international analysis and commentary

America’s views of Europe’s economic outlook

96

After a few years during which the euro crisis had all but disappeared from the headlines, and American policymakers and investors paid less attention to economic developments across the pond, Washington and New York have once again started to take a closer look. Certainly, stagnation in Europe, at a time when the American economy is improving, as well as the implications of ongoing tensions with Russia have been noted all along. However, it was only in recent months, and especially since snap elections were called in Greece and further action by the European Central Bank was discussed, that the euro area moved back into the spotlight of the political discourse in the US.

Paying closer attention to developments in Europe makes sense for US investors, companies, and government officials. Despite the grim economic picture in the Old World and much talk of pivots to other parts of the globe, Europe has long been – and remains – the most important economic partner and top destination for US foreign investments. According to the annual Transatlantic Economy study, Europe has attracted 56% of total global US investment since the beginning of this century. In 2012, roughly 60% of Corporate America’s total foreign assets were in Europe. Europe also accounted for 48% of the aggregate global output of US affiliates in the same year. And there are strong signs that US investments will continue to play a major role in Europe going forward. For example, several reports have indicated that US venture capital investors have steadily increased their share of early-stage startup funding in Europe, accounting for as much as 10% of such funding in 2013.

Given the importance of Europe for American investors (and policymakers), it is not surprising that the specter of a Greek exit from the Eurozone following the country’s elections has once again put the focus squarely on Athens. Yet while panicked scenarios over the fallout of a potential “Grexit” endlessly circulated in New York and Washington at the height of the euro crisis, US analysts today appear less alarmed about the election results in Greece. On one hand, this reflects the view that the new Greek government has limited options  in dealing with the International Monetary Fund and the European Commission. On the other hand, immediate contagion risks emanating from Greece are also seen as less profound than they were just a few years ago.

Still, overall the American debate on the state of Europe’s economy is dominated by concern. In particular, stagnation in large member states such as Italy and France is followed closely. Similarly, and despite a largely successful stress test and asset quality review by the European Central Bank, the European banking system continues to be viewed with some suspicion. Additionally, falling consumer prices and the prospect of potential deflation in the Eurozone are contributing to a skeptical and cautious outlook. Against this backdrop, the announcement of long-expected quantitative easing measures by the European Central Bank has been welcomed in the US, but at the same time is not seen as sufficient, on its own, to restore economic growth in the Eurozone.

From an American point of view, the question of how to get the European economy going again remains crucial. Unfortunately, in the context of the debate between austerity and growth that has been taking place ever since the crisis first began, European leaders have yet to find an answer that is truly satisfactory for Americans.

Nonetheless, what European officials, and especially the ECB, have accomplished over the past few years is to restore some confidence, in the eyes of American investors and policymakers, in the permanence of the Eurozone. The commitment to ultimately “do whatever it takes” in order to keep the currency union together, backed by the actions of the ECB and continuous assurances by key political leaders, have helped to alleviate imminent fears over a break up. However, the overall view in the US remains hesitant, as economic growth trajectories for the US and Europe seem to be diverging. As they have for much of the crisis (and, in some cases since the creation of the euro), many American observers will continue to point to what they perceive as systemic flaws in the setup of the monetary union. Unless these are fixed, or until growth convincingly returns to the Eurozone, a sliver of doubt over Europe’s economic prospects will continue to underlie the view across the Atlantic.