In the dark days of early 2009, following the collapse in global commerce, and a spike in global unemployment, trade and investment protectionism represented a clear and present danger to the global economy. But, with the transatlantic economy now on the mend, the risk of protectionism has diminished over the past year. And transatlantic merger and acquisition activity has rebounded smartly from the depressed levels of 2009., European M&A deals in the United States totaled $115 billion in 2010, up from just $35 billion the year before. U.S. firms, meanwhile, while not as active in Europe, still doled out $65 billion for European M&A deals in 2010. Deal activity was also quite robust in the first quarter of this year.
However, it is not all smooth sailing ahead. There are some storm clouds on the horizon. The whiff of investment protectionism is swirling around the proposed merger between Deutsche Borse and NYSE Euronext, a potential deal that would create a transatlantic stock-trading powerhouse. Whether the deal is consummated remains to be seen. Complicating matters is a counteroffer for NYSE Euronext, America’s oldest and most venerable stock exchange, by the Nasdaq OMX Group, an American-led firm that has appealed to NYSE shareholders to accept their offer since it is an “American” deal. The flag-waving reference is code for “Let’s prevent a foreign company from owning this prized American asset at any cost.” With patriotism now part of the equation, the brewing battle for the NYSE could become more overtly political between the United States and Europe—hardly a propitious development for the transatlantic economy, which rests firmly on the foundation of the free flow of foreign direct investment.
And lest one think cross-border mergers of financial exchanges are not politically charged and nettlesome, it is worth noting that the $7.9 billion bid by Singapore Exchange Ltd. for one of Australia’s main bourses, ASX, is on the verge of collapse after Australia’s Foreign Investment Review Board advised against the deal. The proposed corporate marriage, according to the Review Board, was not in the country’s “national interest.” That is a rather crude form of protectionism and one that could become more prevalent among other nations.
After spending billions of dollars bailing out banks and shoring up their financial sectors, many nations, not unexpectedly, are now reluctant to see large chunks of their financial sector fall into foreign hands—financial exchanges included. This may happen even though such deals make economic sense. The proposed Deutsche Borse-NYSE deal would create a deeper, more liquid transatlantic capital market capable of facilitating more transatlantic M&A deals.
Service activities, including finance, represent the “sleeping giant” of the transatlantic economy in that many cross-border services remain mired in red tape, excess regulations, and internal barriers, preventing the transatlantic economy from becoming even more integrated and seamless. And they are prone to a new form of protectionism.
If the Deutsche Borse-NYSE deal falls victim to politics, then the United States and Europe will have missed an opportunity to take a small step toward the creation of a single transatlantic market in financial services. The latter is a long way off, but steps in this direction would help lower the cost of capital on both sides of the Atlantic, reduce transaction costs for investors, and promote more stock- and bond-trading volumes between the United States and Europe. Broadly speaking, the deal could be a catalyst for a more barrier-free transatlantic service sector lead by financial services.
Moreover, if the bid from Deutsche Borse is scotched for political reasons—overtly or covertly—the end result will be a poisoned investment backdrop for U.S. and European companies, and the growing potential for tit-for-tat protectionism. If history has taught us anything, it is that protectionism begets protectionism.
In the end, the battle for the NYSE Euronext should be decided by economics, not politics.
Joe Quinlan is a Transatlantic Fellow at the German Marshall Fund. (Picture Credit: Simon Q)
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