Sound unconventional? Consider the facts. Along with the United States, Europe still indisputably dominates as the most powerful twin turbine of the global economy. Transatlantic commerce accounts for close to 60 percent of the world’s trade and investment, worth $2.5 trillion in GDP annually and employing some 12 million workers. U.S. investment in the tiny Netherlands is twice that in Mexico and 10 times as much as in China. That’s not news, of course. The surprise is how much U.S. investors think it’s set to grow.
While Asia may enjoy the hottest buzz, major corporations like General Electric believe that an expanded Europe offers greater potential for short- and medium-term profits. And they are adjusting investment strategies accordingly. Microsoft and Intel, among others, recently announced that fully half their global revenues will come from Europe this year. That figure could be even higher next year, notwithstanding the beneficial effects of the past year’s sharp fall in the dollar. “The European Union is now the largest pool of purchasing power in the world, even more important than China,” says Ferdinando Beccalli, General Electric’s president and chief executive for Europe. “That’s why we are there in such a big way.”
Part of the shift is the fault of China, where gaudy FDI numbers belie the more sobering fact that few corporations are making much money on their investments. Fears that the country’s economy is overheating–or worse, approaching what some execs call the “bubble point”–inspires further caution. But what’s really drawing U.S. investment to Europe is the desire to get in early on an expected boom. Initially the 10 new members will add only about 5 percent to the EU’s combined GDP. But history seems to justify high optimism. Every major European enlargement has been accompanied by three to five years of rapid growth–if not generally, then at least regionally.
Predictably, much excitement centers on the former communist countries of Eastern Europe, where cheap labor has attracted many European as well as American companies. Bratislava, the capital of Slovakia, where the corporate tax rate has been slashed to just 19 percent, has drawn so many new automakers that it’s already being called “the Detroit of Europe.”
Even though the incomes of the 74 million Easterners are only one third of those of their richer cousins in the West, they are determined to acquire all the same emblems of prosperity–fast cars, stylish furniture, chic clothes and vacation homes. Add to this the fact that virtually all the former communist states have undergone rigorous tax and labor reforms–luring jobs and capital away from higher-cost social-welfare states like France and Germany–and the stage is set for consumer-driven growth not seen in Europe since the go-go years of West Germany’s postwar economic miracle.
This calculation shows up in the most recent foreign-investment numbers. Already corporate America’s stake in Eastern Europe is running about 60 percent greater than its investment in China–$16.6 billion in 2003, versus $10.3 billion. American exports to those countries are relatively small–about $7 billion, or roughly what the United States sells to Switzerland each year. But what really encourages American companies to invest in the East is the chance to use those countries as export platforms for unfettered access to the rest of the newly expanded EU market.
American companies aren’t neglecting the western half of the Continent, either. U.S. foreign direct investment in so-called Old Europe rose to $87 billion in 2003–a 30 percent jump over the previous year, according to the U.S. Commerce Department–while income generated by European affiliates soared to a record $77 billion. Rather than repatriate this income and get whacked on taxes, many U.S. firms are plowing their profits back into the EU.
Notwithstanding Washington’s anger over French and German policy on Iraq, U.S. companies have not let politics stand in the way of business. GE, Office Depot and the Carlyle Group led the way in acquiring huge stakes in both markets–nearly $7 billion in Germany, after falling by $5 billion in 2002, and a decade-high $2.4 billion in France. The bottom line, says Joseph P. Quinlan, global-market strategist for Bank of America, is that Europe “is just as important, if not more so, to corporate America as China.” It’s hard to imagine a stronger endorsement of Europe’s future.
