Corporate Amercia's Stakes in Europe
It is depressing and disheartening watching the Greek euro-crisis play out - depressing because Europe, yet again, is punching below its weight and disheartening since the euro crisis threatens to tear at the cohesion of the European Union.
I f only the problems in Greece where contained to Greece. They are not, of course. The risks associated with the (in)solvency of Greece has rattled other heavily indebted euro zone members like Portugal and Spain, and cast a dark cloud over French and German banks, creditors with extensive debt exposure to Greece. Juxtaposed against the ongoing financial stress in Greece, real growth in the Euro zone slowed to a crawl in the final quarter of last year, with real GDP rising just 0.1%, a weaker than expected figure. I don't expect a turnaround in growth anytime soon - not with tax increases and spending cuts on the way in a host of European nations. The only bright spot are exports, with a weaker euro, the only silver lining to this crisis, expected to boost the exports of Europe's largest exporters - think Germany, France, and the Netherlands.
Even with a bump from exports, Europe is likely to remain the "sick man" of the world economy in 2010. That is hardly a propitious prospect for corporate America since the global footprint of U.S. multinationals is largest in Europe. Corporate America's global presence is overwhelmingly biased toward Europe; below we outline various metrics that outline the depth and integration of the U.S. and Europe.
Quantifying the Transatlantic Economy
The following metrics underscore the depth and integration of the transatlantic economy.
1. Gross Product of Foreign Affiliates
In their own right, US affiliates in Europe and European affiliates in the United States are among the largest economic forces in the world. For instance, the total output of U.S. foreign affiliates in Europe ($611 billion in 2007) and of European affiliates in the U.S. ($412 billion) is greater than the total gross domestic output of most nations. On a global basis, aggregate output of U.S. affiliates reached nearly $1.12 trillion in 2007, with Europe accounting for roughly 55% of the total. The latter figure was roughly unchanged from the prior year. The United Kingdom, where U.S. investment ties are deepest, accounted for just over 28% of total affiliate output in Europe, followed by Germany (14%) and France (9%). These three nations accounted for more than half of total U.S. affiliate output in Europe in 2007. By sector, output was almost evenly split between services and manufacturing output.
The presence of U.S. affiliates in some European nations is particularly noteworthy. The gross output of American affiliates in Ireland, for instance, represented 21% of Ireland's total output in 2007, roughly unchanged from the prior year. This dynamic reflects, in part, the large U.S. investment base, notably among U.S. technology companies, in the "Celtic Tiger." Elsewhere, U.S. affiliates accounted for 6.2% of the United Kingdom's aggregate output in 2007, 6.7% of Switzerland's, and 5.2% of Belgium's total output. Regarding the latter, it is interesting to note that U.S. foreign affiliate output in Belgium in 2007 ($23.7 billion) was some 6% larger than U.S. foreign affiliate output in China in 2007 ($22.4 billion) and more than four times as large as affiliate output in India ($7.32 billion).
2. Assets of Foreign Affiliates
America's global commercial presence has never been larger, with aggregate foreign assets of corporate America totaling over $13 trillion in 2007. That represents a rise of 17% from the prior year. The bulk of these assets - roughly 63%--were located in Europe, with the largest share, by far, in the United Kingdom. U.S. assets in the latter totaled $3.5 trillion in 2007, roughly one-quarter of the global total, and an amount greater than total combined U.S. assets in Asia, South America, Africa and the Middle East.
U.S. assets in the Netherlands ($1.3 trillion) were the second largest in the world in 2007 (after the United Kingdom). America's sizable asset base in the Netherlands reflects the host nation's strategic role as an export platform/distribution hub for U.S. firms doing business in the rest of the European Union. To this point, more than half of affiliate sales in the Netherlands are for export, namely within the EU. Meanwhile, America's asset base in Germany ($613 billion) was nearly double the base of South America in 2007. The collective asset base in Poland, Hungary, and the Czech Republic (roughly $65 billion) was twice the size of corporate America's assets in India.
3. Affiliate Employment
The common perspective is that when it comes to hiring workers overseas, the bulk of corporate America's overseas work forces toils in the developing nations. Reality is different. Most foreign workers on the payrolls of U.S. foreign affiliates are employed in the industrialized nations, notably Europe.
Out of a global overseas workforce of 10 million in 2007 (only including majority-owned foreign affiliates), roughly 42% were located in Europe. The bulk of these workers were based in the United Kingdom, Germany and France. The European workforce of U.S. majority-owned foreign affiliates was almost evenly split between manufacturing and service workers. That said, it is interesting to note that U.S. affiliates employed just as many manufacturing workers in Europe (1.9 million) in 2007 as they did in 1990. However, while the aggregate number has stayed the same, the geographic distribution of U.S. manufacturing employment in Europe has shifted over the past fifty years. In general, the shift has been toward lower cost locations like Ireland and Spain, at the expense of the United Kingdom and Germany. Between 1990 and 2007, for instance, U.S. affiliate manufacturing employment in the United Kingdom and Germany fell by roughly 32% and 18%, respectively. Meanwhile, manufacturing employment in Ireland soared over 30% over the same period, while rising by over 20% in Spain. However, even with the decline of manufacturing employment in Germany, the manufacturing workforce of U.S. affiliates in Germany alone totaled 372,000 workers in 2007, not far from the number of manufactured workers employed in China by U.S. affiliates (402,800).
4. Research and Development (R&D) of Foreign Affiliates
While most multinationals still tend to cluster their R&D expenditures and activities in their home country, foreign affiliate R&D has become more prominent over the past decade as firms seek to share development costs, spread risks and tap into the intellectual talent of other nations. Alliances, cross-licensing of intellectual property, mergers and acquisitions and other forms of cooperation have become more prevalent characteristics of the transatlantic economy in the past decade. The internet, in particular, has powered greater transatlantic R&D.
Research and development among U.S. foreign affiliates totaled $35 billion in 2007. The bulk of such activity was carried out in the developed nations, where the largest pool of skilled labor resides. In 2007, U.S. affiliates sunk $23 billion on research and development in Europe, or nearly 66% of total R&D expenditures. The United Kingdom, Germany, France, and Switzerland represented markets where R&D expenditures by U.S. affiliates were greatest. These four nations accounted for roughly 45% of U.S. global spending on R&D in 2007.
5. Foreign Affiliate Sales
U.S. foreign affiliate sales (goods and services) were nearly $5 trillion in 2007, well in excess of U.S. exports of $1.6 trillion. Europe accounted for half of total global foreign affiliate sales, with sales topping $2.8 trillion in 2007, up 15% from the prior year. Reflecting just how important Europe is to corporate America, sale of U.S. affiliates in Europe were roughly double comparable sales in the entire Asia/Pacific region. Affiliate sales in the United Kingdom ($672 billion) exceeded aggregate sales in Latin America. While U.S. affiliate sales in China have soared over the past decade, they do so from a low base, and still remain well below comparable sales in Europe. For instance, U.S. affiliate sales of $146 billion in China in 2007 were slightly below sales to Italy ($155 billion) and well below those in Germany ($357 billion) or France ($228 billion).
6. Foreign Affiliate Profits
The transatlantic profits boom continued in 2007 although the tide turned in the second half of the year and into 2008. Looking just at 2008, U.S. affiliates in Europe earned a $173 billion, down slightly from 2007 but more than three times the level of the cyclical lows of 2001, when slow growth on both sides of the Atlantic resulted in a transatlantic profits downturn. In the first half of 2008, U.S. affiliate income from Europe rose 9% from the same period a year ago but then the bottom fell out -- affiliate income plunged along with the economic downturn that swept Europe in late 2008. On a global basis, Europe remains the most profitable region of the world for U.S. multinationals, with Europe accounting for over half of total global affiliate earnings in 2007 and 2008.
Just how important Europe is to the global earnings of U.S. multinationals is reflected by the following: in 2008, U.S. affiliate income from Europe was more than double the total earnings from Latin America and Asia. Up until late 2007, U.S. affiliates have enjoyed the best of both worlds in Europe - a weaker currency and stronger final demand, although both variables have turned against U.S. affiliates. The affiliate earnings environment, on both sides of the Atlantic, will be very challenging in 2009.
The bottom line: as the debt crisis plays out in Greece, the stakes for both Europe and the United States are huge.
The views expressed in GMF publications and commentary are the views of the author alone.