A Tipping Point for Corporate America?
NEW YORK -- They came, they met, 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. Skepticism is warranted because European leaders have failed to address the region’s most pressing problem: the lack of real economic growth. In the near-term, enforced austerity will only make Europe’s unfolding recession deeper and more painful, and exacerbate the sovereign debt 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 U.S. economy into recession during an election year. The odds of this happening are slim given decent underlying consumption levels in the United States, rising capital expenditures, and robust U.S. exports to the emerging markets. The White House, in other words, has other things working in its favor that could negate, at least in the near-term, the effects of a European recession on the broader U.S. economy. The outlook for corporate American is a little dicier. Why? Because over the past 50 years, no other region of the world has attracted as much U.S. foreign direct investment (FDI) than Europe, with the latter accounting for 56% of total U.S. 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--$190 billion 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 U.S. firms than the 1.2 billion folks that reside in the Middle Kingdom. Meanwhile, U.S. investment in Spain is double the U.S. investment position in India; ditto for Sweden and South Korea, where U.S. investment in the former ($58 billion in 2010) is nearly double the stake in the latter ($30 billion). All of the above runs counter to the common narrative that it’s cheap labor and loose regulations that entice U.S. firms to decamp the United States. Not really. Cheap labor is nice but it’s large, wealthy, and well-integrated foreign markets that make U.S. multinationals salivate. And as Europe recovered from the trauma of WWII, becoming larger, wealthier, and more economically integrated, the more U.S. firms sent and sank capital across the pond. Over the 1950s, Europe attracted only one-fifth of total U.S. FDI outflows; then, American firms were motivated by natural resources not markets, making Canada and Latin America the primary destination of U.S. FDI. The emphasis of U.S. multinationals, however, shifted in the 1960s. The hunt was on for new consumers, and the wealthier, the better for U.S. firms, a strategic objective that triggered the U.S. corporate migration to Europe. Of cumulative U.S. investment outflows over the 1960s, roughly 40% went to Europe. Thereafter, the share of capital flowing to Europe steadily climbed, with Europe easily accounting for over half of total U.S. investment in each of the last four decades. Hence what’s good for Europe is good for corporate America. By the same token, when things go bad in Europe, U.S. 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 in Europe and dwindling transatlantic policy coordination between the EU and the United States, could trigger a fundamental rethink among U.S. companies as to Europe’s place in the their global networks. The upshot—a structural shift in U.S. 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. Thus 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 U.S. and European leaders to re-define and re-invigorate bilateral commercial ties. Doing so, in fact, would help boost economic prosperity on both sides of the Atlantic.
Joe Quinlan is a Transatlantic Fellow with the German Marshall Fund’s Economic Policy Program.
The views expressed in GMF publications and commentary are the views of the author alone.