Transatlantic Economy 2012 Volume 1

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Center for transatlantC relatons Johns hokns UnverstyaUl h. ntze sChool of advanCed nternatonal stUdes

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Headline Trends


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Center for Transatlantic Relations

American Consortiu m on EU Stud ies

EU Center of Excellence Washington, DC

The Paul H. Nitze School of Advanced International Studies

The Johns Hopkins University

1717 Massachusetts Ave., NW, Suite 525Washington, DC 20036Tel: (202) 663-5880Fax (202) 663-5879Email: [email protected]://transatlantic.sais-jhu.eduISBN 978-0-9848544-4-8ISBN 978-0-9848544-6-2

Hamilton, Daniel S., and Quinlan, Joseph P.,The Transatlantic Economy 2012: Annual Survey of Jobs,Trade and Investment between the United States and Europe

Washington, DC: Center for Transatlantic Relations, 2012. Center for Transatlantic Relations, 2012


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Table of Contents

Preface and Acknowledgements iv

Executive Summary v

Chapter 1Transatlantic Turbulence: Fasten Your Seatbelts 1

Chapter 2The Post-Crisis Transatlantic Economy:The Eight Ties that Still Bind 14

Notes on Terms, Data and Sources 29

About the Authors 29


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Preface and Acknowledgements

This annual survey offers the most up-to-date picture of the deep and intricate economic relationship bindingEuropean countries to Americas 50 states. This year we have divided the survey into two volumes. Volume Oneoffers Headline Trends for the transatlantic economy, and updates with the latest facts and gures our basicframework for understanding the deeply integrated transatlantic economy via eight ties that bind. Volume Two

provides the most up-to-date information on European-sourced jobs, trade and investment with the 50 U.S.states, and U.S.-sourced jobs, trade and investment with the 27 member states of the European Union, as well asNorway and Switzerland.

This annual survey complements other recent publications of ours in which we use both geographic and sectorallenses to examine the deep integration of the transatlantic economy, and the role of the U.S. and Europe in theglobal economy, with particular focus on how globalization affects American and European consumers, workers,companies, and governments. In Daniel Hamiltons recent book Europes Economic Crisis (Washington, DC:Center for Transatlantic Relations, 2011), co-edited with Nobel Prize Laureate Robert Solow, leading expertsprovide context and grounding for understanding Europes current economic tribulations, and how they mightbest be addressed.His book Europe 2020: Competitive or Complacent? (Washington, DC: Center for TransatlanticRelations, 2011) assesses the EUs global competitive position and maps its connections to 12 other world regions

in terms of goods, services, money, energy, people and ideas. Joseph Quinlans recent book, The Last EconomicSuperpower: The Retreat of Globalization, the End of American Dominance, and What We Can Do About It (NewYork: McGraw Hill, 2010), analyzes the global aftershocks of the Made in America nancial crisis, the attendantrise of developing countries and the impact on the standard bearers of the global economy: the United States andEurope.

We would like to thank Lisa Mendelow, James Medaglio, Andrew Vasylyuk and Alexis Cedeno for their assistancein producing this study.

We are grateful for generous support of our annual survey from the American Chamber of Commerce to theEuropean Union and its member company sponsorsCaterpillar, Fleishman Hillard and SAS; and the European-American Business Council and its member company sponsorsAT&T, Boehringer Ingelheim, CA Technologies,

Cisco, DHL, Nokia, SAP, TE Connectivity, Unilever and Xerox.

The views expressed here are our own, and do not necessarily represent those of any sponsor or institution.Other views and data sources have been cited, and are appreciated.

Daniel S. HamiltonJoseph P. Quinlan


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eeCUte sUmmary

Despite continuing transatlantic economic turbulence, the U.S. and Europe remain each others mostimportant markets. No other commercial artery in the world is as integrated.

The transatlantic economy generates close to $5 trillion in total commercial sales a year and employs up to15 million workers in mutually onshored jobs on both sides of the Atlantic.

Ties are particular thick in foreign direct investment, portfolio investment, banking claims, trade andafliate sales in goods and services, mutual R&D investment, patent cooperation, technology ows, andsales of knowledge-intensive services.

The transatlantic economy is the largest and wealthiest market in the world, accounting for over 50% of

world GDP in terms of value and 41% in terms of purchasing power.

Even following the nancial crisis, U.S. and EU nancial markets continue to account for well overtwo-thirds of global banking assets; three-quarters of global nancial services; 77% of equity-linkedderivatives; more than two-thirds of all private and public debt securities; almost 80% of all interest-rate derivatives; almost 75% of all new international debt securities; and 70% of all foreign exchangederivatives transactions. 91.3% of global foreign exchange holdings are either in dollars (61.7%), euros(25.7%) or sterling (3.9%).

As globalization proceeds and emerging markets rise, however, transatlantic markets are shifting from aposition of preeminence to one of predominance still considerable, but less overwhelming than in thepast. In the last decade the transatlantic share in global stock market capitalization declined from 78%to just over 50%. Its share in stock trading fell from 86% to just over 70%. Asias share of investment banking

revenues rose from 13% to more than 20%. BRIC stock markets grew more than 40% per year while EU andU.S. markets contracted. The BRIC share of listed companies worldwide jumped from just over 2% in 2000to 25% today. China had the largest IPO market in 2010 and 2011.

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The 2012 economic outlook for the transatlantic economy is bifurcated, with the eurozone expected tocontract slightly and the U.S. set to grow by up to 2.2%.

The eurozone crisis and Europes economic slowdown have not only knocked the wind out of the transatlanticeconomy but also dealt a sizable blow to the global economy.

The European nancial crisis has been transmitted to the U.S. via three channelsthrough the capital

markets; through trade; and through U.S. corporate earnings.

U.S. banks are not overly exposed to Greece and Portugal, but they are heavily exposed to banks in the UK,Italy, France and Germany, which are highly leveraged to some of Europes most indebted countries.

Financial contagion in Europe has added volatility to U.S. capital markets and triggered nancial deleveragingby European banks in the U.S. European FDI to the U.Safter nearly doubling in 2010plunged 28% in therst nine months of 2011.

In the rst nine months of 2011, UK FDI to the U.S. was -$9.3 billion. On a year-over-year basis, FDI inowsfrom France to the U.S. declined 86% in the January-September period, while investment inows fromGermany and Ireland dropped 20% and 86%, respectively.


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Government debt is well beyond 100% of GDP in Greece (160.9%), Italy (120.1%), Ireland (106.7%) and Portugal(101.7%). EU public debt as a percent of GDP is around 85%.

Budget decits as a percent of GDP average 6.2% for the eurozone. This masks wide variation, for example,from 4.3% of GDP in Germany to 10.3% in the UK.

The U.S. federal budget decit for scal year 2012 is expected to total $1.1 trillion, the fourth straight year ofa $1 trillion-plus decit, and equating to 7% of GDP.

While many areas of the U.S. and Europe face stubborn unemployment, impaired nancial systems andmounting scal debts, some regions are showing improvements.

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Trade alone is a misleading benchmark of international commerce; mutual investment dwarfs trade and isthe real backbone of the transatlantic economy. The U.S. and Europe are each others primary source anddestination for foreign direct investment.

Together the U.S. and Europe accounted for only 25.4% of global exports and 32% of global imports in

2010. But together they accounted for 57.8% of the inward stock of foreign direct investment (FDI), and awhopping 72.8% of outward FDI stock. Moreover, each partner has built up the great majority of that stockin the other economy.

Foreign investment and afliate sales power transatlantic trade. 60.3% of U.S. imports from the EU consistedof related-party trade in 2010. The percentage was even higher in the case of Ireland (83%) and Germany(67%). Related-party trade accounted for 30% of U.S. exports to the EU but nearly half of total U.S. exportsto the Netherlands in 2010.

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Over many decades no place in the world has attracted more U.S. foreign direct investment (FDI) thanEurope. From 2000-2009 Europe attracted 56% of the global total, and since the start of 2010, Europe hassnagged 55.2% of total U.S. investment.

U.S. FDI to Europe in 2011 topped $200 billion for only the second time on record. Investment ows reached$215 billion, a 23% jump from the prior year.

Strong U.S. ows to Europe in the rst half of 2011, however, were offset by softer, weaker levels in the secondhalf, continuing into 2012.

In the rst nine months of 2011 U.S. FDI ows rose sharply to Germany (214%), Poland (114%), Spain (81%),Austria (69%), the Netherlands (35%), and Ireland (18%).

U.S. investment to Italy plunged 52%, however, and fell 50% to Belgium, 26% to the UK, and 2% to France.U.S. investment in Portugal plunged 729%, while ows to Russia dropped 127%.

Over the past 3 years U.S. companies have disinvested $350 million from Greece$149 million in 2009, $26million in 2010 and roughly $175 million in 2011. U.S. companies also disinvested in Hungary and Turkeyin the rst nine months of 2011, with net outows of $322 million reported for Hungary and $1.3 billionfor Turkey.

U.S. capital ows to the EU15 totaled $53 billion. Excluding the UK, purchases of U.S. securities were -$60billionin other words, there was net selling.

Within Europe, Americas top overseas market has shifted from the UK to the Netherlands. In the decadeto late 2011, the Netherlands accounted for roughly 25% and the UK 21% of total U.S. investment to Europe.The UK has traditionally served as an export platform for U.S. afliates to greater Europe, but the euro,the Single Market, and EU enlargement have all galvanized more U.S. rms to use the Netherlands as a key


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export platform and pan-regional distribution hub. Roughly 60% of total U.S. foreign afliate sales in theNetherlands are exports, with the bulk going to other EU members.

The export-propensity of U.S. foreign afliates in Ireland is even greaterroughly three-fourths of foreignafliate sales are destined for foreign markets, with the rest for the local market. U.S. companies based inIreland exported more than 100 billion of products and services to the rest of the world, including back to

the U.S., far more than U.S. afliate exports from China. U.S. rms have sunk over $170 billion into the Irish economy since 2000, an eight-fold increase from the

comparable levels of the 1990s. Despite Irelands current woes, U.S. rms continue to nd the country favorable.U.S. FDI accounted for 74% of Irelands inward investment in 2011; accounts for 9% of all U.S. investment inthe EU; and for 5% of all U.S. FDI worldwide. Ireland remains the No. 1 location worldwide for U.S. FDI in theinformation sector and third worldwide in the chemicals sector, which includes pharmaceuticals.

The output of U.S. foreign afliates in eastern Europe rose nearly ten-fold between 1999 and 2009, surgingfrom $5 billion to $46 billion. U.S. afliate output in eastern Europe was nearly 50% larger in 2009 than U.S.afliate output in China.

Capital expenditures by U.S. afliates in eastern Europe more than tripled between 1999 and 2009, from$3 billion $9.3 billion. Of total U.S. capital expenditures in Europe of $64.6 billion in 2009, eastern Europe

accounted for 14.4% of the total, up from a 5.4% share a decade earlier.

Poland has attracted nearly $5 billion in U.S. foreign direct investment since 2000a ve-fold increase fromcumulative levels in 1990, and a gure greater than total U.S. investment in Austria and Portugal over thesame period.

U.S. investment in the BRICs has totaled $108 billion since 2000, up from a total of $48 billion in the 1990s.However, the total is less than U.S. investment in Ireland and just 7.2% of total U.S. investment in Europe.Through the rst nine months of 2011 U.S. investment in the BRICs was just 6.1% of U.S. investmentin Europe.

U.S. rms invested $38 billion into China between 2000 and Q3 2011, putting China 12th as a destination ofU.S. FDI, behind Belgium, France, Germany, Switzerland, Ireland, the UK and the Netherlands.

U.S. investment in Ireland over the 2000-Q3 2011 was more than four and a half times larger than U.S.investment in China. U.S. investment in the Netherlands was more than ten times larger and in the UK morethan eight times larger.

Since 2000, U.S. rms have invested more in the Netherlands ($380 billion) alone and in the UK ($315 billion)alone than in South and Central America, the Middle East, and Africa combined ($270 billion).

U.S. cumulative investment in Brazil since 2000 ($37 billion) is roughly 75% of total investment in Belgium.

U.S. FDI in Russia since 2000 has been less than in such smaller European markets as Norway ($16.1 billion)and Denmark ($11.4 billion).

Since 2000 Corporate America has invested less in India ($24.2 billion) than Italy ($29 billion).

U.S. investment in India totaled $2.7 billion in the rst nine months of 2011, compared to $4 billion investedin tiny Belgium over the same period.

On a historic cost basis, the U.S. investment position in Europe was over 13 times larger than in the BRICsand nearly 4 times larger than in all of Asia at the end of 2010.

U.S. investment stakes in France and Belgium in 2010 were on par with the combined U.S. investmentposition in China and India ($87.5 billion).

Americas investment stakes in Ireland ($190.5 billion) were much greater than total U.S. capital sunk inSouth America ($136.4 billion).

U.S. investment in Spain ($58.1 billion) is greater than all of U.S. investment in Africa ($53.5 billion).


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Corporate Americas foreign assets totaled a staggering $20 trillion in 2010. 58% of these assets$11.3 trillionwere located in Europe. Largest share: the UK (22%, $4.4 trillion).

U.S. assets in the Netherlands ($1.6 trillion) were the second largest in the world in 2010. More than half ofU.S. afliate sales in the Netherlands are for export within the EU.

Americas asset base in Germany ($741 billion in 2010, up from $675 billion in 2008) was nearly double its asset

base in all of South America.

Americas collective asset base in Poland, Hungary, and the Czech Republic (roughly $130 billion, up from $85billion in 2008) was much larger than the size of corporate Americas assets in India (est. $85 billion).

U.S. assets in Ireland totaled $836 billion in 2010, more than total U.S. assets in either Germany or France.Ireland accounted for 7.5% of total U.S. assets in Europe in 2010.

Total output of U.S. foreign afliates in Europe ($592 billion in 2009) and of European afliates in the U.S.($389 billion) was larger than the output of such nations as the Netherlands, Turkey or Indonesiaand this ina bad year.

U.S. afliate output in Europe rebounded after recession year 2009 to total $625 billion in 2010 and continuedto expand in 2011, albeit modestly. Growth in 2012 will depend on overall EU growth, with more downside

than upside risks at this juncture.

Aggregate output of U.S. afliates reached nearly $1.2 trillion in 2010; Europe accounted for 52% of the total.The UK accounted for 25% of total U.S. afliate output in Europe, followed by Germany (15%) and France(9%). These 3 countries accounted for roughly half of total U.S. afliate output in Europe in 2009 and 2010. Bysector, services output (54%) has gained ground on manufacturing (46%).

U.S. afliates accounted for over 25% of Irelands total output in 2010; 7% of the UKs output; 6.9% ofSwitzerlands output; 6.7% of Norways output; and 5.8% of Belgiums total output.

U.S. foreign afliate output in Belgium in 2010 (roughly $27.5 billion) was more than double U.S. foreignafliate output in India (est. $13 billion).

U.S. afliate output in Poland totaled an estimated $10.3 billion in 2010, exceeding U.S. output in more

developed markets like Austria, Portugal, and Denmark. There was a ve-fold increase in U.S. afliate outputin Poland between 2000 and 2010.

U.S. afliate output in Hungary ($5.7 billion) was larger than output in Greece ($2.4 billion); U.S. output inTurkey ($8 billion) was roughly 40% larger than output in Austria.

Europe accounted for 51% of U.S. afliate sales worldwide in 2010. Sales rebounded to an estimated $2.7trillion, close to the record high of $2.9 trillion reached in 2008, before the onset of the transatlantic recessionand a 13% plunge in sales in 2009.

Sales of U.S. afliates in Europe in recession year 2009 were roughly double comparable sales in the entireAsia/Pacic. Afliate sales in the UK ($602 billion) exceeded sales in all of Latin America.

While U.S. afliate sales in China have soared over the past decade, they do so from a low base, and stillremain well below comparable sales in Europe. For instance, U.S. afliate sales of $148 billion in China in 2009were above those in Italy ($113 billion) but well below those in Germany ($322 billion) or France ($201 billion).

U.S. foreign afliate sales in Ireland ranked fourth in Europe at nearly $250 billion in 2009a good share ofthese sales, however, take the form of U.S. afliate exports to the EU and other third markets.

Europe remains the most protable region of the world for U.S. companies. U.S. foreign afliate income earnedin Europe rose to an estimated $213 billion in 2011a record high. Afliate earnings weakened at the end of2011, however, amid eurozone uncertainties.

Afliate income soared 126% in France; climbed 16% in the UK, 12% in Belgium, 10% in Germany and Spain,and 6% in the Netherlands.


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U.S. afliate income from Europe in 2011 and 2010 was nearly double the total earnings from South Americaand Asia.

U.S. afliates in 2010 earned 4 times more in the Netherlands alone ($54 billion) and double in the UK alone($26 billion) than they did in China and India combined ($13.5 billion).

In the rst nine months of 2011, however, U.S. afliate income in Brazil ($9 billion) or China ($8.6 billion) was

well in excess of afliate income in Germany ($5.3 billion) and France ($3.8 billion).

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European investment in the U.S.on a historic cost basistotaled $1.7 trillion in 2010, or 72% of total foreigndirect investment in the U.S. Historic cost basis represents the stock of foreign investment in the U.S. Usingthis measure, companies from the UK, followed by Japan, the Netherlands, Germany, and Canada were thelargest foreign investors in the U.S.

The story is the same in terms of foreign investment inows, with European investors accounting for 72.8% ofcumulative U.S. capital inows between the beginning of 2000 and the third quarter of 2011.

Many European nancial rms have scaled back their presence in the United States over the past year due

to Europes sovereign debt crisis, which has forced banks to raise capital at home by selling assets overseas.European automobile manufacturers, on the other hand, have shifted into high gear when it comes to investingin the U.S.

European FDI ows to the U.S. totaled an estimated $120 billion in 2011, a marked decline from $173 billion in2010, yet above the depressed levels of 2009 ($92 billion).

The 2011 downturn was led by Norway (-299%), the UK (-135%), France and Ireland (-86%), Sweden (-59%)and Germany (-20%).

Capital ows from the EU15 to the U.S. fell 69% to $105 billion from Jan.-Nov. 2011.

As of November 2011, China held 24% ($1.1 trillion) of foreign holdings of U.S. Treasuries while Japan andEurope each held 22% (roughly $1 trillion) and OPEC 5%.

In 2010 total assets of European afliates in the U.S. were an estimated $8.4 trillion. UK rms held $2.2trillion, followed by German rms ($1.5 trillion), Swiss and French rms (roughly $1.3 trillion each), Dutchrms (nearly $1 trillion).

The U.S. remains the most important market in the world in terms of earnings for many European multinationals.Prots of European foreign afliates in the U.S. plunged 30% in recession year 2009 but soared by 41% in 2010to a near record $105 billion. And in the rst nine months of 2011, the income of European afliates continuedto rise, climbing some 19% from the same period the year before. All in all, we expect European afliateincome in the U.S. to have reached a record high of $120 billion in 2011.

British and Dutch afliate income in the U.S. in the rst nine months of 2011 rose 33% and 34%. Germanafliate income rose 18%.

European afliate output in the U.S. rebounded in 2010 and continued to expand in 2011 after falling by almost4% in 2009 to $388.6 billion, and by another -6.2% in 2008.

The output of British rms in the U.S. in 2010 reached nearly $106 billionroughly a quarter of the Europeantotal. German afliate output totaled $80 billion, or one-fth of the total. French afliate output accountedfor 14% of the total.

Beyond European afliates, only Corporate Japan has any real economic presence in the U.S.Japaneseafliate output totaled $70 billion in 2010, well below UK and German afliate output.

Overall, foreign afliates contributed nearly $633 billion to U.S. aggregate production in 2010, with Europeanafliates accounting for roughly two-thirds of the total.


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Afliate sales, not trade, are the primary means by which European rms deliver goods and services toconsumers in the U.S. In 2010 European afliates sales in the U.S. ($1.9 trillion) were more than triple U.S.imports from Europe ($522 billion). Afliate sales rose roughly 7% in 2010 following a near 20% plunge theyear before.

Sales by British afliates in the U.S. totaled an estimated $474 billion in 2010, followed by German afliate

sales ($354 billion).

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U.S.-EU merchandise trade totaled an estimated $632 billion in 2011, up 63% from $387 billion in 2000.

U.S. merchandise exports to the EU totaled an estimated $270 billion in 2011, up roughly 11% from the prioryear and off only slightly from the peak of $277 billion in 2008; however, U.S. export growth to Europeweakened in the later months of 2011, a trend directly tied to Europes sovereign debt crisis and the attendantslowdown in economic growth in Europe.

The U.S. 2011 merchandise trade decit with the EU surged to roughly $90 billion, a 23% rise. The tradedecit with Germany exploded by around 43% to roughly $45 billion.

Most U.S. states recorded healthy gains in trade with Europe in 2010. California, Texas, and to a lesserdegree, New York, are the top U.S. state traders with Europe. Californias exports to Europe rose 10% in2010, but total exports of $27.7 billion were basically unchanged from a decade earlier. Texas, in contrast,has more than doubled exports to Europe over the past decade. Energy-related and information technologyexports led the Texas surge.

Germany was the top European export market for 20 U.S. states in 2010. The UK ranked second, and was thetop European export market for 10 states.

In the rst nine months of 2011, Chinas imports from the EU15 totaled $114 billion, a rise of 27% from the prioryear, while imports from the U.S. tallied $74 billion, a rise of 18%. The U.S. trade decit with China was inexcess of $291 billion in 2010, up from $90 billion in 2000; the EU trade decit with China topped $208 billion,

up from $36 billion in 2000; Japans imbalance was just $4 billion in 2010, down from $25 billion in 2000.

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The U.S. and Europe are the two leading services economies in the world. The U.S. is the largest singlecountry trader in services, while the EU is the largest trader in services among all world regions.

The EU ranks number one in each major category of global services trade, accounting for 41.1% of world travelreceipts; 40% of world exports of transportation services; and half of world exports of other commercialservices. Overall, Europe accounted for 41.1% of total world receipts in 2010.

By country, the U.S. was number one in the world in terms of world travel receipts in 2010, with a 14.1%share; number one in world transportation receipts, with a 9.1% share; and the worlds top exporter of othercommercial services, with a global export share of 16%.

Europe and the U.S. continue to lead the world when it comes to many different global services. For instance,of global exports of communication services in 2010, Europes share global share was 58.6%, North Americas16.5%. Of insurance exports, Europe ranked 57.5% to North Americas 24.8%; nancial servicesEurope55.8%, North America 23.1; computer and information service exportsEurope 52.5%, North America 8.7%:royalties and feesEurope 41.2%, North America, 40.7%: and other business servicesEurope 49.5%,North America, 13.2%.

5 of the top 10 export markets for U.S. services are in Europe; the U.S. enjoyed a $43.7 billion private servicestrade surplus with the EU in 2010, compared with its $80 billion goods trade decit with the EU. Top U.S.


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business services exports to the EU included management, consulting, and public relations services ($15.5billion in 2010), research, development, and testing services ($8.8 billion); and computer and informationservices ($6 billion).

U.S. private services exports to Europe nearly doubled between 2000 and 2010, rising from around $106 billionto $200.6 billion in 2010. U.S. private services exports to Europe plunged by 11.5% in 2009 but rose 1% in 2010.

U.S. private services imports from Europe also rebounded by 2.9% in 2010 after having declined by 11% in2009. Europe accounted for roughly 41% of total U.S. services imports in 2010.

Transatlantic services trade gures are impressive, but the more important services linkages are actually inmutual ows of foreign direct investment.

After reaching $634 billion in 2008, sales of services of U.S. foreign afliates in Europe fell to $581 billion in2009. Yet afliate sales of services were nearly triple U.S. services exports to Europe in the same year.

The UK accounted for around 34% of all U.S. afliate sales in Europe; UK services sales ($197 billion in 2009)were down 13.7% from the prior year but were nevertheless greateralmost doublethan total afliate salesof services in South and Central America, Africa, and the Middle East ($108 billion).

On a global basis, Europe accounted for nearly 54% of total U.S. services sales.

Sales of services by U.S. afliates of European rms totaled $422 billion in 2009. European afliate sales ofservices were more than two and a half times larger than U.S. services importsa fact that underscores theever-widening presence of European services leaders in the U.S. economy.

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Despite stories about U.S. and European companies decamping for cheap labor markets in Mexico or Asia,most foreigners working for U.S. companies outside the U.S. are Europeans, and most foreigners working forEuropean companies outside the EU are American.

The number of workers employed by U.S. afliates in Germany, France and the United Kingdom is more than

double those employed in China. European companies in the U.S. employ millions of American workers and are the largest source of onshored

jobs in America. Similarly, U.S. companies in Europe employ millions of European workers and are thelargest source of onshored jobs in Europe.

Roughly 38% of the 11.3 million people employed by U.S. majority-owned afliates in 2010 lived in Europewith roughly half working in the UK, Germany and France

U.S. afliates employed more manufacturing workers in Europe (1.8 million) in 2009 than they did in 1990(1.6 million). Yet the geographic distribution has shifted within Europe towards lower cost locations likeIreland and Poland. Between 1990 and 2009 U.S. afliate manufacturing employment fell in the UK byroughly 36% and in Germany by 8.6%. Meanwhile, manufacturing employment in Ireland soared over 40%,while rising from zero to 10.3% in Poland, the Czech Republic and Hungary.

U.S. afliate employment in eastern Europe more than doubled in the last decade from 221,600 workers in1999 to 509,000 in 2009. Eastern Europes share of total U.S. afliate employment in Europe rose from 6.2%to 12.2%.

Even with the decline of manufacturing employment in Germany, the manufacturing workforce of U.S.afliates in Germany alone totaled 371,000 workers in 2009above the number of manufactured workersemployed in Brazil by U.S. afliates (295,000) yet below the gures of China (516,000).

European majority-owned foreign afliates directly employed roughly 3.5 million U.S. workers in 2010some 700,000 less workers than U.S. afliates employed in Europe. The top ve European employers in theU.S. in 2010 were rms from the UK (900,000, down from 978,000 in 2008), Germany (585,000, down from


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617,000 in 2008), France (525,000, down from 554,000 in 2008), Switzerland (433,000, up from 389,000 in2008) and the Netherlands (344,000, down from 349,000 in 2008). European rms employed two-thirds ofall U.S. workers on the payrolls of majority-owned foreign afliates in 2010.

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The U.S. and EU account for 63% of the top R&D companies; 58% of all global R&D; and 18 of the top 20knowledge regions in the world.

In 2009 U.S. afliates sunk $22.7 billion on research and development in Europe, or roughly 63% of total R&Dexpenditures by U.S. foreign afliates of $36 billion. R&D expenditures by U.S. afliates were greatest inGermany, the UK, Switzerland, France, Sweden, Belgium and Ireland. These seven countries accounted fornearly 84% of U.S. global spending on R&D in Europe in 2009.

In the U.S, R&D expenditures by majority-owned foreign afliates totaled nearly $43.4 billion in 2009around 15% of total R&D spending in the U.S. R&D spending by European afliates totaled $31.3 billion, upfrom $30 billion the prior year, and accounting for 72% of all R&D performed by majority-owned foreignafliates in the United States.

Swiss-owned R&D in the U.S. totaled $9.1 billion in 2009, up sharply from the year before ($6.9 billion),accounting for 21% of total afliate R&D in the United States. British and German afliatesaccounted for a15% and 13% share, respectively.


15/441THE TANSATANTC ECNY 2012 | E 1

The transatlantic economy is poised precariouslyon the edge of what could become an extendedeconomic slowdown, courtesy of Europes

sovereign debt crisis and the regions seeminginability to resolve it. Economic projections vary, butin all likelihood Europe is expected to experience

an aggregate decline in output in 2012, while theUnited States achieves only modest growth. As aresult, the economic outlook for the transatlanticeconomy is bifurcated. The World Bank and IMFexpect the eurozone to contract by between -0.3%and -0.5% in 2012. In contrast, the World Bankexpects 2.2% growth in United States. The IMF is atad more cautious, forecasting 1.8% growth. Againstthis backdrop, the transatlantic economy is poisedto underperform in 2012, with more downside thanupside risks to U.S. and European rms competing inthe largest economies in the world.

Transatlantic turbulence continues as both sidesof the Atlantic struggle to clamber back from the2008-2009 period of nancial turmoil and recession.By the time the dust had settled from the Made inAmerica global crisis, economic output in the UnitedStates had declined 3.5% in 2009, and output in theeurozone had plunged 4.3%. Real economic growthrebounded in 2010 and gained momentum entering2011. Yet as the year unfolded the situation againbecame troubled.

Although years in the making, Europes sovereigncrisis boiled over in the later months of 2011.Panic swept the nancial markets in August andSeptember following credit rating downgrades andnegative outlooks in the United States and Europe,causing interbank lending to seize, banks to scaleback loans, and sovereign spreads to spike. Theinsidious combination of higher interest rates andscal austerity punished Europes periphery anddramatically slowed real economic growth across thecontinent as 2011 came to a close.

EU leaders did little to help matters, as summitafter summit produced little in the way of concertedaction plans needed to pacify the nancial marketsand engender condence among consumers andbusinesses. In the end, the regions sovereign debtcrisis and ensuing economic slowdown have not only

knocked the wind out of the transatlantic economybut also dealt a sizable blow to the global economy.Both lost signicant momentum over the past year.

Despite some condence-inducing measuresnamely the European Central Banks Long-TermRenancing Operation, which has greatly easedliquidity conditions in Europethere are numerousknown unknowns overhanging Europe at thisjuncture. For instance, could a default actually leaveGreece in better shape or is the nation destined toleave the eurozone? Will Portugal ultimately default

on its debt as well? Will the eurozone be successfulin creating a scal compact? Will surplus-Germanyrelent and become a critical source of demand andcredit for its weaker southern neighbors? Will the UKstay in the European Union, and if so, will it becomemarginalized? Will EU leaders ultimately draft a pro-growth economic agenda, allowing various nations togrow out of their problems? Can the competitivenessof Spain, Italy and others be restored in time to staveoff nancial Armageddon? These questions remainunanswered and hang ominously over Europe andthe transatlantic economy.

2011 l: eup m

If we have learned anything in the past year, it isthis: Europe still matters to the United States, tothe emerging markets and to the global economy atlarge. This simple truth was all but forgotten duringthe credit-fueled, shop til you drop era of globalgrowth spearheaded by the United States until 2007.

Things changed in September 2008. When the U.S.economy and nancial sector imploded, devaluing

CHAPTE 1

transatlantC tUrUlenCe:

Fasten Your Seat Belts


16/442 THE TANSATANTC ECNY 2012 | E 1

TANSATANTC TBENCE: FASTEN Y SEAT BETS

the economic credibility of the United States, thecommon narrative turned to the emerging markets.Led by China, the developing nations were anointed

as the new drivers of global growth of the post-crisisera, the new nancial superpowers who would placetheir stamp on global trade, multilateral institutions,and other activities long the domain of the Westi.e.,the United States and Europe.

According to this post-crisis narrative, the U.S.mattered less to the world economy because debt-laden America was a spent and aging engineof growth, while rising China, India, Brazil andother developing nations were ready to assumethe mantle of global growth. And Europe didnt

matter at all.

Reality has proven otherwise. Europe is a key engineof the global economy, and when it malfunctions, sodoes the rest of the world.t Gb ec ig 747

To frame Europes role in the global economy, it isuseful to think of the world economy as a Boeing 747.The latter has four engines and so, quite simply, doesthe world economy.

egi #1: n aic

The United States and Canada make up Engine One,accounting for just over one fth of world GDP based

on purchasing power rates from the IMF. AlthoughEngine One is home to just 5% of the worldspopulation, this engine nevertheless accounts for 30%of global consumption and for 15% of world imports.Until the nancial crisis of 2008, this engine wasknown for driving global demand, adding signicantthrust to other parts of the global economy. When thecrisis struck, however, the main lubricant of demandleverage or debtdried up, sapping Engine One of itspower. A morbid housing market, stubbornly highunemployment, battered state nances, and a dividedand bitter political climate in Washingtonall of

these factors continue to weigh on Engine One. And ifthat is not enough, Engine One faces a problem withEngine Two.

egi #2: eup

Engine Two consists of the 27 member states of theEuropean Union. After emitting smoke over most of2011, Engine Two is now on the verge of losing fullpower. Fiscal austerity, higher interest rates, soaringunemployment, diminished business condence, alack of global competitiveness in many placesall of

tale 1: S S E AEA - EA GDP, ANNA PECENT CHANGE

* 2011: Estimate; 2012: Forecast.Source: IMF

50

40

30

20

10

00

-10

-20

-30

-40

-50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

S Euro Area

uS

$Billions



TANSATANTC TBENCE: FASTEN Y SEAT BE

these factors have sapped Engine Two of its economicvitality, triggering the global turmoil and tumult ofthe past six months. This engine accounts for 22% of

world GDP, over one-quarter of global consumption,the bulk of international trade and nancemetricsthat underscore the fact that Europe plays a key role inkeeping the global economy aloft. Europes wideningsovereign debt problem and Europes inability to getahead of the crisis has placed a tremendous strain onother engines of growth and could ultimately ignite afull blown global banking crisis.

egi #3: ai

Engine Three is the largest in the world in terms ofoutput and population, and is the one engine of the

global economy that seems to be functioning properly.That said, the longer Engines One and Two struggle,the greater the risk to Engine Three, which stretchesfrom India to Japan. Asia cannot y solothere is nosuch thing in this world. To this point, Asias exportgrowth slowed sharply in the second half of 2011 asdemand in Engine Two weakened, reducing realeconomic growth rates across the region, includingChina. Europe still mattersjust ask thousands ofAsian exporters whose orders and revenues havedeclined on account of Europes sovereign debt crisis.

egi #4: Ci ucThe common denominator of Engine Four lies withcommodities or raw materials and encompasses suchregions as Latin America, the Middle East, Russia,central Asia, central Europe and Africa. Althoughthis is a diverse group, the common link holdingEngine Four together is its role as the worlds supplierof primary commodities. This engine of the worldeconomy has been on cruise control for most of thepast decade thanks to soaring global demand for foodand energy and by extension, soaring prices for their

goods. However, reecting the recent weakness inworld commodity prices, when things malfunction inEngine Two, which creates problems in Engines One

and Three, the problems are quickly transmitted toEngine Four via falling commodity prices.

Once again, Europe mattersjust ask the worldscommodity exporters, whose export receipts havedeclined sharply over the past year due to fallingdemand and prices for their wares.

All of the above, as well as the accompanying exhibit,serve as a simple template by which to view the worldeconomy. Too much attention is typically paid to theUnited States and Asia as key growth engines of the

global economy, with only nominal considerationgiven to Europe. Yet Europes global economic weightand stature is just as important. The world waspainfully reminded of this fact in 2011. How Europeseconomic crisis has been transmitted and channeledto the U.S. is discussed below.

Ccig C Ccig fu?

hw eu i tiig Cgi

Europes sovereign debt crisis has entered its thirdyear, and like past nancial crises, the longer it takesEurope to come to grips with its nancial challenges,

the greater the collateral damage to Europe, theUnited States and the global economy. It was in May2010 that the European Union had to come to thenancial rescue of Greece, followed by Ireland inNovember of the same year and Portugal in April 2011.As the nancial crisis has spread and affected otherparts of the Europe, the collateral damage to the U.S.has increased as well.

The European nancial crisis has been transmittedto the United States via three channelsthrough

tale 2: THE F ENGNES F THE WD ECNY (% F WD TTA, 2010)

egi o:

n aic

egi tw:

eup

egi t:

ai

egi fu:

Ci uc

GDP (Purchasing Power Parity) 215 223 351 210

Population 50 86 569 294

Private Consumption Expenditure* 305 284 247 165

Exports 111 363 322 204

mports 154 360 301 185

nternational eserves** 18 111 585 286

Sources: IMF, EIU, UN*Personal or household consumption expenditure**Excluding gold




the capital markets, through trade, and throughU.S. corporate earnings. Each channel is discussedbriey below.

C o: t Ci Cpi m

The most direct way Europes nancial crisis hasjumped the pond has been through the global capitalmarkets. Since European banks are large holdersof sovereign debt, when the sovereign dominoes inEurope toppled last year, bank lending and creditcreation came to a virtual standstill. Rising riskaversion among banks led to widening credit spreadsfor sovereigns, with Italy, for instance, forced to paypunishing yields in excess of 7% in 2011. As the yearprogressed, governments across the continent found itincreasingly difcult to renance debt. Ireland, Greeceand Portugal could not even borrow in the privatecapital markets, and became dependent on nancing

from public sector institutions like the EuropeanCentral Bank, the IMF and European Union.

Since the nancial crisis began in 2008, Europeanbanks have written off over $680 billion in bad loans.That is a large gure, although by some estimates,European banks have written off only half of theirbad loans. U.S. banks are thought to have writtenoff a larger percentage after suffering losses inexcess of $1.2 trillion. Of notable concern is Europesweaker southern periphery, or countries like Greece,Italy, Portugal and Spain, where large government

decits have undermined investor condence in eachgovernments debt and ability to repay it.

Table 3 underscores just how nanciallyinterdependent Europe has become. Notice how

exposed German and French banks are to Greece andPortugal, with Germanys bank exposure to Greecetotaling $33.5 billion and its exposure to Portugalamounting to $36 billion. The comparable gures forFrance are $51 billion and $26 billion, respectively. Butit gets worse: German and French exposure to Italyand Spain is simply staggering, underlining the risk ofEuropes entire banking sector should Italy and Spainbe forced to reschedule/default like Greece. Prospectsof this happening are slim, although back in early 2010,when the nancial crisis in Europe rst appeared, noone ever though Greece would ultimately default.

As for the United States, given the interdependenceof the transatlantic capital markets, Wall Street hasnot been spared Europes nancial crisis. U.S. banksare not overly exposed to Greece and Portugal, withoutstanding U.S. loans/claims in Greece totaling $8.3

billion and Portugal $5.5 billion last year, according tothe Bank of International Settlements. U.S. nancialinstitutions, however, are heavily exposed to banks inthe United Kingdom, Italy, France and Germany, whoin turn are highly leveraged to some of Europes mostindebted countries. Transatlantic nancial links,in other words, are thick and very much entangledacross borders, meaning that a nancial problem inone corner of the eurozone is a problem for the entirecontinent and for the United States.

At a minimum, nancial contagion in Europe has

added more volatility to the U.S. capital markets andworse still, triggered nancial deleveraging amongEuropean banks in the United States. Over the pastyear European banks have shed U.S. assets by sellingor scaling back their North American businesses,

tale 3: CNTES' BANS: CSS-BDE EPSE (AS F END JNE 2011)

Exposureto

gi

b

fc

b

G

b

G

b

i

b

i

b

ugu

b

spi

b

Uk

b

U.s.

b

giu $2302 bn $375 bn $329 m $40 bn $40 bn $446 m $49 bn $184 bn $331 bn

fc $382 bn $2233 bn $18 bn $144 bn $487 bn $75 bn $321 bn $2916 bn $1832 bn

G $172 bn $2629 bn $18 bn $630 bn $2675 bn $29 bn $595 bn $1838 bn $1477 bn

Gc $16 bn $513 bn $335 bn $768 m $39 bn $101 bn $12 bn $126 bn $83 bn

$458 bn $401 bn $1105 bn $507 m $156 bn $227 bn $101 bn $1574 bn $658 bn

$239 bn $4129 bn $1618 bn $454 m $121 bn $29 bn $382 bn $730 bn $455 bn

ug $14 bn $259 bn $359 bn $29 m $21 bn $39 bn $900 bn $256 bn $55 bn

spi $238 bn $1522 bn $1775 bn $349 m $127 bn $296 bn $252 bn $1057 bn $637 bn

Uk $355 bn $2936 bn $5112 bn $166 bn $1612 bn $511 bn $61 bn $4302 bn $6026 bn

Sources: Bank for International Settlements; Financial Times.Data for foreign claims by nationality of reporting banks, immediate borrower basis.




paring their American workforces and reducing thelevel of capital inow to the United States. Cross-border capital ows have reversed, and as part of thisdynamic, foreign direct investment from Europe tothe United Statesafter nearly doubling in 2010 fromthe depressed levels of 2009plunged 28% in the rst

nine months of 2011 from the same period a year ago.Some, but not all, of this decline reects disinvestmenton the part of European banks in the United States,with many European nancial institutions forced tohive off some or parts of their U.S. operations in orderto raise capital at home.In the rst nine months of last year, foreign directinvestment (FDI) from one of Americas largestoverseas investors, the United Kingdom, was actually-$9.3 billion, a clear sign of British rms selling U.S.assets to shore up their nances at home. On a year-

over-year basis, FDI inows from France to the U.S.declined 86% in the January-September period,while investment inows from Germany and Irelanddropped 20% and 86%, respectively.C tw: C- t

Just as global nance has dried up over the past year,so has global trade. Global trade volumes decelerated

dramatically in 2011, and will continue to weaken ifEuropes crisislike the nancial crisis spawned inthe U.S. in 2008ultimately drags the global economyinto recession. Notably at risk is the United States,which relies on Europe to consume roughly one-fthof total U.S. exports.

Last year U.S. exports to the European Union totaledan estimated $270 billion, off only slightly from the pre-

crisis peak of $277 billion in 2008; however, U.S. exports

to Europe weakened in the later months of 2011, a trend

directly tied to Europes sovereign debt crisis.

U.S. exports to the European Union expanded 13.1%in the rst eleven months of 2011 from the sameperiod a year earlier; that is a robust gure but masksthe fact that by November 2011, U.S. exports to theEU were expanding by just 4.8% on a year-over-year

basis. In November, U.S. exports to France, Germanyand Ireland actually declined, by 8.8%, 7% and 8.5%,respectively, from a year earlier. Exports to theNetherlands rose by just 1.5% in November after risingsurging over most of the year.

All of the above speaks to a region losing its economicvitality and the attendant effect on U.S. trade. As part

tale 4: CPATE AECAS BAS TWADS EPE(S FEGN DECT NESTENT (FD) TFWS T EPE AS A PECENT F TTA)

Source: Bureau of Economic AnalysisData through 3Q2011

70%

65%

60%

55%

50%

45%

40%

35%

30%

55%

59%

47%

66%

58%

53%

56%

2000 2002 2004 2006 2008 2010 2000-2011Q3




of this process, Americas merchandise trade decit

with EU surged from $73 billion in the January-November period of 2010 to roughly $90 billion lastyear, a 23% rise. Americas trade decit with Europeslargest economy, Germany, exploded by around 43%last year, rising to roughly $45 billion. The upshot? U.S.exports had been on an upward trajectory over mostof 2011, acting as a key pillar of growth for the U.S.economy. Late in 2011, however, Europes sovereigndebt crisis helped throttle a key component of U.S.growth. Weaker demand from Europeif prolongedcould very well torpedo any chance of the White Housereaching its goal of doubling U.S. exports in ve years.

The goal is unobtainable without a healthy Europe.C t: U.s. Cp eig

Finally, it is not just in nance and trade where theill effects of the European crisis have hurt the UnitedStates. The impact has also become painfully evidentin the earningsor the bottom lineof many U.S.corporations. Numerous U.S. companies, acrossdifferent swathes of U.S. industry, have all recentlytaken a hit on their earnings from deterioratingprots and sales in Europewhether Tiffanys (high-

end retail), General Electric (industrial products) and

Baxter International (health care) or Alcoa (materials)and National Instruments (technology). Indeed, in thefourth quarter of 2011, the earnings of the S&P 500were among the weakest in years thanks to Europeseconomic/nancial crisis and attendant effect onthe rest of the world. More troubling is the fact thatmany U.S. rms singled out Europe as the key riskto their earnings outlook for 2012, underscoring thedeep commercial ties that bind corporate America andEurope together.

Indeed, no other region of the world is as important

to the global success of U.S. multinationals as Europe,due to the simple fact that over the past few decadesno place in the world has attracted more U.S. foreigndirect investment (FDI) than Europe. Over the 1980s,for instance, Europe accounted for 55% of totalcumulative outows from the United States. Europesaggregate share of U.S. investment dipped to 53.5%in the 1990s, but rebounded in the rst decade of thiscentury, edging up to 56% of the global total. And notmuch has changed in the new decade underwaysince the start of 2010, Europe has snagged 55.2% of

tale 5: SEECTED DATA F S FEGN AFFATES* N EPE, 2009

u

%

t Gb r**

Number of Afliates 13,2970 523% 1

Thousands of Employees 4,1739 386% 1

anufacturing Employment (Thousands) 1,8217 397% 1

Total Assets (Bil S$) 10,9378 583% 1

Net Property Plant & Equipment (Bil S$) 4545 416% 1

Total Sales (Bil S$) 2,5067 516% 1

Sales of Goods 1,7668 513% 1

Sales of Services 6240 539% 1

Net ncome (Bil S$) 4798 594% 1

Capital Expenditures (Bil S$) 646 380% 1

&D Expenditures (Bil S$) 227 631% 1

Gross Product ("alue Added", Bil S$) 5918 519% 1

Compensation of Employees (Bil S$) 2717 562% 1

t wig i 2010

S Foreign Direct nvestment utows (Bil S$) 1753 533% 1

Afliate ncome (Bil S$) 1986 485% 1

Direct nvestment Position on a Historical-Cost Basis (Bil S$) 2,1859 559% 1

*Majority-owned bank and nonbank foreign afliates**Ranked against Canada, Latin America ex. Other Western Hemisphere, Africa, Middle East and Asia & Pacic.Source: Bureau of Economic Analysis.




7 THE TANSATANTC ECNY 2012 | E 1

total U.S. investment. This is a rather robust shareconsidering the emergence of the developing nations,notably China and Brazil, and all the hype about U.S.rms decamping from high-cost localesU.S. andEuropefor cheaper destinations in China and Brazil.The evidence suggests that nothing of the sort ishappening.

As Table 5 outlines, by numerous metricsthenumber of foreign afliates, afliate employment,R&D expenditures, afliate income, compensation,total assetsEurope ranks at the top of the list,underscoring the exposure of U.S. rms to the region.In good times, these transmission belts of economicintegration amplify opportunities for growth, protsand jobs. But by the same token, when things gowrong, as they have in parts of Europe over the pasttwo years, the ill effects are quickly transmitted to the

bottom line of many U.S. multinationals.

A key risk in 2012 is that the U.S. earnings slowdownbecomes more pronounced courtesy of Europesrecession, a scenario that could very well lead to lesshiring and investing among U.S. rms and weaker-than-expected U.S. growth. Another medium-termrisk lies with the indebted nature of Europe, with manycountries deep in debt, suggesting a long debt workoutperiod that could inhibit real growth for years.

db Jb

Reecting the poor shape of public nance,government debt is well beyond 100% of GDP inGreece (160.9%), Italy (120.1%), Ireland (106.7%) andPortugal (101.7%). The EUs public debt as a percent ofGDP is presently around 85%, and will only stabilizeat these levels if Europes most indebted nations canstomach severe budget cuts and maintain austeritymeasures on populations that are increasingly angryover how governments have managed state nancesover the past decade. At the moment, budget decitsas a percent of GDP are quite high across Europe,averaging -6.2% for the eurozone as a whole. This

average, however, masks wide variation: while thebudget decit is -4.3% of GDP in Germany, one of theEuropes most scally conservative states, decits inthe rest of Europe are relatively larger: the UnitedKingdom (-10.3%), Greece (-10.6%), Spain (-9.3%), andFrance (-7.1%).Not to be outdone, the U.S. federal budget decit forscal year 2012 is expected to total $1.1 trillion, thefourth straight year of a $1 trillion plus decit. In scalyear 2011, the federal budget decit was $1.3 trillion, or

8.7% of GDP. The decit projected for 2012 equates to7% of GDP, down from the prior year but still relativelyhigh from past years. Given all of these gures, itis little wonder that the specter of sovereign debtdefaults looms large over the transatlantic economy.Greece may still be on the path to default, despite the$172 billion bailout offered by international lendersin February 2012. Will anyone else follow? Portugalis certainly a candidate, while the United Statesconfronts another credit downgrade if Washingtonfails to produce a viable decit reduction plan in thenext year. At the minimum, the heavily indebtednations of Europe will muddle through, condemnedto years of slow or very little growth, the penalty forliving well beyond their means for years.Unemployment remains another key concern for thetransatlantic economy. The unemployment rate in the

United States peaked at around 10% but still hovers atan uncomfortable rate north of 8%. The jobs machineis slowly cranking up in the United States, althoughthe outlook in Europe is more challenging. Indeed,unemployment in the EU reached a record 10.4% inDecember 2011. This gure, however, masks varyingdegrees of joblessness across the continent. Germany,for instance, posted a jobless rate of 5.5% at the endof the year, well below the eurozone average. Theunemployment rate was even lower in Switzerland(3.1%) and the Netherlands (5.8%), but nearly 20% inGreece at the end of year. The rate was even higher

in Spain22.9%. Hungary (10.6%), Poland (12.1%),Ireland (14.5%), Portugal (13.6%) had jobless rates inexcess of 10% at the end of the year. In France, some9.8% of the workforce was without a job in November.

W d i

tic ec?

For starters, the corollary to a transatlantic jobsshortage is weaker-than-expected demand, ora transatlantic economy expanding at a subparpace. In particular, the lethal combination of weakemployment growth and scal austerity suggests a

prolonged period of fragile growth in Europe andpotentially the United States. At the micro level, thismay translate into earnings shortfalls for many small,medium and large cap companies.Second, stubbornly high unemployment and aninability to create jobs go hand-in-hand withprotectionism, or government policies that putnational interests rst and the global commons second,if not dead last. While the G-20 has done a decent jobin avoiding the deadly embrace of protectionism since



EPEAN CECE AND THE 50 S STATES: A STATE-BY-STATE CPASN

tig wi Ci: W h avg?

With so much of the media focused on Chinas exports and what this might mean for the

West, it is easy to forget that China is also the second largest importer in the world, trailing

only the nited States Yes, China exports a great deal of goodsbut it also consumes 9%

of world imports, a share greater than any country in Europe

European rms are prime beneciaries from this little-known fact They are way out in

front of their S counterparts when it comes to providing goods to the iddle ingdom,

although they lag their Japanese counterparts n 2010, Chinese imports from the E15

totaled $125 billion, compared to $150 billion from Japan The laggard: the nited States

Chinas imports from the S tallied just $92 billion in 2010, well below imports from Europe

China has always imported more goods from the E than from the nited States, although

the gap has narrowed slightly over the past decade Chinese imports of E15 goods were

46% larger than S imports in 2000, though 36% larger in 2010

n the rst nine months of 2011, Chinas imports from the E15 totaled $114 billion, a rise

of 27% from the prior year, while imports from the S tallied $74 billion, a jump of 18%

mports from Japan rose by 13% in the rst nine months of 2011 High-end French and talian

luxury items, German automobiles and capital goods, Swiss pharmaceuticalsall of these

products and more have become more attractive to China and help underwrite trade gains

with one of the largest and wealthiest markets in the world

The downside: all three partiesthe nited States, the E15 and Japanstill run massive

trade decits with China As the accompanying chart highlights, the E15s trade decit

with China topped $208 billion in 2010, a sizable jump from the shortfall in 2000 ($36

billion) The S decit with China was in excess of $291 billion in 2010, up from $90 billion

at the start of the decade Japans imbalance with China is not as greatjust $4 billion in

2010, down from $25 billion in 2000




23/44

tale 7: S, EPE AND JAPAN TADE BAANCE WTH CHNA - (BNS F $)

Sources: IMFData through 2010

0

-50

-100

-150

-200

-250

-300

00 01 02 03 04 05 06 07 08 09 10

nited States Japan E 15

tale 6: S, EPE AND JAPAN EPTS T CHNA - (BNS F $)

Sources: IMFData through 2010

160

140

120

100

80

60

40

20

0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

nited States Japan E 15


9THE TANSATANTC ECNY 2012 | E 1



a tic Jb Cii?

n a world of insufcient demand, excess labor, bulging new labor entrants in the emerging

markets and productivity-enhancing techniques that substitute capital for labor, the

transatlantic economy confronts a signicant jobs challenge over the next few years

The numbers are stark: according to the nternational abor rganization (), 80 million

jobs need to be created globally over the next two years (2012 and 2013) just to return

to 2007 employment rates Yet based on subpar growth projects, employment in the

developed nations is not expected to recover to pre-crisis levels until 2016 The developed

nations need to generate nearly 272 million jobs in the next two years to return to normal,although the estimates that only 25 million new jobs will be created, leaving a staggering

job shortage of nearly 25 million

t is only slightly better in the developing nations: roughly 53 million new jobs are needed to

reach pre-crisis levels, and owing to faster levels of real GDP growth, the developing nations

are expected to generate some 38 million new jobs over the next two years Thats an

impressive gure but nevertheless insufcient given the developing nations rising working-

age population, which will help to generate a 15 million job shortage in the near term

n the aggregate, with the global economy struggling to nd its moorings, the expects

the world to generate only half the jobs needed over the next twenty four months According

to the , we are staring at a global employment shortage on the order of 40 million jobs

A global shortage of 40 million jobs? Thats tinder for political and social instability in many

parts of the world, the nited States and Europe included The longer workers remain idle

and the larger the pool of disenchanted laborers, the greater the odds of rising political

and social instability on both sides of the pond, and increased calls for various types ofprotectionism





the nancial crisis of 2008, creeping protectionism isnevertheless becoming a clear and present danger tothe global economy.

Finally, the global jobs shortage will continue to stokepolitical instability and social unrest not only in such

volatile places like the Middle East but also acrossEurope and the United States. Millions of dissatisedand idle workers are a combustible political-economic variable for policy makers on both sides ofthe Atlantic.

rbu rp?

Good but not great is probably the best way to describethe key macroeconomic trends of the transatlanticeconomy leading into 2012. Stepping back for amoment, the bottom fell out of the economy in 2009,with the U.S. nancial crisis-cum-global recession

precipitating deep declines in transatlantic trade,nance, investment, employment, prots and a bevyof other metrics.

2010 was a year of healing, and the year-over-yearcomparisons of many variables were quite robust.U.S. foreign afliate income, for instance, surged

to a record $199 billion in 2010. By the same token,European afliates in the U.S. experienced a 41%surge in income, with income rising to a near-recordof $104.7 billion. As earnings of afliates on both sidesof the pond improved in 2010, so did foreign directinvestment ows. U.S. outows to Europe rose nearly

8% in 2010, while European inows to the UnitedStates soared 88% off the depressed levels of 2009.All this was expected in 2010 and as we outlined inlast years Survey, all the key metrics pointed towardsfurther improvement in 2011.

And in many cases, this is what transpired. As anexample, U.S. foreign investment outows to Europesurged 30% in the rst nine months of 2011 from thesame period a year ago. Over this period, U.S. FDIows rose sharply to Germany (214%), the Netherlands(35%), Norway (23%), Poland (114%), and Ireland

(18%). In contrast, U.S. inows to France declined 2%,while ows to the United Kingdom, Italy and Swedendeclined 26%, 52%, and 134%, respectively.Meanwhile, disinvestment was evident among U.S.rms in problem countries like Hungary and Greece.U.S. rms disinvested $172 million from Greece and

tale 8: PFTS1 EACHNG PEA AGAN

1Income of afliatesSource: Bureau of Economic AnalysisData through 3Q2011. 2011 data is annualized for full year estimate.

240

220

200

180

160

140

120

100

80

60

40

20

0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

S Afliate Protsin Europe

European AfliateProts in the S

uS

$Billions

120

105

74

106

80

98

81

61

49

27

14

3937

2530

242216

8524

213

199

178

197

176

154

136

114

86

65

54

66

585148

4441

3127

2228

33




some $322 million from Hungary in the rst ninemonths of 2011.

U.S. afliate income earned in Europe also increasedin 2011, rising 8% in the rst nine months of the yearfrom the same level a year earlier. Gains were notablyrobust in France, where afliate income soared126% from a year ago. Afliate earnings in Germanywere up 10% in the same period, and climbed 6% inthe Netherlands, 10% in Spain, 16% in the UnitedKingdom, and 12% in Belgium. In terms of afliateincome/earnings, European afliates in the U.S.posted stronger year-over-year gains than theircounterparts in Europe. That is not surprising giventhe fact the U.S. economy grew at a faster pace than

most of Europe over the balance of 2011. In contrast tothe 8% rise in income in Europe among U.S. afliates,the income/earnings of European afliates in the U.S.soared 19% in the rst nine months of last year. Weestimate the earnings of European afliates in theU.S. totaled $120 billion in 2011, an all-time high.

A relatively strong U.S. economy helped boost the

earnings of European afliates last year; however,

the same dynamic did not do much to boost EuropeanFDI inows to the United States. To the contrary,

European inows declined 28% in the rst nine

months of 2011 from the same period a year earlier,

a decline that is more of a reection of troubled

times in Europe than of unfavorable dynamics in theUnited States.

Trends in transatlantic capital ows reect many ofthe variables just mentioned. Indeed, while Europeremains a key provider of capital to the UnitedStates, U.S. capital inows from the European Union(including the global money center, the UnitedKingdom) dropped sharply in 2011. In the rst elevenmonths of the year, EU15 purchases of U.S. securitiestotaled $105 billion, down 69% from the prior year. Incontrast, U.S. capital outows to the EU15 totaled $53

billion in the same period, net outows of $11 billion in2010. Excluding the United Kingdom, a global moneycenter where money from Russia, Africa and theMiddle East is funneled, the gures were not as good:EU purchases of U.S. securities were -$60 billionthere was net selling, in other words. U.S. purchases,meanwhile, totaled nearly $30 billion.

In terms of foreign holdings of U.S. Treasuries,China and Japan still rank number one and two,respectively; as of November 2011, China held $1.1

tale 9: THE PWE BES F THE GBA ECNY CPAED

euic ai Cii Ciic

GDP, PPP 408% 313% 191% 331%

GDP, Nominal 504% 260% 119% 324%

arket cap (as of 1/2/2012) $250 trillion $144 trillion $41 trillion $181 trillion

Personal consumption exp 544% 241% 81% 331%

+A Sales 599% 232% 34% 254%

+A Purchases 323% 382% 164% 341%

nward FD stock 578% 233% 41% 211%

utward FD stock 728% 173% 19% 252%

nows (2000-2010) 563% 228% 76% 217%

utows (2000-2010) 726% 168% 27% 204%

Exports* (Goods) 254% 321% 162% 257%

mports* (Goods) 320% 295% 108% 254%

ilitary Spending $1,0044 $2857 $1491 $8014

(S $ billions at constant 2009 prices) 644% 183% 96% 514%

Top 100 Global Brands87 brandsvalued at

$11 tr

10 brandsvalued at$1184 bil

None49 brands

(all American) at$7939 bil

* Total does not include Intra-EU27 + Norway, Switzerland, & Iceland tradeSources: IMF, Bloomberg, UN, SIPRI, InterbrandAll data for 2010 otherwise noted




trillion in Treasuries, while Japan held $1 trillion.The U.K. ranked third, with holdings of $429 billion atthe end of November 2011. Europes total holdings ofU.S. Treasuries, including the U.K., were in excess of$1 trillion -roughly 22% of the total. That comparesto Chinas share of 24%, Japans 22% and OPECs 5%.

In short, its not just the Asian creditors of China andJapan that are important sources of capital to theUnited States. So is Europe.

Finally, the services economies of the United Statesand Europe have never been as intertwined as theyare today, notably in such activities as nancialservices, telecommunications, utilities, insurance,advertising, computer services, and other relatedactivities. A healthy services sector is critical to botheconomies. While latest services data are less currentthan other indicators, it is important to note that ve

out of the top ten export markets for U.S. services arein Europe and that the U.S. enjoyed a $43.7 billiontrade surplus in private services with the EU in 2010,compared with its $80 billion trade decit in goodswith the EU. Moreover, foreign afliate sales ofservices, or the delivery of transatlantic services byU.S. and European foreign afliates, have explodedon both sides of the Atlantic over the past decadeand become the overwhelming mode of delivery,topping more than $1 trillion. The U.S. and EU areeach others most important commercial partnersand major growth markets when it comes to services

trade and investment. Moreover, deep transatlantic

connections in services industries, provided bymutual investment ows, are the foundation for theglobal competitiveness of U.S. and European servicescompanies.In sum, despite the turbulence of past years and an

uncertain economic outlook for 2012, the UnitedStates and Europe remain each others mostimportant foreign commercial markets, a fact stillnot fully appreciated by opinion leaders on either sideof the transatlantic, much less elsewhere around theworld. Put simply, no other commercial artery in theworld is as integrated and fused together as thetransatlantic economy.

We estimate that the transatlantic economy continuesto generate close to $5 trillion in total commercialsales a year and employs up to 15 million workers

in mutually onshored jobs on both sides of theAtlantic. These workers enjoy high wages and highlabor and environmental standards. In addition, wecontinue to espouse the view that the transatlanticeconomy remains at the forefront of globalizationmeaning that the commercial ties between the U.S.and Europe are deeper and thicker than betweenany other two continents. Recent economic troubleshave only underscored the deep integration of thetransatlantic economy and the importance of healthytransatlantic economic ties for millions of U.S. andEuropean workers, consumers and companies. This

is evident from this survey.



the ost-Crss

transatlantC eConomy:

The Eight Ties that Still Bind

CHAPTE 2CHAPTE 2

To appreciate the distinctive nature of the transatlanticeconomy, it is important to understand one centralfact: foreign investment binds the transatlanticeconomy together far more than trade. Whereas U.S.

and European commercial ties with economies inAsia and elsewhere are each driven largely by trade,commercial ties between the U.S. and Europe aredriven largely by investment.

This distinction is critical. The cross-bordermovement of traded goods and services is a shallowform of integration, and often associated with theearly phases or stages of bilateral commerce. Incontrast, a relationship that rests on the foundationof foreign investment is one in which both parties areextensively embedded and entrenched in each others

economies. Such a relationship is more job-creating,income-producing, and wealth-generating for bothparties than one based solely on trade. This deepintegration epitomizes the transatlantic economy,which is wound and bound together in so many ways.

Understanding that investment comes rst andtrade second in the transatlantic economy, and thatinvestment is a critical dynamic to drive and boosttrade, is central to appreciating the distinctive role theU.S.-EU commercial relationship continues to play inthe global economy, and how to craft policy initiatives

to create jobs and fuel growth.

This investment-trade symbiosis is reected in the factthat the global primacy of foreign afliate sales overtrade continues to expand dramatically. To this point,global foreign afliate sales (sales of afliates fromaround the world) totaled $5.1 trillion versus globalexports of $4.4 trillion in 1990, according to guresfrom the United Nations. In 2010, however, globalforeign afliate sales tallied a staggering $33 trillion, agure three-fourths larger than global exports ($18.7

trillion). The widening gap in part reects risingcross-border investment and commerce between theUnited States and Europe.

Against this backdrop, most American foreignafliates in Europe are indistinguishable from localGerman, French or Dutch rms, while Europeanafliates operating in the United States are barelydistinguishable to U.S. consumers who enjoyEuropean goods and services on a daily basis withoutmuch thought. When they can, U.S. rms and theirglobal counterparts in Europe, Japan and now evenChina prefer to deliver goods and services via foreigndirect investment (foreign afliates) rather than trade(exports).

We do not mean to downplay the importance oftransatlantic trade, which remains considerable.Indeed, transatlantic trade (dened here as U.S.exports plus imports of goods from the EuropeanUnion) totaled an estimated $632 billion in 2011,up from $387 billion at the start of the new century.Transatlantic trade is sizable and important to botheconomies. In addition, investment and trade inmany ways can be synergistic complements, ratherthan substitutes. But this only underscores the needto add investment to the trade picture if one wantsto get a true sense of the size and dynamism of the

transatlantic economy, particularly compared to anyother bilateral economic relationship either partnerhas in the world.

Companies invest abroad for various reasons. Theymay want to make a strategic investment, for instanceto introduce a new product or service. Build whereyou sell is a mantra of many successful multinationals,which requires an in-country/region presence in manydifferent parts of the world. They may seek resources,such as acquiring access to specialized knowledge or



particular technologies. They may want to win sharein new markets, or they may want to achieve greaterefciencies by gaining access to cheap factors ofproduction. While much media and political attentionfocuses on the resource- or efciency-seekingmotivations behind such investments, particularly

the need for cheap foreign labor, the reality is that theincreasingly critical need for companies to positionthemselves within pan-continental markets, and togenerate new sources of knowledge that they can turninto new sources of prot, drives a good deal of mutualinvestment across the Atlantic.

Moreover, these companies and afliates invest inlocal communities. European afliates in the UnitedStates employ millions of American workers andare the largest source of onshored jobs in America.Similarly, U.S. corporate afliates in Europe employ

millions of European workers and are the largestsource of onshored jobs in Britain, Ireland and acrossthe continent.

t tic ec i W

No commercial artery in the world is as large as theone binding the United States and Europe together.The transatlantic economy still accounts for over50% of world GDP in terms of value and 41% in termsof purchasing power, is the largest and wealthiestmarket in the world, and is at the forefront of drivingglobal foreign direct investment and global mergers

and acquisitions activity. Even following the nancialcrisis, U.S. and EU nancial markets continue toaccount for well over two-thirds of global bankingassets; account for more than three-fourths of globalinvestment banking revenue; three-quarters of globalnancial services; 77% of equity-linked derivatives,more than two-thirds of all private and public debtsecurities; almost 80% of all interest-rate derivatives;almost 75% of all new international debt securities;70% of all foreign exchange derivatives transactions,63% of the top R&D companies and 58% of all globalR&D, and 18 of the top 20 knowledge regions in the

world. 91.3% of global foreign exchange holdings areeither in dollars (61.7%), euros (25.7%) or sterling(3.9%).1

All told, by our estimate nearly $5 trillion in commercetakes place between U.S. and European companiesand their afliates each year.

Hence, when one half of the transatlantic partnershipsuffers or goes into recession, as the United Statesdid in 2009, the other half suffers as well. While

the U.S. economy contracted 3.5% that year, thedownturn was even steeper in Europe. Output in theEU contracted 4.2% in 2009, with steeper declinesreported in Germany (5.1%), and Ireland (7%). Then,the transatlantic economic recession was deep andpainful, with the collateral damage evident on both

sides of the pond.

Now the other half of the transatlantic economyis teetering on the edge of recession, with Europethis time playing the role of spoiler. As discussed inChapter 1, the economic downturn in Europe has yetto derail the U.S. economy, but Europes problems arequite evident via declining capital ows from Europeto the U.S., plummeting U.S. exports to Europe, andweaker-than-expected U.S. corporate earnings formany companies with extensive links to Europe.Should the eurozone crisis intensify this year and

growth/demand across the continent weaken further,the risks of a U.S. recession will only rise. The U.S.economy will not escape a recession should Europeseconomic crisis prove to be deeper and more prolongedthan expected.

A weakened transatlantic partner is the last thingthe U.S. needs right now given the soft nature of theU.S. economy. The U.S. economy is growing but hasyet to free itself fully from the economic turbulence ofrecent years. The U.S. housing market remains miredin one of the worse downturns in history. The federal

budget decit is expected to top $1 trillion again thisscal year and could ultimately lead to another creditdowngrade of the United States. State nances remaina challenge, with public sector austerity and layoffsa key drag on growth. A U.S. unemployment rate ofaround 8.5% as of this writing speaks to the sluggishnature of domestic job growth. U.S. rms have beenhiring but tentatively. The U.S. continues to be overlyreliant on spending and borrowing, rather than saving,investing and competing in the global marketplace.

U.S. economic challenges, in turn, have consequences

for Europe, given that the U.S. is one of the top countryexport destinations for EU goods and services, theEUs leading source and destination of both FDI andprivate portfolio investment, and a key innovationpartner for European economies seeking to maintaintheir competitive position in knowledge- basedactivities.

In other words, the transatlantic economy has someheavy lifting to do over the next twelve months andbeyond, problems even more acute owing to Europes


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THE PST-CSS TANSATANTC ECNY: THE EGHT TES THAT ST BND


sovereign debt crisis. Success or failure in one partof the relationship will affect the other since no two

regions of the global economy are as economicallyfused as the two parties straddling the Atlantic.

That said, it has long been our contention that one ofthe most dangerous decits affecting the transatlanticpartnership is not one of trade, values, or militarycapabilities but rather a decit in understandingamong opinion leaders of the vital stakes Americansand Europeans have developed in the success ofeach others respective economies. With so muchattention devoted to the rise of the Chinese economyand shifting trade ows in both the United States

and Europe, many on both sides of the Atlantic haveforgotten about the importance of investment andthe unappreciated, invisible and little understoodactivities of foreign afliates, which represent the realbackbone of the transatlantic economy.

This is illustrated in the accompanying chart, whichillustrates the weight of the transatlantic economyin the overall global economy. Taken together U.S.and European exports to the world accounted foronly 25.4% of global exports in 2010; combined U.S.

and European imports accounted for 32% of globalimports. But the U.S. and Europe together accounted

for 57.8% of the inward stock of foreign directinvestment (FDI), and a whopping 72.8% of outwardstock of FDI. Moreover, each partner has built up thegreat majority of that stock in the other economy. Inshort, mutual investment in the North Atlantic spaceis very large, dwarfs trade, and has become essentialto U.S. and European jobs and prosperity.

All in all, the transatlantic economy remains thedominant force in the global economy Rising powersare resetting the global economy, but they haventdone so yet. Such a transformation is neither complete

nor pre-ordained. And a different world economyis not necessarily a worse one for Americans andEuropeansif they use the coming decade to leverageglobal growth, human talent and innovation whiletackling related challenges of decits and debt, buildingon their own considerable strengths, and exploitingthe full potential of the transatlantic economy. Thatis a big if considering Europes inability to containand address its ongoing sovereign debt crisis andWashingtons ineptness in dealing with the nationsmost pressing issues in a bipartisan fashion.

tale 1: THE TANSATANTC ECNY S THE WD - SHAE F WD TTA

Sources: UN, IMF, gures for 20101 Based on PPP estimates,2 Excluding intra-EU, Norway, Switzerland and Iceland trade.

80%

70%

60%

50%

40%

30%

20%

10%

0%

408%

254%

320%

578%

728%

599%

323%

World GDP1 World Exports2 World mports2 World FDnward Stock

World FDutward Stock

World &ASales

World &APurchases


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THE PST-CSS TANSATANTC ECNY: THE EGHT TES THAT ST B

17THE TANSATANTC ECNY 2012 | E 1

Moreover, time is not standing still. Over the pastdecade, for instance, Asias share of investmentbanking revenues has risen from 13% to more than20%. The transatlantic share in global stock marketcapitalization has declined substantially from 78%to roughly 50% today, and its share in stock trading

has fallen from 86% to approximately 70%. BRICstock markets grew more than 40% per year in thepast decade, while EU and U.S. markets contracted.The BRIC share of listed companies worldwide hasjumped from just over 2% in 2000 to around 25%today. China had the worlds largest IPO market in2010 and 2011. The number of Chinese IPOs morethan tripled in 2010 from the previous year to 349, andthe IPO funds raised more than doubled to 488 billionyuan. In 2011, China had 282 new IPO listings worth286 billion yuan, a decline from the previous year thatunderscores the uncertain global economic climate.2

In addition, European and American nancial andeconomic credibility has been damaged considerablyby back to back nancial crises, rst in the United Statesand now Europe. It is little wonder many developingeconomies in Asia and Latin American have lost faithin free-market capitalism and now look disparagingupon U.S. and European economic management. AsChinese Deputy Premier Wang Qishan reportedlynoted, the teachers now have some problems. Asa result, the window is closing on the ability of theU.S. and Europe alone to set the rules and reap the

benets of an open global economy. Whereas muchof the past decade was about the deep integration ofthe transatlantic economy, during the coming decadeU.S. and European companies are likely to focus muchmore on positioning themselves for a global economywith multiple engines and sources of growth andinnovation.

t ti iQuiig

tic ec

Foreign afliates on both sides of the Atlantichave constructed a formidable commercial

infrastructure over the past half century. Remarkably,notwithstanding all the stress and strain on thetransatlantic partnership over the past decade, thisinfrastructure remains solid and dynamic. Even inthe face of the transatlantic recession of 2008/09,and the economic relapse of 2011, the transatlanticfoundation remains rm. Many measures ofeconomic performance declined sharply in 2009 dueto the transatlantic recession, rebounded in 2010and softened again in 2011, reecting the cyclicaldynamics of the transatlantic economy. Structurally,

the foundation of the transatlantic economy remainsrobust, but 2012at least in the rst half of

Transatlantic Economy 2012 Volume 1

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