity, including long-term bail-
in-able debt.
    Third, European leaders need to do more to recalibrate the 
pace of fiscal consolidation to support demand. Our experience 
suggests that mid-course correction can make a vital 
difference. Some countries should stretch out the consolidation 
path, while those with fiscal space should shift to supporting 
demand. We welcome indications that France, Spain, and the 
Netherlands will take additional time to meet their targets.
    Finally, Europe's surplus countries can and should do more. 
Increased demand in Europe's strongest economies would provide 
relief to weaker euro area economies but also help spur the 
United States and world economy. Where current account 
surpluses remain above 6 percent of GDP, faster wage growth and 
greater homeownership can make an important contribution.
    The past few years have shown how closely tied are American 
jobs and growth to financial conditions in Europe and around 
the world. IMF actions, in particular, have helped shelter the 
U.S. economy from shocks from abroad, protecting American jobs, 
exports, and household savings. The IMF has helped our European 
partners limit contagion and restore financial stability. It 
has done so primarily through its unmatched technical expertise 
and credibility. Europe itself is providing the lion's share of 
the financing.
    The IMF is also an important partner in strengthening 
national security, helping countries from Jordan to Tunisia to 
Yemen anchor financial stability and undertake reforms.
    And finally, when countries join the IMF, they sign up for 
important obligations to maintain open markets and avoid 
``beggar thy neighbor'' policies. The Fund helps investors 
better assess risks by setting standards for transparency and 
data. Countries face censure when they fail to meet those 
obligations, as is currently the case with Argentina.
    As the global economy undergoes a profound reconfiguration, 
it is more important than ever to renew U.S. leadership of the 
IMF. That is why we look forward to working with members of 
this committee and Members of Congress more broadly to expand 
the core quota resources of the IMF with no net new U.S. 
financial commitment to the IMF, while preserving the U.S. veto 
and enhancing its legitimacy. I look forward to working with 
you on this important agenda.
    Thank you.
    [The prepared statement of Under Secretary Brainard 
follows:]

          Prepared Statement of Under Secretary Lael Brainard

    Chairman Menendez, Ranking Member Corker, distinguished members of 
the committee, thank you for the opportunity to speak with you today 
about one of the most important challenges facing the global economy.
    The Transatlantic relationship is a critical anchor of America's 
economic and national security. European allies are essential partners 
in our strategic engagements around the world, from the historic 
changes underway in the Middle East and North Africa to addressing Iran 
and North Korea. U.S. financial and trade linkages with Europe are 
strong, and we hope to make them stronger still by moving forward with 
an ambitious Transatlantic Trade and Investment Partnership agreement.
    But even as our own economy continues to heal, U.S. companies are 
adversely affected by weak business and consumer demand across Europe. 
Three years into the euro area crisis, the risk of protracted 
stagnation represents one of the most important challenges to the 
global economic outlook.
    Since the beginning of the crisis, President Obama has actively 
engaged with European leaders, urging action to restore financial 
stability and support growth. Secretary Geithner and Secretary Lew have 
shared experiences from our own crisis response and recovery plan, 
emphasizing the importance of addressing market challenges decisively 
and retaining flexibility to calibrate monetary and fiscal policy to 
the pace of recovery.
    Euro area leaders deserve credit for the difficult steps they have 
taken to restore financial stability and address the risk of cascading 
defaults and exit. Spain and Italy are now able to borrow at rates that 
are significantly lower than they were a year ago.
    Now the focus must shift from stabilization efforts to supporting 
demand growth in order to avoid protracted stagnation and address 
record levels of unemployment, especially among Europe's young people.
    Since the end of World War II, European leaders have been engaged 
in a historic project to build a closer union. At the birth of the euro 
over a decade ago, political leaders understood they were making a 
choice with historic consequences when they permanently ceded control 
over monetary policy and exchange rates. Europe's crisis has confirmed 
that monetary union without the requisite fiscal and financial 
integration leaves the euro area vulnerable.
    Looking back at the creation of the euro, it is clear that some 
risks were anticipated, while others were not. Fiscal risks were 
broadly anticipated, but no mechanism for fiscal risk-sharing was 
created to address unexpected shocks. Financial integration was 
identified as a goal, rather than flagged as a potential risk, allowing 
the growth of large-scale banks with extensive cross-border linkages 
without commensurate centralization of supervision and resolution 
authority.
    And the extensive debate that took place on the creation of the 
euro largely ignored the risk of external imbalances within the euro 
area. Even today, while large external deficits are flagged as risks, 
there is little discussion of how addressing surpluses in countries 
that export substantially more than they import might help ease the 
sharp compression of demand now underway in deficit countries.
    It was very significant when we saw the European Central Bank (ECB) 
and European leaders join together in support of a strategy anchored by 
critical financial commitments to ensure that countries undertaking 
reforms retain access to market financing and to assure banks have 
access to liquidity and hold credible capital. These commitments 
decisively boosted confidence and restored stability to financial 
markets.
    One of the lessons of our own crisis is that restoring financial 
stability, while critical, is just the first step for the economy to 
heal. The focus of the policy debate in Europe must now shift from 
restoring financial stability to developing a plan to boost demand and 
employment.
    Domestic demand in the euro area is now lower than at the low point 
of the global crisis in 2009 in real terms. All of the recovery in 
European output since that time has come from net exports. That is not 
sustainable for a region that accounts for almost 20 percent of the 
world economy.
    In 2012, demand contracted by over 2 percent across the euro area. 
Unemployment has reached the highest level in at least 20 years with 
over half of young people out of work in countries such as Spain and 
Greece. This poses political risks no less than economic risks.
    Decisive action is needed now to restart demand and avoid the risk 
of protracted stagnation.
    First, we welcome discussions on strengthening credit access for 
small and medium-sized enterprises in southern Europe. The severe 
credit crunch in southern European countries is undermining economic 
activity and weakening the small business sector, traditionally a major 
engine of job creation. In the face of weakening growth and continuing 
disinflation, we welcome the ongoing discussion at the ECB about 
additional measures to improve the transmission mechanism and address 
elevated borrowing costs and unclog credit channels for small 
businesses in southern Europe.
    Second, events in Cyprus only serve to underscore the importance of 
moving forward with full banking union. Europe is making progress on 
the single supervisory mechanism, but it cannot stop there. An 
effective, credible banking union should include not only a single 
supervisory mechanism but also a common resolution authority, 
recapitalization capacity, and credible deposit insurance. Banking 
union requires some degree of risk-sharing between members.
    The upcoming bank stress tests and asset quality reviews are a 
critical opportunity to restore confidence in bank balance sheets and 
restart credit to starving local economies. Our experience suggests 
that the credibility of stress tests is enhanced when there is a strong 
backstop in place, permitting capital to be built without a further 
downward spiral of deleveraging.
    We also have learned from our own experience that it is much easier 
to wind down banks in an orderly manner when there is a well-
established legal framework for resolution that clearly prioritizes 
deposits, buttressed by a strong system of deposit insurance. There 
must be sufficient loss absorbing capital as well as long-term debt 
that can be bailed in.
    In addition, European leaders should do more to recalibrate the 
pace of fiscal consolidation. As we know from our experience, course 
correction can make an important difference. Recent evidence has shown 
that continued sharp fiscal consolidation risks further undermining 
demand, especially when the scope for conventional monetary easing is 
limited. The consolidation path should be stretched out in some 
countries, and those with fiscal space should shift to supporting 
demand. We welcome indications that France, Spain, and the Netherlands 
will be given additional time to meet their budget targets, but there 
is room to do more in the near term.
    Finally, surplus countries should contribute more to demand. 
Rebalancing is hard to sustain when it rests wholly on the compression 
of demand in deficit countries. Increased demand in Europe's strongest 
economies would not only provide relief to weaker euro area economies, 
but would also help spur the world economy. In countries where current 
account surpluses remain above 6.0 percent of GDP, spurring private 
demand in areas such as faster wage growth and greater homeownership 
can make an important contribution.
    For our part, the U.S. recovery is gathering strength by the day. 
But over the past few years we have seen how closely tied American jobs 
and growth are to financial conditions in Europe and around the world.
    During these years, we have seen in concrete terms the value of the 
International Monetary Fund (IMF) in protecting America's economic and 
national security.
    When financial conflagrations have broken out among our trading 
partners, the IMF has acted as the first responder; it has built 
firebreaks to limit contagion even as it has helped our trading 
partners stabilize and heal their economies. The IMF's actions have 
helped shelter the U.S. economy from headwinds abroad and protect U.S. 
jobs, exports, and the savings of American households.
    The IMF has helped our European partners stabilize and strengthen 
the foundations of their monetary union over the past 3 years. We have 
been closely engaged through the IMF and directly in encouraging 
European leaders and the ECB to put in place a joint strategy 
buttressed by a strong firewall to enable countries to undertake 
necessary reforms, while cleaning up bank balance sheets and ensuring 
ample liquidity. The primary value of the IMF's close engagement has 
been through technical expertise and credibility; Europe itself is 
providing the lion's share of the financing. The IMF is now calling for 
Europe to implement a strategy to boost demand and combat unemployment, 
which is important not only for Europe but also for recovery in the 
United States and the world.
    The IMF is an important partner in strengthening our national 
security. The IMF is now helping to address longstanding impediments to 
sustainable and inclusive growth that are essential in securing 
democratic transitions in Arab Spring countries such as Tunisia and 
Yemen and to anchor economic stability in countries such as Jordan and 
Morocco.
    The IMF helps to enforce transparency and strengthen market 
discipline. It plays a central role in setting norms and standards for 
the smooth functioning of the market-based system of international 
trade and finance that is at the core of U.S. prosperity and stability. 
This creates new opportunities for U.S. businesses as they expand and 
sell products to new markets overseas, which supports additional jobs 
here at home.
    As the global economy undergoes a profound reconfiguration, with 
new economic powers increasingly exercising their influence, it is more 
important than ever for us to renew our leadership of the international 
financial system. That is why we have asked Congress, in the 
President's budget, to safeguard U.S. leadership in the IMF by 
approving the 2010 quota and governance reforms. The budget proposal 
will expand the core quota resources of the IMF--with no net new U.S. 
financial commitment to the IMF--while preserving the U.S. veto and 
enhancing the legitimacy of the institution. Today, U.S. approval is 
the only remaining step needed for these important reforms to go into 
effect.
    At its founding, the United States had more influence on the IMF's 
design and operations than any other country. Today, it is vital we 
safeguard our influence in the face of rapid shifts in the global 
economy, working together to strengthen demand and growth in Europe and 
here at home.

    The Chairman. Thank you, Madam Secretary.
    Secretary Hormats.

   STATEMENT OF HON. ROBERT D. HORMATS, UNDER SECRETARY FOR 
ECONOMIC GROWTH, ENERGY AND THE ENVIRONMENT, U.S. DEPARTMENT OF 
                     STATE, WASHINGTON, DC

    Secretary Hormats. Well, thank you very much, Mr. Chairman 
and Ranking Member Corker. I want to also express my thanks to 
other members of the committee who are very actively involved 
in our United States-European relations for their attendance as 
well.
    I want to thank you, Chairman Menendez, for calling this 
important hearing at a very important time.
    My testimony--the written testimony--offers a fuller 
discussion of some of the economic details of our relationship, 
and Under Secretary Brainard has emphasized a number of very 
key points about Europe's current economic circumstances.
    I would like to just utilize a brief oral testimony to make 
a few basic points, one of which is that we have seen our 
relations with Europe and the trade and the economic area, 
really since the end of World War II, be very closely 
intertwined with our strong 
and highly important strategic and political relationship. The 
two reinforce one another. And this has really been true since 
the Marshall Plan, since the creation of the OECD and even the 
Kennedy Round, all of which were meant as economic measures 
that would enhance our economic ties with Europe, but they also 
underpinned a broader political and security relationship. And 
I think we have the opportunity to do the same thing now. While 
economics is the critical important element of our relationship 
with Europe with respect to, say, TTIP, it also can strengthen 
ties between our two countries in a variety of other areas.
    And the key point is we need Europe in many, many ways. 
From the point of view of addressing international threats, 
there are a host of challenges where the United States and 
Europe have worked together in the past and need to continue to 
work together, and closer economic cooperation can underpin 
that relationship. And a prosperous Europe that is able to 
utilize its resources both to address domestic problems and 
also to work with us to address global security issues and 
global economic issues is a very important part of our foreign 
policy and our national security policy as well.
    What we are trying to do in TTIP, in particular, is to 
build a 21st century transatlantic relationship that meets the 
needs of Americans and Europeans together and address a wide 
range of new issues, many of which have not been dealt with or 
have not been dealt with in a complete or satisfactory way in 
other negotiations. So this is really the most ambitious 
negotiation we have ever had, and I would say if you add TTIP 
plus the TPP--the Trans-Pacific Partnership--negotiations, this 
is probably the most and I would say certainly the most 
historic opportunity for improving the global trading system 
since the Kennedy Round. We have an opportunity not only to 
expand trade opportunities but to improve the rules on which 
international trade is based for our own countries and also if 
we do this in the correct way, we can encourage the buy-in of 
third countries to the kinds of rules that we work out with the 
Europeans or we work out, in the case of TPP, with the Asians.
    So the stakes here are enormously high, and they are 
enormously important in part because if the United States and 
Europe can identify good rules and good standards and utilize 
them amongst our own economies, we will be able to have a 
greater degree of job creation within our economies. But we 
will also speak with a much stronger voice when we negotiate 
with many of the emerging economies of the world--many of whom 
do not see the world trading system or the rules of the trading 
system in the same way, divided or much weaker--in convincing 
these countries to make the kind of changes that we want in 
order to create a level playing field in a united sense. If we 
can pull together, we are in a much stronger position to do 
that. And because these countries are the largest and fastest 
growing markets in the world today, when you add them all up, 
helping our own economic opportunities or enhancing our own 
economic opportunities will enable us to strengthen our 
prospects for getting a level playing field amongst these other 
countries as well. So that is a critically important area.
    As you know, we have a number of areas, over 20 different 
areas, that we have identified and were sent up in a letter to 
the Congress by Ambassador Marantis, areas where we have 
particular objectives. The Europeans have their objectives as 
well. And our hope is that we will be able--even though we 
recognize these are tough issues and many of them have been 
tough for quite some time, we are quite aware of how difficult 
this negotiation is, but we are also aware that the stakes are 
very high. The stakes are high, in terms of strengthening our 
economic relations, using our stronger economic relations to 
strengthen our political and security relations, and also using 
this as an opportunity to enable us, the United States and 
Europe, to be in a stronger position to convince other nations 
to engage in rules and standards and procedures which will 
level the playing field for our companies and have a more 
effective global trading system.
    [The prepared statement of Under Secretary Hormats 
follows:]

        Prepared Statement of Under Secretary Robert D. Hormats

    Thank you, Chairman Menendez, Ranking Member Corker, and other 
distinguished members of the committee for inviting me to testify today 
on the U.S.-EU economic relationship.
    The strategic alignment between the United States and Europe, 
rooted in shared history and values, has never been closer in 
addressing both international threats and opportunities--and a host of 
internal challenges.
    U.S. ties with Europe evolved significantly during the 20th 
century. After the Second World War, America's leaders recognized that 
our common future--not just Europe's future--depended on Europe's 
economic recovery from the war, and of course that of Japan. That the 
Marshall Plan combined security with a strong economic dimension is why 
it got such strong support in the United States.
    During the cold war, shortly after the advent of the European 
Economic Community, we together initiated the Kennedy Round of trade 
negotiations in 1964. The Kennedy Round had aims that included 
increased United States-European trade. More broadly it sought to 
sharply reduce global tariffs, break down farm trade restrictions, and 
strip away some nontariff regulations. It also sought to boost trade 
with developing nations.
    At the time we also saw the Kennedy Round as part of the broader 
goal of strengthening the transatlantic partnership--one that might 
ultimately lead to a transatlantic economic community. And in that 
respect, the Transatlantic Trade and Investment Partnership--if it 
achieves its ambitious goals--might be seen as the culmination of the 
spirit that animated the Kennedy Round.
    Although cold war thankfully is over, our work in strengthening 
United States-European relations is not. There is no other region with 
which the United States shares more broadly the same values, and no 
other region with whom partnership, alliance, and shared goals is 
achieved so readily. Among our central goals for this relationship 
continues to be to further enhance our mutual prosperity. Today, we 
draw on the same common values and same shared interests build a 21st 
century transatlantic economic partnership that meets the needs of 
Europeans and Americans in this new century and serves as a beacon for 
the rest of the globe
    We are building on what those before us began. For us and for 
coming generations of Americans and Europeans, the compelling argument 
for strong transatlantic ties cannot be rooted in past disputes, but 
must be future-oriented, based on jobs and economic growth, and on 
shared values of democracy, respect for diversity, freedom of speech 
and religion and expression, and on shared opportunity.
         transatlantic trade and investment partnership, (ttip)
    One of the most exciting portions of President Obama's State of the 
Union Address was the announcement of our intention to negotiate a 
Transatlantic Trade and Investment Partnership, or TTIP. This heralds a 
new era in the transatlantic relationship. The TTIP will be a 
challenge, but one worth undertaking. Already excitement is building on 
both sides of the Atlantic about the potential for this potentially 
wide-ranging agreement.
    The economic relationship between the United States and Europe is 
already strong and integrated. The United States and the European Union 
together have 812 million consumers. And the United States exported 
$458 billion in goods and private services in 2012 to the EU, our 
largest export market.
    Companies in the United States and the European Union have invested 
a total of over $3.6 trillion in each others' markets and approximately 
50 percent of total U.S.-EU trade is intracompany. U.S.-EU trade and 
investment already supports an estimated 13 million jobs on both sides 
of the Atlantic.
    A successful Transatlantic Trade and Investment Partnership could 
further strengthen and deepen U.S.-EU trade and investment ties. A 
comprehensive agreement between the United States and the European 
Union also would have positive effects throughout the global economy. 
Strengthened economic ties between the United States and the European 
Union, and the benefits they produce for both of our economies, will 
enhance our ability to build stronger relationships with emerging 
economies in Asia and elsewhere around the world--relationships that 
support high quality norms and rules in the global economic system.
    With tariffs between the United States and the European Union 
already low, our trade negotiators will aim to address ``behind-the-
border'' barriers to U.S.-EU trade, including unnecessary regulatory 
and standards differences that create burdens for our exporters, while 
maintaining appropriate health, safety, and environmental protections. 
If we and the EU are successful in addressing these ``behind-the-
border'' issues, we can expect to see the benefits of this cooperation 
spread to other markets.
    Let me dwell for a moment on the reasons for this. Companies that 
sell in the transatlantic market want to maximize production efficiency 
by minimizing the number of different requirements to which they must 
conform. U.S.-EU regulatory cooperation will thus improve our own 
production efficiency--but it can also improve product quality and 
safety in many markets and thus in the goods we import. And it can 
promote a more level playing field for American companies in third 
markets.
    U.S.-EU regulatory cooperation--and the adoption of such 
cooperative outcomes by other countries--can also help integrate the 
United States, Europe and other established economic powers with a new 
group of rapidly emerging economic actors--such as China India, Brazil, 
Russia, and others--based on procedures and high standard rules for 
successful market--oriented commerce.
                                 energy
    I'd also like to take a moment to discuss energy. The United States 
and the EU also have an enormous interest in each other's energy 
security and promoting cooperation and research on emerging energy 
technologies and policies, related to such things as smart grids, 
critical materials, and e-mobility. They have a robust energy dialogue 
under the U.S.-EU Energy Council headed by the Secretaries of State and 
Energy. Many EU Member States have heightened their focus on renewable 
energy technologies. And the EU as a whole has established ambitious 
energy efficiency targets.
    At the same time, we've seen many American companies invest heavily 
in Europe, not just in the traditional hydrocarbon industry, but also 
in unconventional gas, renewable, and alternative energy opportunities.
    U.S. and EU researchers also are collaborating on many leading-edge 
technologies, such as those that will enable electric vehicles to 
connect to the grid on both sides of the Atlantic. We are also working 
together to increase our knowledge of the critical materials required 
for certain renewable energy technologies, and identifying ways to make 
us less reliant upon imports of these materials and to use them more 
effectively.
    Before concluding, I would like to make a final point. The 
rebalancing of U.S. foreign and economic policy to Asia has received 
much attention of late. But, as Vice President Biden remarked in Munich 
in February, our engagement with Asia is in Europe's interest and does 
not come at Europe's expense. Europe remains, as the Vice President 
noted, America's indispensable partner of first resort. Indeed it is 
profoundly in Europe's interest for the United States to engage more 
broadly with Asia. It is also worth mentioning that Europe has engaged 
in a broad range of new trade and investment activities in Asia as 
well.
    There is no denying the economic importance of Asia. It is an 
enormous economic priority for the United States--as it is for Europe. 
Indeed, I believe that both Europe and the United States will be in a 
stronger position to meet the competitive challenges of Asia if we have 
stronger economic ties with one another and if we agree on high common 
standards.
    This larger and more systematic approach that we are undertaking 
now can make a big difference. Let me emphasize here that, as with past 
trade negotiations, the success of TTIP will depend on sustained and 
enthusiastic leadership from the President and his counterparts in 
Europe. And I believe we have and will continue to have both. It will 
also depend on very close cooperation with the Congress and 
constituencies throughout the United States. The same types of 
coordination must take place within Europe utilizing Europe's own 
institutional structures. I believe these are also well in train.
    None of this will be easy. But while the challenges are great, the 
opportunities are even greater. This is, in many respects, a once-in-a-
generation opportunity to reshape our relationship with the European 
Union. I believe that an agreement is achievable and that it can 
strengthen the relationship between the European Union and the United 
States--both economically and politically--for many years to come.
    I thank the committee for this opportunity to draw attention to the 
important issue of U.S.-EU economic relations and I look forward to 
answering your questions.

    The Chairman. Great. Well, thank you both. For the record, 
your full statements will be included in the record without 
objection.
    So let us explore some of the items you have raised. Let me 
start with you, Secretary Brainard. Last week, I spoke at the 
annual meeting of the Bretton Woods Committee. You know, one of 
the things I believe is that the United States worked to create 
the IMF to help create stability in global financial markets, 
and for roughly six decades, the IMF has played a critical role 
and continues to do so in responding to economic and financial 
crises. And I think through its actions and through our 
leadership, it has preserved American jobs, helped prevent 
economic crises from creating political instability and 
escalating to armed conflict and therefore threatening our 
national security.
    So I heard you make some references to the IMF. I am 
interested in your thoughts as it relates to what role--has it 
played a stabilizing role in responding to the Eurozone crisis. 
Its involvement has not been without controversy, obviously. 
What is the administration's assessment of the IMF's role in 
the Eurozone crisis to date, and how important has its 
participation been in supporting mostly EU-led stabilization 
efforts?
    Secretary Brainard. Well, thank you, Mr. Chairman.
    I think the IMF's role within the euro area, as they have 
navigated this crisis, has been nothing short of critical for 
protecting the world economy, limiting contagion, helping 
restore stability, and helping avoid much more fundamental 
instability that could otherwise have occurred. And by doing 
so, the IMF, working together with euro area leaders, has 
helped protect U.S. household savings, jobs, exports here.
    They have done that primarily through the technical 
expertise that they bring to the table, as well as the 
credibility--the credibility among market participants, as well 
as among the authorities--and they have helped the Europeans 
craft programs that strike a better balance in terms of 
supporting the recovery, have helped Europeans take very 
decisive actions on their banking system, similar to the ones 
that we took here. And they have done it by providing a minor 
share of financing. So if you look at the financial packages 
that have been necessitated, in some cases the IMF's 
contribution has been $1 for every $5 that has been provided by 
the euro area.
    Our role in the IMF, as you have pointed out, our 
leadership role, has allowed us to also participate in those 
conversations through the IMF, and our influence in the IMF I 
think is at no time more important to safeguard given the 
broader shifts in the global economy.
    The Chairman. And in that context, let me just follow on 
your last comment there. Is our leadership at the IMF at risk, 
given that we are the only major IMF member that has not 
approved the 2010 governance and quota reforms?
    Secretary Brainard. Well, I think the fact that we are the 
only thing standing in the way of the IMF completing the quota 
and governance reforms is something that over time could erode 
our standing.
    The other thing that I think is very important is if we do 
not go forward and reinforce the core quota resources of the 
Fund, which are really at the center of the Fund's activities, 
the IMF will increasingly rely on ad hoc bilateral loan 
arrangements that other countries are happy to provide because 
they view these as simply an alternative place to hold their 
reserves. And so I think our influence could be severely eroded 
over time if we allow those ad hoc arrangements to become the 
primary way the IMF funds itself.
    The Chairman. Secretary Hormats, a final question for you. 
Some say the Eurozone crisis could turn EU governments to focus 
inward, limiting the extent to which we can partner with the EU 
in a variety of foreign policy issues. When we look at 
noneconomic issues--obviously, the economic issues are pretty 
compelling, but on the noneconomic issues, is there a risk here 
of that becoming a reality?
    Secretary Hormats. Yes, there is a risk, and I think it is 
a risk that we need to be aware of. You have phrased it, I 
think, quite accurately that countries that face economic 
difficulties at home or resource constraints at home find it 
more difficult to get political support or to obtain the 
resources that they need for international activities.
    We have been working very closely with members of NATO, in 
particular, when it comes to the security side to avoid that 
turn of events, and also we are working with them to try to 
rationalize the way NATO forces are structured and NATO arms 
are procured so that they get more efficiency per unit of money 
expended for their resources. But we are very cognizant of 
this, and we have had an ongoing dialogue with members of NATO 
to try to minimize the degree to which essential support for 
NATO efforts and for financial support for NATO are continued 
even during this crisis because the world--even though 
countries go through crises and difficulties, threats do 
continue, and therefore, we and other NATO countries need to be 
prepared for this. And we are working very closely to minimize 
the cuts and also to rationalize the use of resources so that 
we get more bang for our buck, so to speak, within the NATO 
context.
    With respect to foreign assistance, much the same thing. 
There are cuts but the cuts so far--because there is a lot of 
political support in many of these countries for foreign 
assistance, we have not seen large cuts, but nonetheless, there 
is a pull-back in some countries, very substantial pressure for 
more pull-backs.
    The Chairman. Thank you.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman.
    And thank you both for your testimony. I did not realize we 
were going to have a commercial today for the IMF, but I know 
that every time I see Lael that is going to happen.
    Christine LaGarde was up the other day meeting with several 
of us. And I will say that the quota resources issue is going 
to come to a head soon. I do hope that you will socialize that 
issue with many Members. I think this is an issue on which 
there is not a lot of understanding. I do think it is going to 
take some effort. It is not just going to come up for a vote 
and be passed. But anyway, thank you very much for being here.
    Mr. Hormats, with TTIP, I assume that we begin the process 
with everything being on the table. Right? We are discussing 
every single issue.
    Secretary Hormats. Yes.
    Senator Corker. We are not excluding on the front end any 
issues?
    Secretary Hormats. That is correct. Our goal is to have as 
broad a mandate as we can on our side, and we also are 
encouraging the Europeans to do the same, that is to say, we do 
not want them to take things off the table in advance of the 
negotiations. If we did that, then there would be a lot of 
constraints on the ability to get the kind of ambitious outcome 
that we would like to get.
    Senator Corker. So, Secretary Brainard, my understanding is 
that there maybe a push by Treasury to take some of the 
financial regulation issues off of the table. I know you talked 
about some of those. But my sense is that issues relative to 
derivatives, issues relative to some of the Volcker Rule issues 
may be taken off the table and that the administration will try 
to negotiate outside of the agreement we are talking about. I 
just wondered if you would weigh in on that.
    Secretary Brainard. Senator Corker, the issue of financial 
services in the TTIP--obviously, recognizing that we are still 
in stakeholder consultation process, so we are still hearing 
from stakeholders. But, of course, financial services, while 
you would expect would be in, we think that there are important 
market access gains that we would push for, and, of course, we 
want to nail down some market access that we have gotten but 
have not gotten committed.
    With regard to regulatory convergence, as you know better 
than anybody, Senator, we have obtained commitments not just 
from Europe but from all G20 members, from all Financial 
Stability Board members, to bring their standards to the levels 
that our regulators are now implementing. And we have obtained 
commitments to do that in very tight timelines. Most of those 
are intended and committed to be done this year. We think it is 
extraordinarily important, as our regulators move forward to 
implement the very important financial reforms that responded 
to the ravages of the crisis, that we not disadvantage our 
companies by moving forward in a way that leads to an unlevel 
playing field.
    So I would say that our most important focus has to be 
getting the whole set of countries in the G20, not just the 
Europeans but very important Asian markets, to implement on 
time, and that will be mostly in the next few months.
    Senator Corker. But are you taking those issues outside of 
TTIP is the question because I understand there is a very big 
push-back by the European countries regarding those two issues 
I just brought up. And my question is, Are you going to try to 
take those off of the table, which could lead to Europe taking 
agriculture off the table and possibly other kinds of sensitive 
issues.
    Secretary Brainard. I think our focus, quite the reverse, 
is to not give our European counterparts any excuse to slow 
down the implementation that they have already committed to in 
areas like bank capital, on resolution, on cross-border 
derivatives, on clearing, on the full set of commitments they 
have made. We want to make sure that we see implementation on 
timeframes that will put our players, our market participants, 
on a level playing field. And those timeframes are very 
immediate. So we are going to continue to put a focus on 
getting that implementation.
    Senator Corker. Do you think they will be done in advance 
of reaching an agreement on TTIP?
    Secretary Brainard. They have committed to have them done 
on a timeline that is more ambitious. And we are going to 
continue to push for those timelines because they were 
important concessions that we want to see implemented.
    Senator Corker. Thank you.
    Mr. Hormats, I know this administration has a lot at stake 
in the auto industry. There was a recent study that indicated 
if you could do away with the nontariff barriers to the auto 
trade, under this agreement, it would be the same as taking a 
27-percent ad valorem tax off of the industry. And I am hoping 
that the administration is committed to knocking those barriers 
down to zero so that we can make sure we do not have duplicate 
regulation taking place. I would love to hear your comments in 
that regard.
    Secretary Hormats. Well, we have actually paid a great deal 
of attention to the auto industry as we have begun to develop 
our own positions on this. In fact, we have had this very 
useful comment period over the last several months where we 
have gotten a lot of comments from the auto industry, and many 
of them have been directed at just the points you have raised 
with respect to tariffs, but particularly the nontariff 
barriers which are a major issue. You are quite correct. If we 
can reduce these what we call ``behind the border'' measures, 
which tend to be regulatory issues, standard setting issues, 
and develop a level of consensus which ends up in much lower 
barriers to transatlantic trade in this sector, it could be of 
enormous benefit.
    We have actually worked in another group, the Transatlantic 
Economic Cooperation group, or TEC, to help the auto industry 
work together, in effect, on electronic cars and reduce 
differences in standards and regulations quite considerably so 
that the opportunity for greater transatlantic trade in 
automobiles, in hybrid cars or electronic cars, is now 
considerably greater than it was, but our aim is to do similar 
things here. We think there is great opportunity for reducing 
regulatory barriers to trade in many things, and the auto 
sector would certainly be a very strong candidate for that.
    Senator Corker. Thank you both for your service. I 
appreciate it.
    The Chairman. Senator Murphy.
    Senator Murphy. Thank you, Mr. Chairman. Thank you for this 
hearing.
    I appreciate both of our witnesses' focus on TTIP. As the 
chairman of the Subcommittee on European Affairs, we hope, 
through the committee, to be able to be on the leading edge of 
explaining the benefits of this agreement, one that will be 
very complicated to Members of the Senate.
    Mr. Hormats, I want to ask you to focus on a portion of 
your testimony that you did not necessarily spend time on in 
your verbal remarks with respect to energy.
    Secretary Hormats. Yes.
    Senator Murphy. When the Turkish delegation was here about 
a week ago, they spent a good deal of time--at least a portion 
of their members did--trying to convince us of the importance 
of LNG exports to that region. Anytime you talk to the Poles--
who have some degree of consternation over the last several 
years of missile defense announcements--they understand that 
perhaps the most important thing we can do for them is to help 
them, diversify their energy supply as well.
    I want you to talk for a second about what we can do not 
only to try to diversify the energy sources in Turkey, but also 
in Eastern Europe so that there is less reliance on places like 
Russia and Iran, and particularly with respect to LNG exports. 
This is something that all of Europe, not just that region, are 
certainly looking forward to. If you can talk a little bit 
about the future of U.S. energy policy specifically with 
respect to those regions?
    Secretary Hormats. Yes. Thank you very much for asking it.
    This is a vitally important part of our overall 
relationship with Europe today, in large part because of the 
reasons that you have just mentioned. And that is, we want to 
help the Europeans to diversify their sources of energy, the 
kinds of energy they utilize, and the way in which it is 
delivered in order to give them a greater degree of variability 
in the way they decide on when and how to procure energy. That 
is to say, we do not want them to be in a position where they 
get the largest portion of their energy from one source because 
that source may or may not be reliable all the time and may ask 
for pricing provisions, which are much greater than might be 
available through other methods.
    So what are we doing? We are trying to develop, among other 
things, alternative pipeline routes to Europe for both oil and 
gas, the southern routes in particular. We are encouraging the 
Europeans, now that we are importing less natural gas from 
Qatar because we have our own gas boon--more of that is going 
to Europe. We are working with Europe on a number of areas of 
shale gas or alternative gas development. We have a number of 
projects in alternative energies, wind and solar in particular. 
So we have a very strong ongoing effort with the Europeans to 
help them diversify energy sources.
    And what we have seen already is actually quite impressive. 
I mean, even though they have not really moved directly into 
shale because it takes time to develop the technology, we have 
seen as a result of their ability to access alternative sources 
of energy a far stronger European position in negotiating 
natural gas contracts with Russia. Russia used to have an 
arrangement whereby the natural gas price was linked to the oil 
price. Now, in the past, they really had no choice but to go 
along with that. Now they do because while the price of oil is 
quite high, there are many new sources of natural gas 
available.
    With respect to American natural gas, we have a process of 
approval of project by project, but in some of those projects, 
there will be opportunities, I believe, for Europeans to access 
American natural gas, but it will depend on the Department of 
Energy's individual decisions with respect to specific 
projects.
    Senator Murphy. I want to ask one question with respect to 
TTIP, and that is this: There are essentially two negotiations 
that are going to be taking place; one between the EU and the 
United States and one within the EU. And one of the things that 
we overlook is that there is going to have to be a significant 
degree of harmony amongst those nations in order to negotiate 
what is likely the biggest trade agreement that they have ever 
tried to undertake as a unit.
    So I pose the question to both of you very quickly: Are we 
underestimating or overestimating the degree to which one of 
the most problematic aspects of this agreement will be the 
ability of the EU nations to get on the same page, especially 
with respect to these nontariff barriers?
    Secretary Hormats. Well, you are quite right. There are 
those two negotiations.
    The Europeans now are in the process of developing their 
mandate and the mandate effectively is a negotiation which is 
led by the European Commission but involves 27 member 
governments, and they are now trying to work this out 
themselves and try to get a consensus, or as close to a 
consensus as they possibly can, among those governments for the 
open mandate that we are asking for and that the Commission 
wants. They do not want a lot of constraints on their ability 
to negotiate. So they are working that through, and by the 
middle part of June, this is supposed to be resolved and worked 
out. And so far there is reason to believe that while there are 
pressures by certain governments to get certain things off the 
table, so far the Commission, I think, has done quite a good 
job. And I think the governments realize that a negotiation 
with the United States, if they take too much off the table on 
their side, their ability to get the kind of things they want 
in the negotiations is also constrained by that approach. So, 
so far I think things have worked well, but we will not know 
candidly until we get their mandate, which will be in 2\1/2\ 
weeks.
    The Chairman. Senator Johnson.
    Senator Johnson. Thank you, Mr. Chairman. I would like to 
thank the witnesses for being here.
    Under Secretary Hormats, let us go back to TTIP. In your 
testimony, you show that currently our exports to Europe is 
$458 billion and that they are the largest export market. Are 
we their largest importer or have we been surpassed?
    Secretary Hormats. Collectively--well, China--yes, we are. 
We and Europe have the biggest bilateral trade both ways of any 
two areas.
    Senator Johnson. Good. So we have not been eclipsed.
    In terms of the issues, I would like to do it from the 
United States side and then from the European perspective. What 
are the top three trade barriers that we are experiencing that 
we are going to be negotiating over? In what product areas or 
what issues?
    Secretary Hormats. We are trying at this point not to get 
too specific about what our individual negotiating objectives 
are, but let me give you a general idea of what the concerns 
are and where we will be focusing. And I think if you have a 
chance to take another look at the letter Ambassador Marantis 
just sent up, you will get a sense of that.
    But basically the key areas are the ones that have been 
mentioned earlier. Many of them are nontariff barriers which 
have to do with regulations. The regulations in many cases 
relate to agriculture, and coming from Wisconsin, your farmers 
are familiar with a lot of these agriculture-related issues. So 
overall, nontariff barriers are probably the most important 
element of this.
    Senator Johnson. That is from the U.S. perspective.
    Secretary Hormats. From the American perspective. That is 
right.
    Senator Johnson. So that is our primary complaint. What is 
their primary complaint against us?
    Secretary Hormats. Well, they would like to see a number of 
things. I mean, we have things like the Jones Act. We have a 
number of things where they would like to see some of our laws 
and regulations modified so some of their companies could play 
a greater role in the United States, things of that nature. So 
there are a wide range of specific issues. The tariffs on light 
trucks as a result of a historical set of events are quite 
high; 25 percent. Some of their light truck companies would 
like to get that.
    But they are mostly in the areas of standard setting. They 
would like to see our standard setting and their standard 
setting converge. And I think if you were to identify the 
central point of a discussion between our two countries, it is 
to try to find a way of ensuring that American regulatory 
standards and the procedures by which those standards are set 
are more transparent. And each side has the opportunity to play 
a greater role in trying to develop a convergence.
    This is not to say that we want to lower the barriers of 
the quality of the regulations. We want to make sure that the 
regulations meet the safety needs of the American people, and 
the Europeans want to do the same. The question is whether we 
can find ways of doing it in a way which is mutually consistent 
and does not deter trade or interfere with trade. That is 
really the center point of it. And we can go through case and 
verse.
    At the end of the 90-day period, we will have a clearer 
idea of where we are going to come out and where they are going 
to come out on the specifics. At this point, it is a bit harder 
to get into the specifics. But those are at least some of the 
very important areas.
    Senator Johnson. So it really sounds like both sides have 
the exact same complaint against the other. It really does 
break down in which product area.
    Secretary Hormats. It largely is the same set of concerns, 
that if you can have common standards and common regulations 
and common procedures for developing those standards and 
regulations, then there is an opportunity for a more seamless 
set of trade relations between our two countries.
    But the other element that can be as important in the long 
run is if we can agree on common high standards that meet the 
needs of our people, then there is an inducement for other 
countries to adopt those standards. A, we are in a stronger 
position to push them than we would be if we are divided. But, 
B, if you are a producer in, say, India, you are going to say 
to your government, we do not want to have to comply with 
Indian standards and then the Euro-American standards. So there 
will be pressure in those countries to adopt these increasingly 
global standards, and in turn, if they do that, then American 
companies that are trying to sell in these countries will 
encounter fewer barriers as well because there will be a 
greater possibility of internationalized standards as opposed 
to balkanized ones.
    Senator Johnson. Just one real quick question. Has the 
administration put a number or a goal, and if we succeed in 
coming to an agreement, what that would mean in terms of 
additional exports?
    Secretary Hormats. We have not done that exactly, but we 
have been utilizing a lot of data that we have received from 
various economic think tanks and other groups that have made 
very clear calculations on the amount of trade that can be 
produced, the benefits for GDP growth on both sides, and the 
benefits for job creation. I will be very happy to send you 
some of their data, which is quite good. I mean, they are not 
all the same, but they all point to a much more positive 
direction for----
    Senator Johnson. Do you want to quick throw out one of 
those numbers just to whet our appetite?
    Secretary Hormats. I have got them. Let me go through and I 
will come up with them in a second.
    Senator Johnson. That is fine.
    Thank you, Mr. Chairman.
    Secretary Hormats. But I will make sure you get them.
    The Chairman. Thank you very much.
    Let me just follow up very quickly. We have a vote going 
on. I know Senator Corker has a final comment for this panel.
    In response to your questions of Senator Johnson about what 
is the core of the essence of the negotiation, I just want to--
because I know some of the sentiments of some of the members 
here, as well as some of the sentiments of some of the Members 
in the Senate, and that is that harmonization does not mean 
necessarily subversion of sovereignty. Right? Secretary 
Hormats?
    Secretary Hormats. Pardon me?
    The Chairman. You were looking for the figures. You can get 
it to Senator Johnson and you can provide it for the record.
    I just want to make sure because I know sometimes our 
colleagues have concerns here. So your response to Senator 
Johnson's question about what is the essence of the TTIP 
negotiation--and so I just want to make sure so that we have a 
fully included record that harmonization does not necessarily 
mean subversion--it does not mean subversion.

    [Editor's note.--The information requested for the record 
had not been provided at the time this hearing went to press.]

    Mr. Hormats. It does not. On the contrary, it means we want 
to make sure that the standards--our goal in setting the 
standards and regulations is essentially to make sure that we 
protect the safety of the American people when, for instance, 
we are talking about safety regulations.
    The Chairman. As well as our economic interests.
    Mr. Hormats. And certainly as well as our economic 
interests.
    The Chairman. So it does not necessarily entangle us. It 
enhances our abilities.
    Mr. Hormats. Absolutely. The goal is to do two things: one, 
to protect our interests but also to enhance prospects for 
greater export opportunity to these countries. And that is our 
goal.
    One of the concerns--and let me elaborate because I think 
you made a very important point. One of the things we are very 
focused on is that when regulations are established in 
particular areas, they be based on scientific evidence as 
opposed to being done for political purposes. So we want to 
make sure that science-based evidence is available when 
decisions are made, for instance, on various types of 
agriculture regulations, which is very important for a number 
of products that the United States sells. And the same thing 
with cars. It is not just putting where the light ought to be. 
It is having a real reason, when you make that regulation, for 
doing it. So we want evidence-based decisions when it comes to 
regulations.
    The Chairman. I appreciate that response.
    Senator Corker.
    Senator Corker. Again, thank you.
    And I just want to make one brief comment too. I really 
appreciated Senator Murphy's comments about the energy piece. 
And, Secretary Hormats, I was recently in Munich meeting with a 
number of business leaders there. The energy policies that 
Germany in particular, but many European countries, have 
generally put in place have also created a tremendous 
opportunity for foreign direct investment here in the United 
States to produce products that are going to be shipped back to 
Europe because of the tremendously competitive energy prices we 
have.
    I know that he is still looking for that number. I hope he 
is listening to the comment.
    Secretary Hormats. I am for sure.
    Senator Corker. Senator Johnson has gotten you all fouled 
up here, I know. But would you comment on that? Is that not a 
tremendous opportunity for this country if we can get this 
agreement done? We have an opportunity for those manufactured 
products to be built here and shipped back to Europe because of 
the tremendous natural gas prices that we have here.
    Secretary Hormats. Absolutely. One of the dramatic 
revolutions that we have had in this country is in the area of 
natural gas and also tight oil, which is in North Dakota and 
Montana. But the natural gas revolution, the fracking 
revolution some would call it, is very important because it 
does two things. One, it has dramatically lowered the price. 
Second, it has made us much less reliant on imports because I 
mentioned earlier we used to import Qatari gas. Now we do not 
need to do this. And it is a highly valuable asset from our 
point of view.
    What is also interesting, Senator Corker, is that if you 
look at a lot of American companies today, the notion of 
outsourcing used to be very attractive. Now, when you add two 
things together--one is the availability of natural gas on a 
very steady basis in different parts of the country, and two, a 
lot of countries are concerned about the length of their supply 
chain. As chairman of GE Immelt put it, he likes to have, now, 
more visibility over his supply chain. So we are beginning to 
get circumstances in which people are coming into the United 
States or reconsidering the export of manufactured goods to 
other parts of the world. So this is a very important benefit.
    There is the huge price differential. If you take the price 
of natural gas delivered to Asia, LNG, it is probably three 
times higher than the price of LNG gas at Henry Hub, which is 
the place where the market effect is created here. It costs a 
little bit more to move it around from there, but basically we 
have a big differential. And it is a very good thing for 
throughput for plastics companies, for instance, but also for 
people who utilize that gas for power. And gradually our hope 
is that this will back out other sources of energy and enable 
us to utilize the gas to a much greater degree.
    And we also are much more efficient than we were years ago 
in the utilization of both gas and oil.
    Senator Corker. Thank you both.
    The Chairman. Well, thank you both for your testimony. We 
look forward to continuing to be engaged with you on these 
issues.
    The committee will stand in recess so that we can vote. The 
chair's intention is to vote, immediately come back, and call 
up our second panel.

    [Recess.]

    The Chairman. The committee will come back to order.
    I want to thank our panelists for their forbearance as we 
had votes. And I know that both of you understand that, 
especially Congressman Kolbe.
    I am pleased to begin our second panel related to our topic 
of the United States and the European Union economic relations. 
We have two distinguished members from the think tank world 
today who will give us further insight into the economic 
challenges and opportunities facing Europe and the United 
States.
    The Honorable Jim Kolbe currently serves as the senior 
transatlantic fellow for the German Marshall Fund of the United 
States. We know him well here in Congress because he served 
with great distinction for over 20 years in the House of 
Representatives representing the State of Arizona.
    The Honorable Douglas Rediker is a visiting fellow at the 
Peterson Institute for International Economics. He previously 
represented the United States on the Executive Board of the 
International Monetary Fund.
    And both of these gentlemen have extensive experience 
working on issues related to the European Union and are experts 
on the subject of United States-European Union economic 
relations.
    So let me thank you both for being here today, and with 
that, I will recognize Congressman Kolbe.

 STATEMENT OF HON. JIM KOLBE, SENIOR TRANSATLANTIC FELLOW, THE 
   GERMAN MARSHALL FUND OF THE UNITED STATES, WASHINGTON, DC

    Mr. Kolbe. Thank you, Mr. Chairman, Senator Corker. It is a 
pleasure to be with you and the members of the committee here 
today.
    I will submit my entire testimony for the record and I will 
summarize it here very briefly.
    The Chairman. Without objection, both of your statements 
will be fully included in the record.
    Mr. Kolbe. Thank you, Mr. Chairman.
    It is a great opportunity to appear before the committee 
today, and I think it is appropriate that the committee is 
holding this hearing on the current economic situation in 
Europe and the potential opportunities that the United States 
and the European Union might share that could generate economic 
growth.
    I think we all know that Europe is coping with the most 
difficult crisis it has faced since the Second World War. It is 
struggling with the financial crisis that began, to some extent 
here, in 2008 and has now turned into a severe economic and 
employment crisis.
    A prolonged recession could be corrosive to the foundations 
of the European Union. For the past 5 years, we have witnessed 
the effects of a persistent and deep recession in Europe. 
Tensions can quickly turn into anger and resentments toward the 
EU as populations in the southern countries express resentment 
toward a range of policies which they believe are placing 
asymmetrical economic pressures upon them. If these perceptions 
are not reversed, the economic recession in Europe could very 
well undermine the legitimacy of more than half a century of EU 
political and economic integration.
    The United States has played an important role in Europe 
affairs serving as the offshore balancer since the early 20th 
century, but for the last decade, we have adopted more of a 
role as an observer rather than a full participant. We viewed 
economic events in Europe through a prism of how economic 
problems in Europe might affect our own economy. We have 
adopted an attitude that this is a problem to be solved by 
Europe and Europeans. Undoubtedly, it is certainly true that 
the United States cannot impose a solution on Europe but, 
nonetheless, we have an important stake in helping resolve the 
economic and financial crisis in Europe.
    The EU is our largest and most important trading partner. I 
know you have heard this already this morning. Combined, we 
account for nearly half of the world's GDP. The United States 
and the European Union account for nearly a third of global 
exports and imports. And foreign directed investment is an 
important component of job creation and represents a long-term 
commitment on the part of the investor to the receiving 
country. Over $100 billion in foreign direct investment came 
from the European Union to the United States in the year 2011 
alone. In fact, nearly half of all the current FDI to be found 
in this country originates in the EU.
    However, our relationship goes far beyond strong economic 
ties. We share a deep and abiding commitment to Western values 
of openness, rule of law, free markets, and democracy. We share 
deep security ties through NATO. Simply put, we are heavily 
invested in each other's success.
    The economic malaise in Europe has a direct impact on these 
strategic links that tie the United States and Europe together.
    A persistent economic recession in Europe, if not reversed, 
threatens to undermine the very foundations of the EU and the 
process of EU integration with far-reaching results. If Europe 
is unable to reinvigorate growth and opportunity in the 
southern tier, it risks fracturing this consensus surrounding 
the benefits of European integration. Southern Europe is likely 
to see only the suffering and hardships of austerity and little 
of the benefits that might flow from continued EU membership.
    For the United States, this prospect of a fraying political 
and economic consensus in Europe poses a difficult dilemma. The 
United States has derived important national security benefits 
from a prosperous and unified Europe.
    Assume for a moment that Europe is consumed by a vicious 
cycle, struggling with increasingly severe economic problems 
and a fraying political consensus. Strategic challenges may 
develop on the international scene and the United States and 
European Union could find themselves unable to mount a unified 
response.
    What, as a policy matter, can the United States do to take 
the sting out of the economic crisis in Europe? I think that 
the United States and the EU can work together to take steps 
that assist Europe in weathering its current crisis while 
laying the foundation for the long-term growth.
    Of course, I am talking about TTIP, the Transatlantic Trade 
and Investment Partnership. It has the potential for being a 
vitally important trade and investment agreement which can 
benefit both economies, but it should also be viewed as being 
in our strategic interests.
    TTIP will directly benefit the United States in several 
ways.
    First, it can renew and rebuild the historic United States-
European Union relationship.
    Second, TTIP will demonstrate to southern EU member states 
and to the United Kingdom new benefits to EU membership.
    Third, United States and European Union cooperation on TTIP 
will deliver benefits on the economic global stage. Because of 
its sheer scope and its size, TTIP can help overcome trade 
fatigue and spur efforts to remove trade barriers around the 
globe. It can provide a strong incentive for advancing rules-
based trade liberalization. If fashioned properly, it can 
provide an open door through which other countries can walk and 
join in an ever-widening circle of countries committed to trade 
liberalization.
    Let me suggest just very briefly, because I realize my time 
is up, just two ground rules that I think TTIP must meet if its 
high expectations are to be set for it.
    First, it must be ambitious. The negotiation should begin 
by being as comprehensive as possible. There should not be any 
attempt to leave off one thing after the other. They should 
take the position that everything is on the table for 
discussion. Do not take sensitive sectors out of the 
negotiations before we even begin.
    And second, it should have a strong focus on regulatory 
convergence and equivalence. The real gains from the agreement 
will come not from eliminating tariffs, but from eliminating 
nontariff barriers. To use the example of automobiles, the same 
car produced in the United States and Europe is subjected to 
different safety and environmental testing, even though the 
regulatory outcome is virtually identical. These different 
testing rules, which lead to the same safety and environmental 
outcomes, add significantly to the costs of the overall product 
and limit our competitiveness. Achieving a workable process for 
our industries to develop mutual recognition on regulatory 
development should be a top priority in any negotiation.
    Mr. Chairman, members of the committee, this is the moment 
for the United States and Europe to negotiate the boldest, 
broadest trade and investment agreement we have ever 
contemplated since World War II. The time is ripe. The will is 
there. The benefits for all are obvious.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Kolbe follows:]

                    Prepared Statement of Jim Kolbe

    Mr. Chairman, members of the committee, thank you for the 
opportunity to appear before the committee today. Europe is our most 
important ally and certainly our largest trading partner, so it is 
appropriate that the committee is holding this hearing on the current 
economic situation in Europe and potential opportunities the United 
States and the EU might share that could generate economic growth.
    In 2011 and 2012, I cochaired the Transatlantic Task Force on Trade 
and Investment, a joint project by the Swedish Trade Ministry, the 
European Centre for International Political Economy (ECIPE) and the 
German Marshall Fund of the United States (GMF.) In our report, issued 
in February 2012--in the middle of a growing Euro-crisis in Europe and 
a deep economic recession here at home--we concluded that the time was 
ripe to move forward with a new transatlantic trade and investment 
agenda to promote economic growth, jobs, innovation, welfare, and 
economic development. I am pleased--as are all the other members of our 
task force that the Obama administration and the European Commission 
will soon commence formal negotiations for a free trade agreement along 
the lines we advocated.
    Europe is coping with the most difficult crisis it has faced since 
Second World War. But it is a crisis not brought on by the machinery of 
war, but by the inadequacy of its economic and financial machinery. The 
EU is struggling with a financial crisis that began in 2008 and has now 
turned into a severe economic and employment crisis. Europe's attempts 
to cope with its sovereign debt and ensure bank solvency to stabilize 
the financial system have shown some success, but high unemployment and 
social instability remain with signs of worsening ahead.
    A prolonged recession could be corrosive to the foundations of the 
EU. For the past 5 years, we have witnessed the effects of a persistent 
and deep recession in Europe. Tensions have risen between the 
relatively prosperous northern countries in Europe and those struggling 
in the south as leaders at both ends pull different levers in an effort 
to bring stability to the economic system and restore growth. As we 
have seen in recent elections and in street demonstrations--in Italy, 
Spain, Greece--tensions can quickly turn into anger and resentment 
toward the EU as populations in the southern countries express 
resentment toward a range of policies which they believe are placing 
asymmetrical economic pressures upon them. Over the long haul, if these 
perceptions cannot be reversed, the economic recession in Europe could 
very well undermine the legitimacy of more than half a century of EU 
political and economic integration.
    The United States has played an important role in Europe affairs, 
serving as the ``offshore balancer'' since the early 20th century. For 
much of the 20th century, the United States considered its strategic 
relationship with Europe to be the most important in the world. Bretton 
Woods, the Marshall Plan, NATO, the IMF and the World Bank all stand as 
monuments to that deep relationship. But for the last decade and 
particularly as the European economic crisis deepened, the United 
States has adopted more the role of an observer, rather than a full 
participant.
    To the extent that the United States viewed economic events in 
Europe as a matter of serious concern, it has done so primarily through 
a prism of how economic problems in Europe might affect our own 
economy. Largely because of our own fiscal and financial difficulties, 
we have adopted an attitude that this is a problem to be solved by 
Europe and Europeans. While it is certainly true that the United States 
cannot impose a solution on Europe and a lasting solution must have its 
origins with Europeans, the United States nevertheless has an important 
stake in helping resolve the economic and financial crisis in Europe.
    Europe's economic troubles affect us directly and deeply. The fact 
is, using any of several different measures, the United States and 
Europe constitute the most important economic relationship to be found 
in the world today.
    The EU is our largest and most important trading partner. Combined, 
we account for nearly half of the world's GDP. The U.S. and E.U. 
account for nearly a third of global exports and imports.\1\ In fact, 
Europe purchased 3 times as much of our exports as did China and 15 
times more than India. Looked at from the European side of the window, 
the United States purchased twice the amount of European goods as they 
sold to China and nearly seven times the quantity sold to India.\2\
    An equally important measure of the relationship is to be found in 
foreign direct investment. FDI is an important component of job 
creation and represents a long-term commitment on the part of the 
investor to the receiving country. By this measurement, it is clear 
that Europe and the United States look favorably upon each other as an 
opportunity for investment. Over $100 billion in Foreign Direct 
Investment came from the European Union to the United States in 2011 
alone. In fact, nearly half of all the current FDI to be found in this 
country originates in the EU. Likewise, the United States invested an 
estimated $150 billion in the EU in 2012. Because the United States and 
the EU are advanced economies, much of this investment supports 
intrafirm trade--international flows of goods between parent companies 
and their subsidiaries or affiliates in another country. And it is here 
that the greatest opportunity lies for increasing our already 
substantial trade.
    However, our relationship goes far beyond strong economic ties. We 
must not underestimate the importance of the strategic, political, and 
cultural relationships that bind us together. We share a deep and 
abiding commitment to Western values of openness, rule of law, free 
markets, and democracy. We share deep security ties through NATO, 
arguably the most successful alliance in history. Simply put, we are 
heavily invested in each other's success.
    The economic malaise in Europe has a direct impact on these 
strategic links that tie the United States and Europe together.
    A persistent economic recession in Europe, if not reversed, 
threatens to undermine the very foundations of the EU and the process 
of EU integration with far-reaching results. For example, the countries 
of southern Europe are young democracies, many born as recently as the 
1970s. The peoples of these nations rejected an authoritarian past as 
they looked northward for inspiration to a unified Europe that was 
democratic, strong, and prosperous. Even today, EU membership is a 
strong attraction to many former Soviet bloc nations in eastern and 
Central Europe, and others on the periphery, like Turkey, as these 
countries either reorient their economies away from a Soviet-managed 
economic system or to manage conflicting national identity issues. The 
EU provided a means of transcending these conflicts, many of them 
centuries old, as EU membership give their citizens a sense of 
belonging to a unified Europe. They also view membership in the EU as a 
source of economic opportunity as they join a continent-wide, internal 
market, free of tariff and other barriers that continue to stunt 
intracontinental trade in such regions as East and West Africa or 
Southeast Asia. If Europe is unable to reinvigorate growth and 
opportunity in its southern tier, it risks fracturing this consensus 
surrounding the benefits of European integration. Southern Europe, 
struggling with high unemployment and economic uncertainty, is likely 
to see only the suffering and hardships of austerity and little of the 
benefits that might flow from continued EU membership.
    For the United States, this prospect of a fraying political and 
economic consensus in Europe poses a difficult dilemma. The United 
States has derived important national security benefits from a 
prosperous and unified Europe. Europe has been an important ally of the 
United States economically, politically, and militarily. The United 
States, working in concert with a strong Europe, has had the ability to 
leverage and project our influence and our shared Western values. With 
increasing integration of the EU, Europe will continue to develop and 
strengthen its own institutions of parliamentary and federal democracy. 
This contributes to a virtuous cycle whereby Europe builds and 
strengthens internally. A Europe which can better organize its internal 
affairs will be better able to act in concert with the United States in 
external affairs.
    But assume for a moment that Europe is instead consumed by a 
vicious cycle, struggling with increasingly severe economic problems 
and a fraying political consensus. In such an environment, strategic 
challenges may develop on the international scene, and the United 
States and EU could find themselves unable to mount a unified response. 
For example, the United States has real interest in Europe's ability to 
address security problems emanating from North Africa. But if the 
Mediterranean tier of European Union countries turns its back on 
economic and political integration, meeting such challenges would be 
difficult at best. Similarly, Russia could take advantage of EU 
weakness and take a more assertive role in Eastern Europe. Or on the 
economic front, the United States and Europe might find itself unable 
to mount an effective response to growing Chinese assertiveness in 
Africa and Latin America.
    What, as a policy matter, can the United States do to take the 
sting out of the economic crisis in Europe? I believe the United States 
can have a positive role in working with the EU as it moves toward 
growth and prosperity. The United States and EU can together take steps 
that both assist Europe in weathering its current crisis, while laying 
the foundation for long-term growth.
    As you know, in February, the United States and EU announced their 
intentions to begin negotiations on a comprehensive, high-standard free 
trade agreement--the Transatlantic Trade and Investment Partnership, or 
TTIP for short. I believe TTIP has the potential for being a vitally 
important trade and investment agreement which can benefit both 
economies. But we should also view it as being in our strategic 
national interests.
    Trade liberalization is at the heart of the EU project. In 1951, 
the Treaty of Paris, signed by France, Germany, Italy, and the Benelux 
states (Belgium, the Netherlands, and Luxembourg) created a common 
market for coal and steel. This alliance--the stepchild of the 
visionary Frenchman, Jean Monnet--developed into the European Economic 
Community and, later became the European Union. Since its creation, the 
EU has undergone several more iterations of integration--notably the 
Masstricht Treaty creating the euro currency and the Lisbon Treaty 
refining and expanding the EU political institutions. What began as a 
way of drawing the continent of Europe together in peaceful trade and 
economic development after the horrors of the wars of the early 20th 
century has become a pathway to deep political integration.
    The Transatlantic Trade and Investment Partnership--TTIP--will 
directly benefit the United States in several ways. First, it can renew 
and rebuild the historic U.S.-EU relationship and draw the United 
States and EU even closer together. For four decades of cold war and 
two-plus decades that have followed, the United States has benefited 
from a unified and prosperous Europe. A stable and peaceful Europe, a 
deeply integrated economy, and a shared commitment to democracy 
provides the United States with a strong and focused partner that helps 
to promote a common approach to political and military challenges as 
they arise in other parts of the world.
    Second, TTIP will demonstrate to southern EU member states and to 
the United Kingdom new benefits to EU membership. The U.K. is engaged 
in a robust debate over its future in Europe with Prime Minister 
Cameron calling for a referendum on the future of the U.K.'s 
participation in EU integration. TTIP will provide a powerful incentive 
for the U.K. to consider favorably its position in the EU since they 
would draw on the benefits of trade liberalization flowing from TTIP.
    Third, U.S.-EU cooperation on TTIP will deliver benefits on the 
economic global stage. As we noted in our report on Transatlantic Trade 
Leadership, U.S. and E.U. still lead the world when it comes to global 
economic policymaking. This position is likely to remain for many years 
to come. Historically, the United States, European Union, and Japan led 
multilateral trade talks. While other countries such as China, India, 
and Brazil are catching up in terms of their economic influence, the 
U.S.-EU partnership is indispensable to provide global leadership on 
trade liberalization. Because of its sheer scope and size, TTIP can 
help overcome ``trade fatigue'' and spur efforts to remove trade 
barriers around the globe. This is particularly important in the wake 
of the stalled Doha round of WTO negotiations. TTIP can provide a 
strong incentive for advancing rules-based trade liberalization. If 
fashioned properly, it can provide an open door through which other 
countries can walk and join in an ever-widening circle of countries 
committed to trade liberalization.
    The TTIP trade agreement is unlike any other we have ever tried. It 
is unprecedented in its scope. It will be the largest FTA ever 
attempted and it will be an eye-to-eye negotiation among equals. It 
will require the significant attention, time, and resources of the 
entire U.S. Government. We are not just negotiating solely with EU 
Commission; in effect, we are negotiating with 27 EU countries, each of 
whom will present unique challenges.
    Let me suggest a couple of ground rules for TTIP if it is to meet 
the high expectations that are being set for it.
It should be ambitious
    The negotiation should begin with an eye to being as comprehensive 
as possible. There are certainly sensitive sectors on both sides of the 
negotiating table. The United States has longstanding demands with 
respect to agriculture, such as how to handle the issue of genetically 
modified organisms (GMOs). The French have already indicated a demand 
for a ``cultural exception'' which would preserve restrictions on U.S. 
imports of movies and television. Europe as a whole wants to pry open 
the vast market of 50 states' government procurement codes. Both sides 
should take the position that everything is on the table for 
discussion; don't take sensitive sectors out of the negotiations before 
we even begin or we will end up with an agreement that disappoints us 
all.
It should have a strong focus on regulatory convergence and equivalence
    While tariff barriers in both the United States and Europe are low 
(averaging in the 3-5 percent range with some notable tariff peaks), 
complete elimination of tariff barriers will provide significant 
economic gains given the sheer size of our trading relationship. But 
the real gains from the agreement will come from eliminating nontariff 
barriers (NTBs). To use an example in automobiles, the same car being 
produced in the United States and Europe is subjected to different 
safety and environment testing, even though the regulatory outcome is 
nearly identical. These different testing rules which lead to the same 
safety and environmental outcomes add significant costs to the overall 
product and, ultimately, to the consumer, placing our industries at a 
competitive disadvantage. One study commissioned by the European 
Commission indicated that these NTBs are equivalent to an ad valorem 
tariff of approximately 26 percent.\3\ It is the American consumer who 
pays that tax. Achieving a workable process for our industries to 
develop mutual recognition on regulatory development should be a top 
priority for both sides in any negotiation.
    Mr. Chairman, members of the committee, this is the moment for the 
United States and Europe to negotiate the broadest, boldest, trade and 
investment agreement that has ever been contemplated since World War 
II. The time is ripe. The will is there. The benefits for all are 
obvious.
    I commend you for holding this hearing. I urge you to keep the 
pressure on the administration, our negotiators, and all the special 
interest groups for the next several months to be certain we do not 
falter and that the outcome is no less tomorrow than what we 
contemplate today.

----------------
End Notes

    \1\ Source: Hamilton, D. and Quinlan, J. (2011) The Transatlantic 
Economy 2011, Center for Transatlantic Relations.
    \2\ Source: ``A New Era for Transatlantic Trade Leadership, a 
Report From the Transatlantic Task Force on Trade and Investment,'' 
February 2012, European Centre for International Political Economy and 
the German Marshall Fund of the United States, page 16.
    \3\ ECORYs Nederland BV, ``Non-Tariff Measures in EU-US Trade and 
Investment: An Economic Analysis'', p. 48, 12/11/2009, cited by the 
Auto Alliance, May 10, 2013, comments submitted to the U.S. Trade 
Representative.

    The Chairman. Thank you.
    Mr. Rediker.

 STATEMENT OF HON. DOUGLAS REDIKER, VISITING FELLOW, PETERSON 
     INSTITUTE FOR INTERNATIONAL ECONOMICS, WASHINGTON, DC

    Mr. Rediker. Thank you, Mr. Chairman and Ranking Member. It 
is an honor to once again appear before you this morning.
    I would like to start my testimony with two reminders.
    First, the EU is qualitatively and quantitatively our 
strongest global ally. It is based on, as we just heard, a set 
of shared values, including rule of law, openness, property 
rights, democracy, and for the most part, market economics. The 
transatlantic economy generates $5.3 trillion in commercial 
sales each year and employs up to 15 million workers on both 
sides of the Atlantic. European-controlled companies in the 
United States employed roughly 3.5 million Americans in 2011. 
An economically strong Europe is in our national interest.
    My second reminder is that the European Union is 
fundamentally a political project. Although the euro is 
obviously an economic instrument, its introduction remains 
principally an outgrowth of political motivations. Perhaps 
paradoxically to understand European economic issues, one needs 
to always remember to look primarily through a political prism.
    European leaders often note that their progress should be 
viewed as one would a marathon and not a sprint. By that 
standard, it is early in the race and there are significant 
hurdles still ahead.
    Europe currently suffers from a broken monetary 
transmission mechanism, a dearth of available credit, lingering 
concerns about potential exits from the euro, fragmentation 
across the European Union, and a negative feedback loop between 
banks and sovereigns.
    While borrowing costs have stabilized in large part due to 
aggressive action by the ECB, the short-term economic outlook 
for Europe remains dim, with an expected 0.1-percent decline in 
GDP across the EU predicted for this year.
    So while the worst economic outcomes have been averted, 
Europe today suffers from stagnation, high unemployment, and a 
banking system in serious need of shoring up.
    Now, in spite of this assessment, the European response 
over the past 3 years has actually been far more aggressive, 
effective, and positive than is generally acknowledged. Europe 
today is significantly more stable and prepared for future 
events than virtually anyone could have predicted 3 years ago.
    Over that relatively brief time span, Europe has created a 
permanent rescue fund, with up to 500 billion euros available 
for program countries; created a temporary rescue fund, with an 
additional 200 billion euros available and already utilized in 
programs for several countries; seen the ECB expand its limited 
mandate to heighten focus on the stability of the financial 
system; undertaken significant fiscal, structural, and 
financial sector reforms in multiple countries; and reached an 
agreement on the creation of a single banking supervisory 
mechanism. This progress has been painful and remains 
insufficient. But 3 years ago, each of these steps would have 
been seen as politically, legally, or economically impossible.
    Now, with respect to the IMF, its involvement in the euro 
crisis was initially resisted by many leaders in European 
countries in part because it was seen as too technocratic and 
not politically malleable enough to play a constructive role. 
It could not be counted on to succumb to political pressures to 
avoid politically unpalatable outcomes. And yet, the IMF's 
unparalleled expertise led to its inclusion in the troika, 
along with the European Commission and the ECB, which together 
have led the crisis response.
    Perhaps the most important contribution made by the IMF was 
as the principal driver of program design, surveillance, and 
review. And when the IMF did provide financial support, it did 
so with strict conditionality and with strong support from its 
executive board.
    This is not to say the IMF performed flawlessly. At times, 
the Fund sent confusing messages on the great economic debate 
of our time, colloquially known as ``austerity versus 
spending.'' And the IMF accepted assumptions in the initial 
Greek program that were proven woefully incorrect. But even 
then, the IMF played a crucial and positive role. When a 
country's economic survival is in question, even the IMF needs 
to balance its role as honest truth teller with the risk of 
triggering the very consequences that everyone seeks to avoid.
    Now, for Europe, as with any marathon, the race does not 
get easier as it progresses. It gets harder. The issues looming 
ahead are daunting. They involve the potential for stronger 
countries to find themselves taking on the risks of weaker ones 
with the potential quid pro quo of asking those seeking support 
to agree to rule changes that could include the loss of some 
element of national sovereignty. This presents a delicate and 
potentially destabilizing dynamic, putting Germany and France, 
the two most important founding members of what is today the 
EU, on a path toward increasingly uncomfortable conflict.
    Now, to conclude, while frustrating, inefficient, 
complicated, and often painful to watch, the evolution of the 
European Union is something that we as Americans should 
continue to encourage. While I do not wish to belabor the 
marathon analogy, those who complete the race often cite the 
encouragement they receive from those cheering them on along 
the way. It is in our national interest to remain invested and 
engaged in Europe's success.
    Thank you.
    [The prepared statement of Mr. Rediker follows:]

                 Prepared Statement of Douglas Rediker

    Thank you, Mr. Chairman, Ranking Member, and members of this 
committee. It is an honor to once again appear before you this morning 
on the subject of United States-European economic relations.
           the european union is a marathon political project
    While the purpose of today's hearing is not to rehash what led to 
the economic challenges currently facing the European Union, I would 
like to start my testimony with a reminder that the European Union is 
fundamentally a political project. Although the euro, as a common 
currency, is obviously an economic instrument, its introduction within 
the European Union remains principally an outgrowth of political 
motivations. Somewhat paradoxically, to understand European economic 
issues, one needs to always look primarily through a political prism.
    The introduction of the euro was one step in an ongoing political 
project intended to ultimately lead to deeper and wider integrated 
Europe, largely based on a set of basic values consistent with our own. 
While frustrating, inefficient, complicated, and often painful to 
watch, the evolution of the European Union is something we, as 
Americans, should encourage. Its future success serves our direct 
economic, financial, and strategic interests.
    European leaders often note that their progress should be judged as 
one would in viewing a marathon and not a sprint. By that standard, it 
is still early in the race, and there are significant hurdles still 
ahead.
               current economic challenges facing the eu
    More than a decade after monetary union, Europe currently suffers 
from:

   A broken monetary transmission mechanism, in which the 
        traditional tools of monetary policy fail to reach the real 
        economy;
   A dearth of available credit, which hinders real economic 
        activity;
   Lingering concerns about potential exits from the euro, 
        thereby increasing sovereign borrowing costs and increasing 
        overall investment risks;
   Fragmentation, not only within the European Union, but 
        within the euro area itself, with borrowing costs, political 
        tensions, unemployment and growth prospects increasingly 
        diverging into distinct camps--the very opposite of what 
        monetary union was intended to accomplish; and
   A negative feedback loop between banks and sovereigns, in 
        which countries rely too heavily on banks to help finance their 
        sovereign debt, risking a deterioration in the banks' own 
        balance sheets if the quality of that debt is called into 
        question, potentially leading to the need for the already weak 
        and overly indebted sovereigns themselves to step in and 
        provide capital to keep the banking system afloat.

    While sovereign and bank borrowing costs have stabilized, in large 
part due to aggressive action by the European Central Bank, the short-
term economic outlook for Europe appears dim, with the IMF predicting 
an economic decline of 0.3 percent for the euro area this year \1\ and 
the European Commission itself predicting 0.4 percent decline in the 
euro area and 0.1 percent decline across the EU.\2\
    In short, while the worst economic outcomes have so far been 
averted, Europe today suffers from economic stagnation, unreasonably 
high unemployment and a banking system that is in need of serious 
shoring up.
                    european policy responses so far
    In spite of this sober assessment, the European response over the 
past 3 years has actually been far more aggressive, effective, and 
positive than has generally acknowledged. That does not mean that there 
are no further risks. But Europe midway through 2013 is significantly 
more stable and prepared for future events than virtually anyone could 
have predicted 3 years ago.
    Over that relatively brief time span, Europe has:

   Created a permanent rescue fund, the European Stability 
        Mechanism (``ESM'') with 500 billion euros potentially 
        available for program country bailouts;
   Created a ``temporary'' rescue fund, the European Financial 
        Stability Facility (``EFSF''), with an additional 200 billion 
        euros still available, having already been utilized in programs 
        for three countries within the Euro area;
   Seen the European Central Bank expand its mandate to 
        include, de facto, the preservation of the stability of the 
        financial system, through various standard and nonstandard 
        measures, including the expansion of its balance sheet to over 
        2.5 trillion euros;
   Undertaken significant fiscal, structural, and financial 
        sector reforms in Greece, Ireland, Portugal, Spain, Italy, 
        Cyprus, and beyond; and
   Reached agreement on the creation of a single banking 
        supervisory mechanism under the auspices of the ECB.

    This progress has been painful, has come at enormous political, 
economic, and social cost, and is far from sufficient. But we would be 
remiss in not recognizing that 3 years ago, each of these steps would 
have been seen as politically, legally, or economically unlikely or 
impossible.
                          the role of the imf
    The involvement of the IMF in the euro-crisis was initially 
resisted by many leaders in European countries. In part this was 
because the IMF was seen as too technocratic and not politically 
malleable enough to play a constructive role. Perceived as an 
unyielding technocratic economic institution, the IMF could not be 
counted on to succumb to political pressures and avoid politically 
unpalatable outcomes. And yet, the IMF's unparalleled expertise in 
program design, surveillance, monitoring, and implementation led to its 
inclusion in the ``troika'' along with the European Commission and the 
ECB, which together have led the crisis response.
    While the IMF provided financial support for several European 
countries that accepted international programs, the main value added by 
the IMF in the euro-crisis was as the principal driver of program 
design, monitoring, surveillance, and review. It was this unparalleled 
expertise, more than specific financial commitments, that has provided 
the IMF with disproportionately large influence relative to its 
financial outlays over the outcomes in Europe thus far. Nevertheless, 
it is worth noting that in those instances when the IMF did agree to 
provide financial support, it did so with strict conditionality and 
with virtually unanimous support from its executive board.
    Beyond specific country programs, the IMF has played an influential 
role on specific and broad policy matters, including research and 
recommendations on issues relating to banking and financial sector 
reforms, tax policies, and a wide array of other macroeconomic and 
structural areas. In short, throughout the euro-crisis, the IMF has 
served admirably as an independent economic policy advisor.
    This is not to say that the IMF performed flawlessly. It did not. 
The IMF undoubtedly could have done things better. At times, the Fund 
sent confusing or conflicting messages on the great economic debate of 
our time--colloquially known as ``austerity versus spending.'' The IMF 
accepted questionable assumptions in the initial Greek program--
assumptions that were proven woefully incorrect. But even in these 
instances, I believe that the IMF played a crucial and positive role. 
With a country's economic survival in question, even an international 
financial institution needs to balance its role as ``honest truth 
teller'' with the risk of triggering the very consequences everyone 
seeks to avoid.
                   future path for the european union
    Today's Europe is both fragile and in the process of reinvention. 
Whether by design or crisis, today's Europe is already greatly evolved 
from only a few years ago, with even more significant steps toward 
deeper integration still ahead. Next month, European leaders are 
expected to formally agree to the creation of a single banking 
supervisory mechanism under the auspices of the European Central Bank, 
slated to become operational next year. This is the first step toward 
full banking union across the euro area. Next steps along this path 
include Europewide bank asset quality reviews, bank stress tests, the 
creation of a single bank resolution mechanism and potentially a single 
resolution fund and a cross-border bank deposit guarantee scheme.
    But, as with a marathon, the race does not get easier as it 
progresses, it gets harder. These looming issues involve both the 
potential for countries with strong balance sheets to find themselves 
taking on the risks of those with weaker ones and the potential quid 
pro quo of asking those seeking outside support to agree to rules and 
potentially treaty changes that could alter the shape of what it means 
to be a member of the EU. The potential for a loss of some element of 
sovereignty in return for financial support remains a delicate and 
potentially destabilizing dynamic. It puts Germany and France, the two 
most important founding members of what is today the EU, on the path 
toward increasingly uncomfortable conflict.
              why does europe matter to the united states?
    Quite simply, the European Union represents the most important 
strategic, financial and economic partner this country has. While there 
may be times when we grow impatient watching Europe's marathon, we need 
to recognize how deeply intertwined and invested we each are in each 
other's success. The emergence of fast growing markets in Asia, Latin 
America, and Africa are of enormous strategic and economic interest to 
the United States. Yet, the ties between Europe and the United States 
remain quantitatively and qualitatively in a league of their own.
    Europe remains are our strongest global ally. The EU is based on 
concepts of: rule of law, openness, respect for property rights, 
democracy and, for the most part, market economics. We clearly have our 
differences. But, make no mistake. An economically strong Europe is in 
our national interest.
    The transatlantic economy generates $5.3 trillion in total 
commercial sales each year, employs up to 15 million workers on both 
sides of the Atlantic.\3\ The United States and Europe are each other's 
primary source and destination for foreign direct investment, with 
Europe representing 56 percent of total U.S. global FDI since 2000.\4\ 
In 2012 alone, U.S. FDI in Europe exceeded $206 billion.\5\ Americans 
invested more in Germany alone than in all of Central America . . . 
including Mexico.\6\ European investment in the United States amounted 
to $1.8 trillion in 2011, more than 70 percent of total FDI in the 
United States. In 2011, Europe's investment flows to the United States 
were seven times larger than to China.\7\ The transatlantic 
relationship also supports American workers, with European-controlled 
companies in the United States employing roughly 3.5 million Americans 
in 2011.\8\ The EU represents 22 percent of the world's GDP and over 25 
percent of global consumption.\9\
                               conclusion
    The euro-crisis represents an opportunity to reform and restructure 
the EU. While I don't wish to belabor the marathon analogy, those who 
complete the race often cite the encouragement they receive from those 
cheering them on along the way. It is in our national interest to 
remain invested and engaged in their success to ensure that Europe 
emerges stronger from this crisis.

----------------
End Notes

    \1\ http://www.imf.org/external/pubs/ft/weo/2013/01/.
    \2\ http://ec.europa.eu/economy_finance/eu/forecasts/
2013_spring_forecast_en.htm.
    \3\ ``The Transatlantic Economy 2013,'' Daniel S. Hamilton and 
Joseph P. Quinlan, Center for Transatlantic Relations, page 1.
    \4\ Ibid. page 2.
    \5\ Ibid. page 2.
    \6\ Ibid. page 4.
    \7\ Ibid. page 7.
    \8\ ``The Transatlantic Economy 2013,'' Daniel S. Hamilton and 
Joseph P. Quinlan, Center for Transatlantic Relations, page 12.
    \10\ ``The Transatlantic Economy 2013 Volume 1/2013.'' Daniel S. 
Hamilton and Joseph P. Quinlan, Center for Transatlantic Relations, 
page v.

    The Chairman. Thank you both for those insights.
    Let me start off where you both ended, Mr. Rediker, in your 
statement about looking at the EU through a political prism. So 
what is the focus? From their perspective, what is the focus of 
that political prism from your view?
    Mr. Rediker. I think whether it is the euro as a currency, 
which is the most recent manifestation, or the broad expansion 
and deepening of the European Union, while it has obviously 
economic consequences, the main motivation was--I mean, go back 
to the post-World War II era--to create a Europe where armed 
conflict was never going to be a relevant consideration. And if 
that is the primary motivation, I think thus far we can say 
they have succeeded in that.
    As a consequence of that initial step, clearly economic 
issues became more and more and more important. And so my point 
was if you look at things on a straight line economic 
trajectory, then 3 years ago we could easily have seen the 
outcome of Europe, whether it was Greece-specific, Ireland-
specific, Portugal-specific, or Europe-specific, would have 
ended in a very different set of circumstances because 
economically, under the political and legal constraints in play 
in the treaties and under the rules and regulations of Europe 
at the time, the outcome should have been much more daunting 
and dramatically bad. But political considerations stepped in 
and Europe ended up where they said they could not go--that is, 
there are a lot of the ``we will never go there'' points--for 
example, they all said that there will never be a point in 
which one country bails out another. There is an anti-bail-out 
clause in the treaties in Europe. Well, clearly, as I suggested 
in my testimony, there are now permanent and other mechanisms 
that are there for that very purpose. They are there through 
economic means, but to achieve the political purpose of keeping 
the European Union together and harmonized.
    The Chairman. So when I have often thought of the European 
Union at its beginning, I thought of it as--I described it as, 
well, it is this club, so to speak, and there are high 
standards to be part of the club. And if you want to get a key 
to the club, you had to meet the high standards, and those 
countries that were not, in fact, capable of meeting those 
standards that the incipiency would have the assistance to be 
able to build themselves up to be able to meet those standards 
and therefore be part of the union. That is a very broad 
analogy.
    Do you see that as the original intent, either one of you?
    Mr. Rediker. Yes, with a big ``but,'' and the big ``but'' 
is there were a number of countries that could not meet that 
high standard in getting in. So the choice was either you 
remain wedded to an explicitly strict standard and say until 
you get here, you are just not coming in or, again back to my 
point about politics, there was a political decision taken that 
a number of countries that were not going to, anytime soon, 
meet that standard, that high standard, so how can we finesse 
their entry because it was better to have them in and encourage 
them along a productive, positive course rather than keep them 
out and wait and see when they got their act together 
sufficiently economically and politically to meet that high 
standard. So, again, yes, they set rules that were written in 
stone until they were not really written in stone.
    Mr. Kolbe. I would agree with what Doug just said about the 
way in which the European Union has come about and the way in 
which it has evolved. As you look at the creation of the euro 
currency and the Eurozone, it is easy now to look back. And 
some people at the time said this was going to be the problem 
that they created with the European Central Bank. They 
centralized the finance, the monetary side of the picture, but 
they never really centralized the fiscal side of the picture. 
So you had the countries in the southern tier that were not as 
economically as well off, did not have the ability--or were 
almost induced to have more greater deficit spending because 
they were able to do that. The so-called 3-percent limit on the 
deficit--really there was no enforcement mechanism for it. But 
this all turned out, of course, to be to the advantage of the 
countries on the other side as well who were exporting all 
these goods to countries like Greece and Spain and Portugal and 
elsewhere. So it was a symbiotic relationship. Now they are 
trying to deal with that problem today, and it is going to be a 
very long time before, I think, they are able to work 
themselves out of this.
    The Chairman. One final question. You know, emerging 
economies have become bigger players in the international 
economy and also in international governance. That, I think, is 
evidenced by the prominence of the G20. And at the same time, 
United States policy is now--we have this rebalancing toward 
Asia. We have an increasing interest in other parts of the 
world.
    How does the importance of our economic relationship and 
economic cooperation with the Europeans rank in this evolving 
context where the slow growth European nations seem to be 
ceding their global economic leadership role to the faster 
growing emerging markets? And what economic issues would we 
benefit from-- 
I think some you touched on in some of your original 
testimony--from a tighter, closer, more harmonized United 
States-European Union cooperation? I offer that question to 
both of you.
    Mr. Kolbe. I will lead off with just a brief answer.
    I think you have, in a sense, answered the question 
yourself. As I suggested in my remarks, the advantage of the 
TTIP is not the reduction of tariffs, which are as close to 
zero as any countries have in their trade relationship, though 
there still will be significant economic benefits by 
eliminating all the tariffs. Because of the sheer size of the 
trade relationship, eliminating those tariffs will have a 
significant benefit.
    But the real benefits will come from the nontariff 
barriers. If we are able to resolve--and I say ``if''--the key 
things like the agricultural issues, the GMOs, the issue of 
procurement, which is a major issue for the Europeans here in 
the United States, the issue of automobile regulation and 
inspection, financial services, a major issue on both sides--if 
we are able to resolve those, the benefits will be tremendous.
    The sheer size of this economic relationship will not harm 
our growing relationship with China and other Asian countries, 
but I think it will enhance the world's view as we look toward 
trying to bring Doha back into being again, the Doha Round of 
talks. This is a way, in a sense, to do that by having an 
agreement that other countries could join in. So it becomes 
kind of a bilateral plus a regional agreement that is much 
larger than that, and other countries can join into it.
    Mr. Rediker. Well, just picking up on Jim's point, I think 
I am less optimistic that we are ultimately going to get to 
something like a Doha because we have tried and it has become 
very clear how difficult it is.
    But picking up on your initial question, what we, I think, 
have started to engage in are these super-regional agreements 
and alliances. These are not just individual bilateral trade 
agreements or investment agreements. These are very large and 
meaningful blocs that we are negotiating with now potentially 
whether it is Europe with TTIP or with Asia through TPP. That 
actually has enormous potential through these regional efforts 
to create the rules of the road both on the tariff basis in 
those countries in those areas where we still have high tariffs 
and in the nontariff areas where it is really regulatory and 
nontariff issues. That sets a framework that ultimately is one 
of those instances where--to be colloquial about it--we are 
saying, ``I am not going to wait for you. I am moving ahead, 
and you can either hop on the train or you are going to be left 
behind.''
    And if we end up driving those, I certainly do not think it 
is Europe to the detriment of Asia or Asia to the detriment of 
Europe. I think we are in a unique position, in engaging in 
these two major potential agreements, to set those rules of the 
road which basically end up determining, whether countries like 
it or not, the rules of the rest of the world are going to end 
up having to deal with. So I think it is very positive.
    I also think in terms of the fast growing, emerging markets 
versus the established, more developed markets of Europe, it is 
kind of a stocks-and-flows argument to some degree, meaning 
there is such a deep and embedded relationship commercially and 
trade- and investment-wise between the United States and Europe 
that although there are clearly huge growth opportunities in 
the emerging markets that we as a country are well served by 
embracing wholeheartedly, that is not to diminish the enormity 
of our relationship with Europe. So I think both are important. 
One is obviously faster growing; the other is just so deep and 
robust and long-term that we have to take it enormously 
seriously.
    The Chairman. Thank you very much.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and each of you 
for your testimony and for being here.
    I know you have talked of a greater engagement with the 
European Union. But the European Union has decided to be the 
European Union and it has gone through a lot of trials and 
tribulations. I know this is not for us to determine. But would 
you say that the success of the European Union is in our 
national interest versus a disparate group of countries 
operating independently?
    Mr. Kolbe. Unquestionably, yes. The disintegration of the 
European Union, if that actually occurred, would be 
catastrophic to the United States and to our international 
interests, our political, economic, diplomatic interests. It 
would be very serious.
    Mr. Rediker. I would agree. I see only upside in the 
European Union staying together. I think if you get back to a 
very core premise of values, which both Congressman Kolbe and I 
referred to, the ideas of democracy, of consensus, of property 
rights--go on down the list of things that we as a country and 
as a people take as a basic foundation--are not necessarily 
accepted all around the world. So the fact that between 
ourselves and the European Union we have those basic shared 
values is an enormous starting point for any conversations on 
almost any subject in a multilateral or global context.
    Mr. Kolbe. If I might just add to that. Were that worst 
case scenario that you described to occur, think what might 
happen to the Central and Eastern European countries that have 
gradually moved toward the European Union and toward democracy 
and an open market economic system. They would then be very 
vulnerable to being drawn back into a Russian orbit, and that 
cannot be good for the United States. It certainly cannot be 
good for democracy in the rest of the world or for the economic 
system.
    Senator Corker. I was interested to hear your comments 
about looking at the European Union through a political lens. 
Do you see it progressing on to become is a true fiscal union? 
Some of the problems have been solved through stop gap measures 
since the crisis, but will the European Union evolve further?
    Mr. Rediker. They are certainly progressing. And as I 
mentioned in my statement, it is painful to watch because 
getting 27 countries to agree on anything is very difficult, 
and that is just a starting point because it is not only the 27 
countries, it is the institutions, it is the subgroups within 
the 27. It is enormously complicated and cumbersome.
    I am worried that while they are progressing on the banking 
union, which is the first step in this next iteration of 
Europe, that there are some very difficult issues that are now 
coming to the fore. So they have kicked the can down the road 
sufficiently to get to where they are, and I applaud them for 
it. But some of the most difficult issues are now really ripe 
for being resolved.
    And again, as I mentioned, I think that the difference 
between where the Germans start from and where some others--and 
particularly the French--start from is a case where it is not 
that these circles do not overlap at all, but it is hard to 
find the areas where you really can find areas of agreement on 
very fundamental issues.
    Again, I will repeat. This comes down to the retention of 
national sovereignty versus ceding some of that to a central 
authority on financial matters and political matters. That is 
really tough existential stuff for these countries and their 
governments, and that is what lies ahead in the short term.
    Senator Corker. Can they survive over a 20-, 30-, or 40-
year 
period without achieving greater fiscal unity?
    Mr. Rediker. I think what is urgently needed is a 
continuation of what we have seen largely via the European 
Central Bank, which is an ability to take weaker countries and 
banks where their financing dries up and find some way to 
mutualize that. Thus far, they have found ways to do that 
through the ECB, through these other mechanisms, the ESM, the 
EFSF, and others. Over time--and that is not a long period of 
time, your question was over a 
20-, 30-, 40-year framework--this stop gap system is not 
sustainable. There needs to be some means by which a permanent 
resolution of these outstanding issues is arrived at.
    And if you listen to what the Germans and others say, they 
say we are willing--much more willing than they were 3 years 
ago, mind you--to put our sovereign balance sheet at risk if 
you, whoever you are--collectively the rest of you, so to 
speak--agree to take certain steps to allow us to feel 
comfortable about what that risk really looks like. But that is 
really tough stuff because it does mean that loss of 
sovereignty at some level, and how they navigate through that 
is difficult.
    So the short answer to your question is ``No.'' If they do 
not resolve this over the short to medium term, I do not see it 
sustainable as within a 20-year timeframe. I would say it is 
not sustainable within a 5-to-10-year timeframe.
    Senator Corker. NATO has been a tremendous alliance for our 
security. On the other hand, there are only three European 
Union countries that are actually honoring their agreement on 
defense spending. What has really happened with NATO over time 
is we are the provider of protective services and they are the 
consumer of protective services. That cannot continue. And I am 
only slightly exaggerating when I say what I just said. 
Certainly there have been meaningful contributions. But over 
time, that is the way this has evolved.
    Can you talk a little bit about the interrelationship 
between NATO and the fiscal union? We are talking about the 
TTIP agreement that we hope comes to a success and just overall 
security issues relative to NATO, which is very important to us 
on another front.
    Mr. Kolbe. Well, just in a general way, your premise is 
certainly correct. We have been by far the largest contributor 
to NATO, and the other countries have not come up to the 
standard that has been set for the NATO countries in terms of 
their contributions of their budget to the NATO defense.
    But I think it goes back to what we were both saying 
earlier in our remarks, and that is that the European Union is 
a political union, and these do all tie together. There is no 
question that these issues are interlinked. And it is hard to 
see if the European Union were to continue to fray and to show 
that it is coming apart at the seams--it is hard to see how we 
can have any resolution of the security issues.
    I do think that the European Union and the integration, the 
economic and continuing political integration that it has, 
enables us to have greater cooperation with Europe on some of 
these security issues, whether it is in Libya and other parts 
of north Africa, whether it is in the Middle East. We have not 
had all the cooperation we would like, and we have not seen eye 
to eye on everything certainly in Afghanistan or Iraq. But we 
have had much greater cooperation than we would have had, I 
think, had we been trying to deal with 27 different countries 
on the economic front.
    Senator Corker. Mr. Chairman, is it all right if I keep 
going?
    The issue of Turkey. I know Turkey is not part of the 
European Union. There have been issues there that have kept 
that from occurring. They are evolving into a more important 
country in terms of our national interest.
    As we look at this TTIP negotiation that is taking place--I 
know Turkey's Prime Minister was here recently talking with the 
President about the trade agreement. How should we look at 
Turkey as we move ahead with TTIP? Are there bilateral 
discussions that ought to take place relative to them and this 
entire trade agreement?
    Mr. Rediker. I would not want to speculate on whether the 
Turkey conversation relative to trade is going to be a plus or 
a negative relative to TTIP. But I would bring the question 
back to Turkey and its overall strategic role economically and 
politically and say it is enormous and it has evolved 
considerably vis-a-vis the EU. So I would say within the last 5 
to 10 years, the issue of Turkey joining the EU has stopped 
being a front page news story both in Turkey and across the 
European Union. It was a pretty important election campaign 
issue in the German and French elections the last go-round, 
meaning not this most recent but the previous one, and now is 
basically a nonissue. And in part it is a nonissue because the 
Turks have made it a nonissue because their clamoring to get 
into the EU has been quieted not only by the turmoil in the EU, 
but by their own sense of strategic importance in a role that 
they played which was somewhat unforeseen at the time. They 
felt 10 years ago that their future really needed to be 
anchored in the robust central political and economic health 
provided by the European Union. And over time, obviously, as 
the context of this hearing demonstrates, the European Union is 
not considered to be the magnet for economic growth in the 
future that it once was.
    But more than that, Turkey plays this enormously 
interesting and strategic role of east-west--there are a 
variety of issues that we could go into in greater detail. But 
they actually feel much stronger now I am not saying as a 
stand-alone because as a stand-alone, that is overstating it. 
But certainly their sense of importance as an independent actor 
in the region militarily, security-wise, economically, 
tradewise is much deeper. And so they themselves are of, at 
best, two minds about whether they want to join the EU or not.
    And in the context of trade, as I say, that is not an area 
I have looked at in great detail, but I would suggest that TTIP 
with Turkey added on would be--I am not going to say a bridge 
too far, but it is already going to be wildly difficult to get 
27 countries to agree on most things. The Turkey issue, in the 
context of trade and TTIP, I would suggest, is probably one 
step beyond where we would like to go.
    Mr. Kolbe. If I might just add to that. I agree with what 
Doug has just said about Turkey seeing itself today as a bigger 
player in the world and in the region. They see themselves as 
kind of at the center between Europe on one side, the Middle 
East on the other, north Africa, the former Russian bloc up 
here. They see themselves as playing a very strategic role, and 
they do. They always have from NATO. They have been a part of 
NATO from the very beginning.
    I was just in Turkey last month and what I found in the 
conversations with them about TTIP is that they are concerned. 
They are concerned that they are going to get left out. Somehow 
they are going to get squeezed out of the talks, and somehow 
their trade relationship with Europe, which is quite 
substantial, much larger than their trade relationship with the 
United States--it is one of the things we should be focused on, 
increasing that trade relationship. They are worried about 
being left out of that or squeezed out of that. So they are 
very concerned about this. They do not expect that they are 
going to be made a part of it, though they say we have been a 
part of NATO all along. We have been there before all these 
other countries were. Why should we not be considered to be a 
part of it?
    Senator Corker. I just will ask one last question, if it is 
OK with the chairman.
    I know that you all are very focused on TTIP and other 
issues. Is it your opinion, looking from the outside, that the 
administration seems to be fully committed to this and is doing 
all the things they need to do to bring this to fruition?
    Mr. Kolbe. I would say ``Yes.'' I mean, I do not think this 
administration would have gone down the path of starting the 
TTIP negotiation if they were not committed to getting it done, 
and I think the nomination of Mr. Froman to be the U.S. Trade 
Representative--he is deeply invested in this, and I think he 
clearly has a reason to see it through to the end. That is not, 
however, to gainsay the difficulties that are going to be 
involved in getting this agreement done. There are substantial 
and very deep differences over a number of issues that are 
going to be very tough to negotiate. So I think we have got a 
long road ahead of us.
    One of the things that is a little bit of concern is that 
the Commission finds itself coming to an end in the middle of 
next year. They have a timetable that they would like to see 
this done by that time. That is unrealistic. And we are, of 
course, looking at the end of the Obama administration as a 
timetable for it. So kind of meshing these two timetables is 
going to be one of the first things that they are going to have 
to think about.
    Senator Corker. Thank you both and thank you, Mr. Chairman, 
for having this hearing.
    The Chairman. Thank you, Senator Corker.
    I just want to make two observations. One on the Turkey 
question. Obviously, part of the challenge is for the 
Europeans, in considering Turkey as an addition to a very 
difficult set of negotiations, is that everybody in the EU has 
agreed to live to a certain set of standards across the 
spectrum. And we have talked about some of those challenges of 
being able to achieve those standards. It would be easy to 
piggyback onto a negotiation but not have to live up to a whole 
set of standards. And I think that is probably one of the 
challenges at the end of the day.
    And the other is that I think this is the first time the 
committee has had a hearing as a full committee on Europe in 
over 2 years. I think it is an expression of the importance 
that we have that we view of the United States-European 
relationship, particularly the European Union. And we look 
forward to continuing to deepen those understandings through 
the committee's work as well.
    With the thanks of the committee to both of you for your 
insights, the record will remain open until Friday of this week 
for questions that members would have.
    This hearing is adjourned.
    [Whereupon, at 11:45 a.m., the hearing was adjourned.]
                              ----------                              


              Additional Material Submitted for the Record


  Response of Under Secretary Robert Hormats and Under Secretary Lael 
     Brainard to Question Submitted by Senator Christopher A. Coons

    Question. As we seek closer trade ties with Europe, it is important 
that we ensure a level playing field through the even application of 
the European Union (EU) regulatory process. While the EU has initiated 
a number of commendable environmental regulations, not all Member 
States properly comply. This can disadvantage U.S. companies which have 
invested in reliance on the anticipated implementation of the 
regulation. For example, a variety of U.S. companies have made 
investments, many of them quite significant, related to implementation 
of the Mobile Air Conditioning, or MAC, Directive. The Directive was 
scheduled to go into effect at the beginning of the year, but there are 
increasing reports of widespread noncompliance. The U.S. companies who 
made good faith investments based on the Directive are now experiencing 
economic harm.

   What steps is the administration taking to ensure U.S. 
        companies are able to compete in a fair and consistent process?

    Answer. We are consulting closely within the interagency and with 
the European Commission (and, as needed, with EU Member States) on 
regulatory issues, including the Mobile Air Conditioning (MAC) 
directive. In our discussions with the Europeans, we have stressed the 
importance to U.S. companies that this directive be implemented 
properly on an EU-wide basis so that shortcomings in implementation do 
not undermine investments that companies have already made. We will 
continue to raise this issue and the importance for our trading 
relationship of having all EU Member States apply EU directives in a 
timely and consistent manner. Eliminating disparate Member State 
implementation of and compliance with EU legislation is an important 
component of our engagement through the Transatlantic Trade and 
Investment Partnership (TTIP) to reduce regulatory barriers to trade 
and ensure a level playing field for U.S. companies.
                                 ______
                                 

  Response of Under Secretary Robert Hormats to Question Submitted by 
                         Senator Jeanne Shaheen

    Question. In your testimony you mention that upcoming trade 
negotiations with respect to the Transatlantic Trade and Investment 
Partnership (TTIP) will aim to address ``behind the border'' barriers 
to U.S.-EU trade, including ``unnecessary regulatory and standards 
differences that create burdens for our exporters, while maintaining 
appropriate health, safety, and environmental protections.''
    Both sides of the Atlantic are in the process of determining their 
mandate for the upcoming negotiations. One of the longstanding sticking 
points will be regulatory differences and compatibility issues.

   With respect to possible regulatory harmonization in the 
        upcoming TTIP negotiations, which sectors do you anticipate 
        will provide the best opportunity for U.S. businesses to 
        benefit from a TTIP deal?
   Which sectors, if any, will the United States trade 
        negotiators push to remove from consideration with respect to 
        regulatory harmonization discussions?
   Do you anticipate that the medical technology and medical 
        device technology industries will be covered under the upcoming 
        TTIP negotiations? What is the possibility for convergence on 
        the regulatory front with respect to medical technology and 
        medical device technology exports?

    Answer. As indicated in the High-Level Working Group report and in 
the United States Trade Representative's March 20 notification letter 
to Congress on the Transatlantic Trade and Investment Partnership 
(TTIP), one of our major negotiating objectives will be to find ways to 
remove ``behind the border'' barriers to trade and to address 
regulatory restrictions that impose costs, reduce efficiencies, and 
limit the ability of firms on both sides of the Atlantic to compete and 
innovate. Our goal is to establish strong horizontal disciplines that 
will benefit all sectors. With respect to sector-specific regulatory 
issues and regulatory cooperation, the administration's Trade Policy 
Staff Committee is currently analyzing public inputs received in 
response to USTR's Federal Register notice. We will have a better sense 
of the areas where progress is most possible and where there are 
potential roadblocks later this summer once negotiations have 
commenced.

                                  
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