CRISIS AND CHANGE IN EUROPE

WHAT IT MEANS FOR U.S. BUSINESS

Presented byKris BledowskiEconomist andCouncil Directorkbledowski@mapi.net

Outline

• Two-Pronged Analysiso Structural change: long-term risks and opportunities for U.S. exporterso Medium-term change: cyclical outlook for European manufacturing

• Beyond the Crisiso Europe as long-term partner in manufacturingo Competitiveness, convergence, integration, cohesiono Emphasis on longer-term trends

• Beyond Headline Numberso Europe’s manufacturing business cycleo Risk areaso Detailed European industrial outlook by sector

• Will the Eurozone Break Up?

Despite Growing Importance of Asia, Trade with Europe Weighs Big …

Trade Volumes in Goods

Source(s): Bureau of Economic Analysis and Manufacturers Alliance/MAPI

Trade Balance in Services

… And the European Share of FDI Flows Dwarfs Other Regions

Foreign Direct Investment to/from Europe

Source(s): U.S. Bureau of Economic Analysis and Manufacturers Alliance/MAPI

Income Convergence Inches Ahead But the Pace is Slow

Real GDP Level, PPP-Weighted, Relative to EU27 Mean

Source(s): Eurostat and Manufacturers Alliance/MAPI

Industrial Integration Has Tightened Sharply Over the Past Decade

Correlation Coefficients of Annual Manufacturing Growth Rates With EU27 Benchmark

Source(s): Eurostat and Manufacturers Alliance/MAPI*Poland 1996-1999

Volatility of Cyclical Change is Down This Decade

Standard Deviation of Real GDP Annual Growth Rates, (Quarterly Data)

Source(s): Eurostat and Manufacturers Alliance/MAPI*Poland 1996-1999

Leverage Ratios Vary Widely; So Do Relative Changes

Liabilities of Non-Financial Corporations, percent of GDP

Source(s): Eurostat and Manufacturers Alliance/MAPI* 2008; all others 2009

Source(s): Eurostat and Manufacturers Alliance/MAPI

Exports and Wages, 2000-2007

All Countries Grew Exports; Some Also Improved Competitiveness

Source(s): OECD and Manufacturers Alliance/MAPI

Productivity and Costs, Average Annual Growth Rates, 2000-2007

All Countries Are Productive; Some Control Costs Better Than Others

Eurozone Consumers Are Absent – Weak Growth Supported by Public Spending

Contribution to Eurozone’s GDP Growth, 2010Q1

Source(s): Eurostat and Manufacturers Alliance/MAPI

Contribution to Eurozone’s GDP Growth, 2009Q4

Central European Growth is More Robust But Also Uneven

GDP Forecast, Czech Republic, Hungary, Poland (CEE3)

Source(s): Eurostat and Manufacturers Alliance/MAPI

Lending Conditions Are Easing and Economic Climate Is Up

IFO Economic Climate and ECB Loan Officer Survey for the Eurozone

Source(s): European Central Bank and IFO Institute and Manufacturers Alliance/MAPI

Recovery Held Back By Depressed Bank Lending

Lending to the Private Sector

Source(s): European Central Bank and Manufacturers Alliance/MAPI

Costs of Financial Rescue Packages Have Been Modest So Far

Net Revenue (Cost) to General Governments, 2009 (Percent of GDP)

Source: Eurostat and Manufacturers Alliance/MAPI

The Industrial Side of the Economy Holds Up Better Than the Rest

Manufacturing Growth Rates, 2010Q2

Source(s): Eurostat and Manufacturers Alliance/MAPI

Sector 2009 2010 2011

Motor vehicles -23.8 19.5 4.0Chemicals -10.8 10.5 1.4Computers & electronics -21.1 8.3 1.2Electrical equipment -21.6 6.2 -1.1Rubber & Plastics -13.7 5.9 -0.9Fabricated Metals -22.8 4.0 3.2Paper & products -9.4 3.9 -1.0Textiles -19.1 3.5 -7.8Machinery & Equipment -27.0 2.6 5.9Food, beverages, tobacco products -1.1 0.1 -0.8Wood & products -16.3 -2.2 -2.7Non-Metallics -19.5 -4.0 -2.3Petroleum & Coke -8.0 -4.4 2.3Construction -8.3 -7.5 -0.2

Source: Eurostat and Consensus Forecasts and European Commission and Manufacturers Alliance/MAPI

Industrial Rebound in Western Europe Will Be Short-Lived

Manufacturing Production, Eurozone (Annual Percentage Change)

Sector 2009 2010 2011

Computers & electronics -1.9 31.8 -2.1Paper & products 0.5 14.8 3.3Machinery & Equipment -17.2 14.8 9.5Motor vehicles -14.6 13.1 7.8Rubber & Plastics -7.7 11.4 6.6Electrical equipment -9.7 11.3 11.2Fabricated Metals -17.3 8.7 7.2Textiles -11.3 5.3 -2.4Chemicals -8.7 5.1 -0.9Wood & products -3.9 3.5 1.1Petroleum & Coke -9.3 1.6 2.8Food, beverages, tobacco products 0.9 0.5 -1.1Non-Metallics -14.6 -1.0 3.6Construction 0.9 -14.5 1.0

Source: Eurostat and Consensus Forecasts and European Commission and Unicredit and Manufacturers Alliance/MAPI

Central Europe’s Industry Will Post Few Weak Spots in 2010

Manufacturing Production, Central Europe (Annual Percentage Change)

Will the Eurozone Break Up?

• Monetary Union as a Political Projecto Politics trumps economicso But economic costs of break-up matter

• What to Expect in Medium Termo Revisions to Stability-Growth Pacto New/improved fiscal ruleso Institutionalized macro-prudential oversight?

• Total Break-up vs. Individual Defectionso High cost of individual countries leaving (e.g., Greece, Germany)o More probable than total break-up but probability still lowo Sovereign defaults possibleo Permanent improvement in regional imbalances unlikely even in long term