Making American cents of the eurozone crisis
NEW YORK – The current eurozone crisis does not stop at the old continent’s edge. Corporations on these shores are paying close attention to what happens in Greece, Ireland, and the rest of the struggling European economies. And if they aren’t paying attention, they should be. Contrary to prevailing wisdom, Europe remains hugely important to the bottom line of Corporate America since the global footprint of U.S. multinationals is largest across the Atlantic. Notwithstanding all the chatter about the rise of China, for many U.S. firms, as Europe goes, so goes their global earning. U.S. affiliates in Europe rank among the largest economic forces in the world.
The total output of U.S. foreign affiliates in Europe, estimated at $640 billion last year, is greater than the total gross domestic output of most nations. On a global basis, the aggregate output of U.S. affiliates is in excess of $1.2 trillion, with Europe accounting for just over half of the total. With such an integrated transatlantic economy, the stakes for American firms are massive. When you dig into the national level in Europe, it becomes even more interesting. The gross output of American affiliates in Ireland, for example, is roughly one-fifth of the nation's total output, which is another way of saying that as the battered Celtic Tiger struggles to get its financial house in order, numerous U.S. firms (think technology, pharmaceuticals) should be nervous. Corporate America's predominant presence in Ireland is emblematic of a broader trend – of aggregate foreign assets of Corporate America (roughly $11.5 trillion today), the bulk of these assets – roughly 60% -- are located in Europe. Why Europe? Because for decades and through various economic cycles, Europe has remained a massive, wealthy, and stable market for U.S. foreign affiliates selling goods and services ranging from automobiles to chemicals to data processing services.
Reflecting just how important Europe is to Corporate America, sales of U.S. affiliates in Europe were more than double comparable sales in the entire Asia/Pacific region in 2008, the last year of available data. While U.S. affiliate sales in China have soared over the past decade, U.S. affiliate sales of $131 billion in China in 2008 were slightly above sales to Italy ($129 billion) but well below those in Germany ($347 billion), France ($232 billion) and Ireland ($250 billon). Europe is not only a critical market for Corporate America but also a key source of skilled labor. The common perception is that when it comes to hiring workers overseas, the bulk of Corporate America's overseas workforce toils in developing nations. Reality is different. Most foreign workers on the payrolls of U.S. foreign affiliates are employed in industrialized nations, notably Europe. Out of a global overseas workforce of 10 million in 2008 (only including majority-owned foreign affiliates), roughly 42% were located in Europe. Of particular interest, U.S. affiliates employed just as many manufacturing workers in Europe (1.9 million) in 2008 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 changed.
In general, the shift has been toward lower-cost locations like Ireland and Spain, at the expense of the United Kingdom and Germany, which means that problems in Ireland and Spain will directly affect the workforce of American firms. That said, the manufacturing workforce of U.S. affiliates in Germany alone totaled 387,100 workers in 2008, not far from the number of manufacturing workers employed in China by U.S. affiliates (409,900). The bulk of this workforce toils in high-end manufacturing and service activities, and serves as a compliment rather than substitute to U.S. workers. As part of this dynamic, more U.S. firms are building out their research and development platforms in Europe, with U.S. affiliates sinking $24 billion into R&D in Europe in 2008. The figure equates to roughly two-thirds of the global total. Expenditures were the largest in the United Kingdom, Germany, France, Sweden, and Ireland.
Not unexpectedly, rising value-added activities among U.S. foreign affiliates in Europe have maintained the region's leading role in driving U.S. global earnings. And speaking of earnings, despite the rise of China and the ferocious appetite for Western goods in Delhi, Dubai, and Dar es Salaam, the simple truth is that Europe remains the most profitable region of the world for U.S. multinationals. Europe has accounted for more than half of total global affiliate earnings over the past few decades. Looking a ways ahead, it would hardly be surprising for U.S. affiliate earnings in India, China, and Brazil to outpace growth in Germany, Italy, and France. But in the foreseeable future, Europe will remain the bedrock and the primary source of U.S. global earnings. Just ask a number of U.S. technology leaders, who recently surprised the financial markets by announcing that global earnings may be weaker next year on account of softer sales and earnings from Europe. The news was a stark reminder that as Europe struggles to come to grips with its sovereign debt burdens, the stakes for many U.S. firms are substantial. The transatlantic economy is the most intertwined and integrated economic bloc in the world – a fact largely unappreciated and little recognized by many in the United States.
Joseph Quinlan is a Bosch Fellow at the Transatlantic Academy.
The views expressed in GMF publications and commentary are the views of the author alone.