Two ways US and Europe can boost their economies

Over the past few years, the United States and Europe have rarely been the source of positive news for the global economy. While the nascent American recovery is fragile and under constant threat from political brinkmanship in Washington, Europe has been pulled back into recession as a result of its sovereign debt crisis.

To some observers the malaise symbolizes the decline of the transatlantic economy, as emerging powers claim a bigger share of global trade, investment, and economic growth.

But the US and Europe now have two significant opportunities to give their economies – and the relationship between their economies – a much needed boost.

The first opportunity is for each side of the Atlantic to successfully navigate the perilous terrain of their debt mountains and fiscal cliffs, and remove some of the uncertainty that’s holding back hiring and investment.

The second is the real possibility that, after discussing the idea for decades, the US and the 27-member European Union could actually start negotiating a comprehensive US-EU free trade agreement. That would not only give impulse to both economies, it would rejuvenate the transatlantic relationship generally.

The immediate focus, naturally, is on Washington, where President Obama and House Speaker John Boehner are negotiating to avoid the “fiscal cliff,” a series of automatic tax hikes and spending cuts scheduled to take effect on Jan. 1. Given the political polarization, an early and wide-ranging deal seems improbable.

Yet even going over the cliff is unlikely to do serious damage to the American economy, provided an agreement can be reached within the next couple of months. The effects of the missed deadline will have begun to take effect by then, and that pressure will make a deal more likely.

Meanwhile, the European debt crisis has appeared less dramatic in recent weeks, after the European Central Bank stepped up its activities and temporarily calmed investors. Also, eurozone finance ministers finally agreed today that the European Central Bank should become the regulator for a new EU-wide union of large banks. That’s an important step in bringing uniform oversight to the banking sector, and addressing the kinds of structural problems that caused the debt crisis in the first place.

Beyond solving their own internal crises, the US and the EU finally have the chance to get more from their economies by bringing them even closer together through a free trade agreement. Both sides should join hands and plunge into talks.

Chances for a deal are better than ever. A working group of high ranking US and EU officials is evaluating the feasibility of such a pact, which would remove remaining barriers to trade and investment flows. Tariffs would be greatly lowered or swept aside and compatibility between standards and regulations would be harmonized.

This will require effort. Consider, for instance, differences in agricultural standards for genetically modified food, in product-safety requirements, data privacy, and restrictions on foreign investment. But the effort is worth it. Although hurdles to transatlantic trade are already relatively low, the sheer size of this marketplace – nearly half the world’s gross domestic product – ensures that even small improvements would produce significant gains.

A study for the European Commission found that eliminating or harmonizing half of all remaining non-tariff restrictions on transatlantic trade would add 0.7 percent to the size of the EU’s economy and 0.3 percent to America’s by 2018. Lowering or eliminating the last tariffs would bring even more benefits.

Compared to the economic effects of fiscal cliff or eurozone negotiations, these numbers may be relatively small, but they should not be dismissed. And a potential US-EU trade agreement would provide benefits beyond the immediate economic realm.

Much like the transatlantic relationship itself, economic ties between the continents are often taken for granted as the focus on both continents slowly shifts to emerging markets such as India, China, and Brazil. Yet, at least for the time being, Europe and the US remain each other’s most important economic partners. At a time when Europe is focused inward and the US is “pivoting” to Asia, a  renewed comprehensive economic partnership would give US-European relations a new purpose.

And because both economies account for a third of all trade flows, a trade agreement between the US and Europe would have global consequences. It could set a new aspirational standard for future trade deals – for instance, by putting upward pressure on other countries to adopt US-EU standards on intellectual property rights.

Remaining obstacles to the negotiations on a Transatlantic Free Trade Agreement may be tough to clear, but they are by no means impossible. It is high time for the United States and Europe to finally create this piece of good news.

Peter Sparding is a transatlantic fellow for economic policy at the German Marshall Fund of the United States. The views are the author’s alone.