Europe Still Matters
Many investors and policy makers have dismissed Europe as a spent and aging power, a region hardly relevant to the world economy. A decade of tepid economic growth seems to support that claim, especially juxtaposed against robust performance from Brazil, Russia, India and China - the BRIC nations - in particular and the emerging markets in general. As defined by the 27 member states of the European Union, Europe seems easy to ignore, at least at first.
The Continent's slow and uncoordinated response to the global financial meltdown has not done much to bolster the region's image. Neither has the fact that Europe has emerged as the laggard of the global economy. Based on the latest estimates from the Organisation for Economic Co-operation and Development (OECD), the Eurozone economy is expected to contract by nearly 5% this year, a much deeper decline than in the United States (-2.8%) and light years behind China, where 2009 growth forecasts have been revised up to +7.7%.
In 2010, Eurozone economic growth is projected to be flat, while the OECD expects the U.S. economy to expand by 1% and China to grow by more than 9%. Against this backdrop, no one really expects much from Europe, so when the region disappoints, it's hardly an earth-shattering event for the financial markets.
That said, Europe does matter. We are talking about one of the most important economic entities in the world, a key source of demand for the United States and numerous emerging markets. Bringing the Doha trading round back to life, forging an agreement on global climate change and fostering peace in the Middle East and other troubled spots - these challenges mandate Europe's participation and leadership.
More immediately, as the global economy struggles to right itself in the months ahead, Europe's role and contribution (or lack thereof) will be crucial. For more perspective on this topic, consider the following metrics:
The largest economy in the world - A full-fledged global economic rebound requires Europe's presence. The European Union is the largest economy in the world, accounting for roughly 30% of world GDP in 2008 (based in U.S. dollars). On a purchasing power parity (PPP) basis, the EU's global share is around 22%, but no matter how you slice it, the EU represents a sizable share of the global economy. The strength and durability of a global economic recovery will hinge, to a significant degree, on the EU's ability to kick-start its own economy.
A huge source of global demand - Europe's economy is not only large, it's wealthy. Income levels vary across the region, but an average per capita GDP of $33,400 (PPP) makes this region one of the wealthiest in the world. The personal consumption expenditures of its close to 500 million people reached nearly $11 trillion in 2008; that represents roughly 30% of the global total. Thanks to this underlining wealth, the EU is the world's largest importer, accounting for roughly 37% of global imports in 2008. The United States accounted for less than 15% of global imports last year, the BRICs, less than 12%. A key takeaway - a revival in global trade requires a revival in European demand, a prospect that does not look likely until 2010.
A key source of foreign direct investment - Europe remains a principal recipient and provider of foreign direct investment (FDI). According to the United Nations, European nations accounted for roughly two-thirds of global FDI outflows and nearly 50% of global FDI inflows between 2000 and 2007. U.S. firms have been significant beneficiaries of this dynamic.
Despite all the chatter of U.S. investment decamping for cheaper locales in Asia and elsewhere, the EU remains the primary destination of U.S. foreign investment, and by a wide margin. On a historic cost basis, America's investment stake in Europe topped $1.5 trillion in 2007 (the last year of available data). That figure represented 54% of total U.S. investment overseas, which underscores the massive stakes Corporate America has in Europe. U.S. FDI in the BRICs in 2007 - $70 billion cumulative - equaled less than 5% of total U.S. investment in the EU. Meanwhile, Corporate Europe's stakes in the United States are massive, with the EU accounting for more than 70% of total FDI in the United States. No other region of the world has invested as much in the United States as Europe.
An important source of U.S. global earnings - Europe matters most when it comes to U.S. global earnings. The EU that generates more foreign earnings for Corporate America than any other region; Europe has accounted for more than half of total U.S. foreign affiliate income, a proxy of global earnings, this decade. Not unexpectedly, U.S. global earnings have plunged along during the past year's steep decline in EU economic activity. Against this backdrop, Europe is critical to a rebound in U.S. global earnings.
The bottom line
There are enough metrics that underscore the importance of Europe to fill a dozen columns, but the conclusion remains the same: Yes, it's easy to dismiss Europe as a fossil. Europe's earned the right to be called the world's economic laggard, but that doesn't mean United States should ignore or write off the region.
The views of this artcile reflect the author's, not the German Marshall Fund
The views expressed in GMF publications and commentary are the views of the author alone.