America watching eurozone crisis with baited breath
by Joe Quinlan
12 December 2011
What are the ramifications of European recession for the US government and corporate America – asks Joe Quinlan
They came, they meet, and they bargained in Brussels, and after yet another European summit - member states agreed to be more like Germany—more conservative and disciplined about spending, deficits, and debt. Yet the euro endgame remains far from clear. Agreeing to fiscal discipline is one thing, but implementing such provisions will be quite another in nations already in the grips of grinding austerity that has crushed workers incomes, lengthened jobless lines and squeezed real growth. The financial markets, meanwhile, remain nervous about the future of the Eurozone; unsure and unconvinced that Europe has finally got it right and that the pact hammered out last week will end the region's sovereign debt crisis.
Scepticism is warranted because European leaders have failed to address the region's most pressing problem: the lack of real economic growth. In the short-term, enforced austerity will only make Europe's unfolding recession deeper and more painful, and exacerbate the sovereign crisis in Greece, Italy, Ireland, and other debt-laden countries. This backdrop suggests more market volatility, rising social instability and incessant political haggling among eurozone members - all of which will make for a trying 2012 for two American constituents desperate to see Europe get its act together -- the White House and corporate America. The Obama administration fears that a prolonged recession in Europe will ultimately lap up to American shores and tip the United States economy into recession, during an election year. The odds of this happening are slim - given decent underlying consumption levels in the US, rising capital expenditures and robust exports to the emerging markets. The White House, in other words, has other things working in its favour that could negate - at least, in the near-term - the effects of a European recession on the broader US economy.
The outlook for corporate American is a little dicier. Why? Because over the last 50 years, no other region of the world has attracted as much US foreign direct investment as Europe, with the latter accounting for 56 per cent of total American global FDI stock in 2010. America's global footprint is largest among the wheezing economies of Europe versus the spry and vigorous economies of Asia, South America, and Africa. To this point, America's investment stock in Ireland - $190bn on an historic cost basis - is more than three times larger than the comparable figure for China. In other words, notwithstanding the fact that the entire population of Ireland - some 4.5 million people - would not even rank as a large city in China, the one-time Celtic Tiger is more important to American firms than the 1.2 billion folks that reside in the Middle Kingdom. Meanwhile, US investment in Spain is double the American investment position in India; ditto for Sweden and South Korea, where investment in the former - $58bn in 2010 - is nearly double the stake in the latter, some $30bn.
All of the above runs counter to the common narrative that it is cheap labour and loose regulations that entice American firms to decamp the United States. Not really. Cheap labour is nice - but it is large, wealthy, and well-integrated foreign markets that make US multinationals salivate. And as Europe recovered from the trauma of the Second World War - becoming larger, wealthier and more economically integrated; the more US firms sent and sank capital across the pond. During the 1950s, Europe attracted only one-fifth of total Amercian FDI outflows; then, American firms were motivated by natural resources not markets, making Canada and Latin America the primary destination of US FDI. The emphasis of American multinationals, however, shifted in the 1960s. The hunt was on for new consumers and the wealthier the better - a strategic objective that triggered the US corporate migration to Europe. Of cumulative US investment outflows over the 1960s, roughly 40 per cent went to Europe. Thereafter, the share of capital flowing to Europe steadily climbed with Europe easily accounting for over half of total US investment in each of the last four decades. And so what is good for Europe is good for corporate America. By the same token, when things go bad in Europe then US multinationals are hardly immune.
The question now is whether Europe's ongoing financial crisis and its aftershocks will prove to be a tipping point for corporate America. A prolonged recession in Europe, juxtaposed against political instability and dwindling transatlantic policy coordination between the European Union and the United States could trigger a fundamental rethink among American companies as to Europe's place in the their global networks. The upshot - a structural shift in US foreign investment with less flow to Europe and more capital destined for the high-growth regions of Asia and South America. Such a trend would undermine the vitality of the transatlantic economy, producing losers on both sides of the Atlantic. Time is short. So far, transatlantic policymakers have squandered the opportunity to use the financial crises of 2008 and 2011 - to craft policies that promote greater transatlantic integration. It is not too late, however, for American and European leaders to redefine and reinvigorate bilateral commercial ties. Doing so, in fact, would help boost economic prosperity on both sides of the Atlantic.
Joe Quinlan is a fellow with the German Marshall Fund think-tank, which originally published this paper as part of its Transatlantic Take series
They came, they meet, and they bargained in Brussels, and after yet another European summit - member states agreed to be more like Germany—more conservative and disciplined about spending, deficits, and debt. Yet the euro endgame remains far from clear. Agreeing to fiscal discipline is one thing, but implementing such provisions will be quite another in nations already in the grips of grinding austerity that has crushed workers incomes, lengthened jobless lines and squeezed real growth. The financial markets, meanwhile, remain nervous about the future of the Eurozone; unsure and unconvinced that Europe has finally got it right and that the pact hammered out last week will end the region's sovereign debt crisis.
Scepticism is warranted because European leaders have failed to address the region's most pressing problem: the lack of real economic growth. In the short-term, enforced austerity will only make Europe's unfolding recession deeper and more painful, and exacerbate the sovereign crisis in Greece, Italy, Ireland, and other debt-laden countries. This backdrop suggests more market volatility, rising social instability and incessant political haggling among eurozone members - all of which will make for a trying 2012 for two American constituents desperate to see Europe get its act together -- the White House and corporate America. The Obama administration fears that a prolonged recession in Europe will ultimately lap up to American shores and tip the United States economy into recession, during an election year. The odds of this happening are slim - given decent underlying consumption levels in the US, rising capital expenditures and robust exports to the emerging markets. The White House, in other words, has other things working in its favour that could negate - at least, in the near-term - the effects of a European recession on the broader US economy.
The outlook for corporate American is a little dicier. Why? Because over the last 50 years, no other region of the world has attracted as much US foreign direct investment as Europe, with the latter accounting for 56 per cent of total American global FDI stock in 2010. America's global footprint is largest among the wheezing economies of Europe versus the spry and vigorous economies of Asia, South America, and Africa. To this point, America's investment stock in Ireland - $190bn on an historic cost basis - is more than three times larger than the comparable figure for China. In other words, notwithstanding the fact that the entire population of Ireland - some 4.5 million people - would not even rank as a large city in China, the one-time Celtic Tiger is more important to American firms than the 1.2 billion folks that reside in the Middle Kingdom. Meanwhile, US investment in Spain is double the American investment position in India; ditto for Sweden and South Korea, where investment in the former - $58bn in 2010 - is nearly double the stake in the latter, some $30bn.
All of the above runs counter to the common narrative that it is cheap labour and loose regulations that entice American firms to decamp the United States. Not really. Cheap labour is nice - but it is large, wealthy, and well-integrated foreign markets that make US multinationals salivate. And as Europe recovered from the trauma of the Second World War - becoming larger, wealthier and more economically integrated; the more US firms sent and sank capital across the pond. During the 1950s, Europe attracted only one-fifth of total Amercian FDI outflows; then, American firms were motivated by natural resources not markets, making Canada and Latin America the primary destination of US FDI. The emphasis of American multinationals, however, shifted in the 1960s. The hunt was on for new consumers and the wealthier the better - a strategic objective that triggered the US corporate migration to Europe. Of cumulative US investment outflows over the 1960s, roughly 40 per cent went to Europe. Thereafter, the share of capital flowing to Europe steadily climbed with Europe easily accounting for over half of total US investment in each of the last four decades. And so what is good for Europe is good for corporate America. By the same token, when things go bad in Europe then US multinationals are hardly immune.
The question now is whether Europe's ongoing financial crisis and its aftershocks will prove to be a tipping point for corporate America. A prolonged recession in Europe, juxtaposed against political instability and dwindling transatlantic policy coordination between the European Union and the United States could trigger a fundamental rethink among American companies as to Europe's place in the their global networks. The upshot - a structural shift in US foreign investment with less flow to Europe and more capital destined for the high-growth regions of Asia and South America. Such a trend would undermine the vitality of the transatlantic economy, producing losers on both sides of the Atlantic. Time is short. So far, transatlantic policymakers have squandered the opportunity to use the financial crises of 2008 and 2011 - to craft policies that promote greater transatlantic integration. It is not too late, however, for American and European leaders to redefine and reinvigorate bilateral commercial ties. Doing so, in fact, would help boost economic prosperity on both sides of the Atlantic.
Joe Quinlan is a fellow with the German Marshall Fund think-tank, which originally published this paper as part of its Transatlantic Take series
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