The financial crisis that began in 2008 didn’t only impact the economy in the U.S., it caused serious problems for economies throughout the world. Europe was hit particularly hard and is still struggling to recover. With eurozone unemployment at a record high and the area divided about how to resolve its banking crisis, companies and households are reluctant to spend even as governments cut costs to bring down their budget deficits. However, the worst of the crisis may be over. Business and consumer confidence is rising across the Continent, sovereign bond yields are falling and the migration of capital away from its weakest economies is easing. Talk of an imminent breakup of the currency union has all but disappeared. In fact, recent indicators have shown that the EU economy is doing better heading into 2013 than many expected. Markit®, a financial information group, reported that its purchasing managers’ index for the eurozone economy – a closely watched gauge of activity – rose to a ten-month high in early February. Even though the index remains below the level that would indicate expansion, the survey echoes other findings that the economy in Europe may be over the worst of its troubles as both of its main pillars, manufacturing and services, show signs of improvement.
Nonetheless, Europe continues to face serious problems. Retail sales figures released this month by Eurostat, the EU’s statistics office, confirmed expectations that the region remained in recession at the end of 2012. Retail sales fell 0.8 percent in December from the month before, double market expectations, and were down 1.7 percent for all of 2012. It is difficult for any economy to sustain growth without robust consumer spending. Factory and services output also contracted in December for a 17th consecutive month, and the unemployment rate is at 11.8% and rising in many countries. The European Central Bank lowered its growth forecast for the eurozone economy to a decline of 0.3 percent this year. With interest rates already at record lows, the ECB doesn’t have many stimulus tools available. In addition, some economists worry that Europe may be running the risk of complacency, which could undermine the improvements it has seen and could even mean that it faces the same problems as Japan, with a permanently depressed or stagnating economy.
U.S. Trade with Europe
According to the Office of U.S. Trade Representative, the relationship between the U.S. and the 27-nation EU is the largest and most complex in the world, with investment and trade valued at $4.5 trillion in 2011. Transatlantic investment is directly responsible for roughly 7.1 million jobs, based on an estimate from 2008. This enormous volume of trade and investment promotes economic prosperity on both sides of the Atlantic and both areas continue to pursue initiatives to create new opportunities for commerce. In fact, a free-trade agreement, elusive for more than a decade but with a potentially huge economic impact, is gaining momentum and may finally be attainable. Arduous negotiations still lie ahead, but if technical hurdles can be overcome, supporters believe that it could rival the North American Free Trade Agreement in scale and be a cheap way to encourage growth because it would result in billions of dollars in transatlantic business. It could also allow Europe and the U.S. to define the rules of global trade before China and India do. U.S. companies have invested some $1.9 trillion in production, distribution and other operations in the EU, far more than in China, and EU companies have invested about $1.6 trillion in the U.S.
“There is now, for the first time in years, a serious drive towards an E.U.-U.S. free-trade agreement,” Karel De Gucht, the European trade commissioner, said earlier this month. The Europeans hope that, by eliminating frictions, increased trade will provide some badly needed economic growth on both sides of the Atlantic. Government leaders, corporations and business groups are also pushing for an agreement. Tariffs on goods traded between the U.S. and EU are already low, averaging less than 3 percent. Companies that do substantial amounts of transatlantic business say that even a relatively small increase in the volume of trade could deliver major economic benefits.
In early February, De Gucht met with U.S. officials, including outgoing Trade Representative Ron Kirk, to prepare for negotiations on the free-trade agreement and put the finishing touches on a joint EU-U.S. report. “The EU’s economic relationship with the U.S. is its most important, unrivaled in scope and intensity,” the European Commission said in a report before the meeting. “A far-reaching agreement between the two biggest economies in the world would indeed give a strong boost to economic growth and send a strong signal of leadership to other countries.” The prospect of a deal is gaining even more support as the U.S. and the EU attempt to realign themselves to balance China’s growing economic prominence. An agreement on a mandate to start negotiations may be in place by June. Any deal would then need political backing and ratification by both sides – a process that can take more than a year but that would clearly be enormously beneficial to both sides.
Statistics on EU-U.S. Trade
- U.S. exports to the EU accounted for $302.6 billion in 2012 (up from $274.5 billion in 2008).
- EU imports to the U.S. totaled $419.9 million in 2012 (up from $367.9 billion in 2008).
- Total U.S. investment in the EU is three times higher than in all of Asia.
- The transatlantic relationship defines the shape of the global economy as a whole. Either the EU or the U.S. is the largest trade and investment partner for almost all other countries in the global economy.
- The EU and U.S. economies combined account for about half the entire world GDP and for nearly a third of world trade flows.
Sources: U.S. Census Bureau, European Commission