Atlantic Council

Atlantic Council President and CEO Fred Kempe recently delivered a speech to the Chamber of Commerce annual board meeting on the topic of "Rising to the Challenge: A Call for US and European Leadership of the New Global Economy."

Read his prepared remarks below.

Rising to the Challenge: A Call for US and European Leadership of the New Global Economy

Remarks by Frederick Kempe, President & CEO, Atlantic Council

As prepared for delivery to the US Chamber of Commerce annual board meeting on June 6, 2012.

Thank you, John [Ruan, chairman of the board, US Chamber of Commerce], for that kind introduction. I’m deeply honored to follow such a distinguished businessman and philanthropist onto the stage.

I also want to congratulate you, John, on your tenure as the Chairman of the Chamber as it celebrates its 100th anniversary year.

We had the great privilege to host you, Tom [Donohue, president and CEO of the US Chamber of Commerce], on April 18, the day you celebrated your centennial. You were a big hit at the Atlantic Council. Your comments on the central importance of the transatlantic economic relationship were timely. Your entrepreneurial leadership of the U.S. Chamber of Commerce, taking it to new levels of influence, has been an inspiration.

Thank you for having me here with you today.

I’d like to think of this session as part of a deepening cooperation between our organizations at a moment of historic test.

We face a realignment of global economic and political power and influence, the likes of which we haven’t seen since the 19th century. There are great opportunities in these sorts of upheavals, but also significant dangers. We at the Atlantic Council see those dangers as being significantly greater if the U.S. and Europe don’t hold together as the world’s largest community of common values, foreign direct investment and job creation. The business community is a crucial driver of that global change, with deep implications and tectonic shifts in political and military power and influence.

I want to take note of the Chamber’s decision to boldly embrace a global vision, which will be essential for it to help keep US business at the vanguard of international progress. As Tom said at the Council: “We have recognized that it would be impossible to effectively represent the business community without being fully engaged in global affairs from an economic, security, and even geopolitical perspective.”

Our mission at the Atlantic Council is to push and prod the United States and our European friends to jointly address the world’s biggest global challenges: Arab upheavals; NATO’s future and its role in Afghanistan; the rules governing global finance; Africa’s journey to prosperity and security; and the resiliency of the global economy.

We do this because we believe deeply in our shared history and values, and that our greatest challenge in the “West” is to embrace and advance the positive changes sweeping the globe, while staying vigilant that the values we believe anchor this new prosperity remain at the core of the institutions and norms that govern the international system. This is more important now than ever, as new models of capitalism, such as state or authoritarian capitalism, arise to challenge free markets. Global stability depends ever more on our close alliances.

Yet the West is at risk. We talk at the Council about a “double threat” to the transatlantic relationship – we are both mired in debt and slow growth, and we are both facing political gridlock that threatens to prevent us from solving our most basic problems; problems we have been advising other countries on for decades, and we are now seemingly incapable of taking our own good advice

The United States and Europe can only provide influence, can provide a model for others in the world, when we work from a position of strength, and right now, more than anything, that means economic growth and dynamism. We have entered an era of global competition, and in that world the Atlantic Council has concluded that it will be less arms control agreements and more trade, investment, regulatory and tax decisions and agreements – and our overall competitiveness -- that will ensure our global position.

And so it is crucial that the Atlantic Council and the US Chamber advance a compelling vision for a renewed transatlantic economy that spurs jobs, innovation, and growth, and that sets the global gold standard for business vitality and governance.

But let’s be honest. This effort hasn’t been made easier by the most threatening crisis facing the European Union project since the birth of the European Coal and Steel Community in 1951. European Central Bank President Mario Draghi warned last week that the euro common currency was “unsustainable unless further steps are being undertaken” to save it.

Greece has been the canary in the coal mine, but the problem has more to do with the mine than the canary.

People are talking a lot about a “euro crisis” – looking mostly at the fate of the single currency. But it’s really a Europe crisis. The currency is a proxy for a series of unanswered questions about Europe’s identity, its democratic credibility with European citizens and the effectiveness of its common structures.

There are economic and political components to the issue:

The Economics

First, the economics.

Europe adopted a common currency without having a common fiscal policy. This means that countries like Greece could borrow cheap money without any real supervision of its financial health, let alone any way to enforce fiscal discipline. The promise the euro zone members made to each other to keep deficits low was broken often and early, and Germany was the first to do it. It’s worth recalling that much of the profligacy of the south had to do with euro interest rates set too low for Spain and Italy but just right for the then-stagnant German economy.

Cheap money let many European countries forgo hard structural economic reforms that would have made them more competitive.

Add to this that everyone assumed the European Central Bank would back up everyone’s debts, and you have a recipe for disaster.

Enter the financial crisis. A massive credit freeze, popping of multiple real estate bubbles that hugely increased bad debt on the books of the financial system, met weak fiscal balance sheets and a completely unprepared governance system. What we now face is countries unable to support their own budgets or their banks, and looking to each other for help. All with no institutional mechanism to make that happen.

As the crisis progressed we watched various new waves of threats seemingly come and go, only to reappear. In 2010 we were worried about the PIIGS – Portugal, Italy, Ireland, Greece, and Spain. Somewhere in this group lurks the destruction of the Euro.

• Italy’s government fell and Mario Monti, its technocratic leader has done much to restore confidence, but his country is far from safe.
• Ireland and Portugal have been rescued by the IMF and the European support fund and so have been removed from the equation for now.
• That leaves Greece and Spain – which are the focus of major concern today.

We should not take a potential Greek exit from the euro lightly. There has been some unfortunate talk, including from Germany, that the Greeks can just leave the Euro and somehow muddle through. This is wrong for two reasons. First, the economics are terrible:

• The International Institute of Finance estimates that a Greek exit would cost the global economy $1.25 trillion.
• The IMF thinks the Greek economy would contract by a massive 10 percent.
• JP Morgan estimates, immediate losses from a Greek exit would cost nearly 500 billion dollars, nearly half that would cost Greece’s official lenders -- the EU and the IMF), and over a quarter of it to other European countries, and the remainder to European banks.
• Economists predict the overall costs of capital would shoot up due to higher risk levels, which would ultimately have serious consequences for US banks.

Those are high stakes. Unfortunately Greece’s response so far has been to hold a gun to its head and insist on suicide if it isn’t rescued.

Second, it would mean that the Euro has failed its first test. It would do so because the political will to save it wasn’t there. There would be implications of that decision for the entire European project. Witness the new and growing pressures on Spain, Europe’s fourth largest economy.

The Politics

That brings us to the second and now the most serious problem – the politics. What we have in Europe now is essentially Germany vs. the rest of Europe – especially now that France has elected a socialist government and the Dutch government has fallen.

Specifically, the question is whether Germany, given its greatest position of European power and influence since World War II, is determined to save the euro or is calculating that the euro perhaps wasn’t such a good idea in the first place and now the costs of sustaining it may have grown too high.

That thinking is supported by the new, best-selling book by Thilo Sarrazin, the former Bundesbank director, called “Europe Doesn’t Need the Euro.” According to a new opinion poll, some 43% of Germans agree with him – while roughly the same number, 45%, agree with Chancellor Merkel’s view that the euro’s failure would result in failure of the European project.

I just returned from Spain, where I spent a great deal of time talking to the country’s top economic officials. They’ve taken a lot of the right steps: reduced their deficits, reformed the labor market, recapitalized banks. But there was a frustration among Spaniards that none of it would make any difference if Germany didn’t do more to convince the markets they were all in..

One official gave me his telling narrative about how he wishes Germans would regard history. First in 1945, he said, Germany paid the price of national division for the suffering it caused Europe. Second, he continued, the Deutsche Mark and monetary sovereignty were the price that it paid for re-unification. Thus, he said, Germany should see that it really has no choice but to save the euro and the European project that rests beneath it. (Provocatively, he asked, if Germany allows the Euro to blow up, are we entitled to revisit German unification.)

It was in that context, that Spain put before the European Commission a proposal for a banking union with federal guarantees and European-wide supervision. The jury is out on how Germany will respond.

And how it decides will shape history. Germany is far and away the strongest economy in Europe. Its GDP is about $1.8 trillion, which is about $500 billion more than France, and over 1.5 times the size of Spain.

Germany has been the biggest beneficiary of the common currency area. Its exports to its Eurozone partners are 40 percent of its GDP. Its global exports have grown over 200 percent since the introduction of the Euro. Germany has vaulted from the “sick man of Europe” in the late 1990s to its crowning jewel, and the Euro has played a crucial role.

That said, I agree with Martin Wolf of the Financial Times who believes the Germans are pursuing a strategy of forcing either harsh adjustment or swift departure, in either case capping their exposure to the southern countries of the euro zone and accepting that it might be reduced to a smaller, like-minded core.

Solutions

So Europe has a clear if hugely difficult choice, and that will be driven by Germany. It can draw closer together or fly apart.

To draw together, the Germans will have to agree to some kind of shared fiscal burden. This might look like Euro bonds, debt forgiveness, tighter fiscal rules, or all of the above. The final outcome has to result in sharing the costs of Greece’s woes, and demonstrating that Italy and Spain won’t be left to fend for themselves. The sequencing of those instruments matters – it would be a mistake to jointly secure sovereign debt before indebted countries promise reforms. But Europe has to make the political decision they’ll do so.

Second, they’ll need to establish the institutions to make this happen. That probably looks like a pan-European finance ministry with real authority to enforce budget discipline. Some of the measures passed already head in that direction, but there will need to be more.

Finally, and most importantly, the continent needs a vision for growth. This has also begun to develop, but right now “growth” remains too much a euphemism for increased government stimulus rather than real commitments to address structural problems.

This is where we come in – the people gathered in this room, along with our European counterparts. Governments have an important role to play in setting the terms for growth. But it’s up to the businesses that make the transatlantic economy thrive to make this happen.

Tom said it perfectly at the Council: “genuine, sustainable, job-creating growth must come from the private sector, and not from more public spending, taxes, and debt.”

The US Chamber has called for transatlantic pact on growth. The Atlantic Council stands ready to help the Chamber make that a reality. Now let’s be honest: this isn’t the best time in the U.S. or Europe for this work. We’ve got our elections. And I was told by a key Obama administration official that they didn’t not to pick up calls for a transatlantic economic partnership agreement because they figure Europe has its hands too full handling its crisis.

Yet it’s a times of crisis that one needs to show vision and solidarity. So far, the Obama administration has seen the Euro crisis more as a threat to the U.S. economy and its re-election than a issue concerning our long-term strategic interests across the globe.

We must lift our sights, because of the enormous stakes. The transatlantic economy remains the largest, wealthiest, and most integrated market in the world, making us deeply dependent on each other’s success. Tom went over some of these numbers at the Council, but they are so dramatic that they are worth repeating.

• The United States and Europe generate $5 trillion in sales a year and employ 15 million workers on both sides of the Atlantic. Together we account for over 50 percent of global GDP.
• The US market is crucial to European companies, which earned a total of $120 billion in income in 2010.
• And the same is true in reverse. Of $20 trillion in foreign assets for US companies, 58 percent were in Europe in 2010.
• Five of the top ten export markets for US service companies are in Europe, helping generate a $43.7 billion services trade surplus with Europe
• Our financial markets account for over 75 percent of financial services, two-thirds of global banking assets, and over 90 percent of foreign exchange holdings are either in US dollars, euros, or sterling.
• US FDI to Europe in 2011 was over $200 billion, and 56 percent of US FDI lands in Europe.
• European affiliates directly employed 3.5 million US workers in 2010, about 700,000 less than US affiliates employed in Europe.

The consequences of failure are also clear, and we’re already seeing them:

• TRADE: Slower growth in Europe dampens demand for US goods, and a weaker Euro compounds this problem.
• FINANCE: Market volatility over the last five years has been intense, spooking investors and keeping capital on the sidelines, fleeing to safe havens, and to emerging markets.
• We are now seeing intense capital flight from Europe. This makes US investments in Europe more risky, and is flooding the US treasury market with demand for US bonds as capital moves to safe havens. Spain alone has lost $82 billion, nearly 10% of its total economy, over the last couple weeks.
• Finally, slow growth and weak economies diminish our global credibility and the integrity of the free market economic model.

The goals for a pact are pretty clear. Tom has spelled them out well:

• Deepen trade ties by getting rid of remaining barriers, especially in services.
• Streamline regulatory cooperation so businesses can effectively and predictably operate in both jurisdictions
• Complete financial regulatory reform in a way that coordinates our approach and removes barriers to capital flows, which will have to include tax reform

These are tough subjects, but there are two major forces working in our favor:

There is an urgency for job creation on both sides of the Atlantic that has never been higher.

Second, there is a clear recognition that we are losing ground to emerging economies, and that we need a better strategy to address that fact.

We can’t afford to let alternative models of growth set global standards. Strong intellectual property rights, the ability to repatriate profits, freedom to enter and exit markets, and strong commercial laws are the best way to promote growth.

Period.

So this means it’s more urgent than ever that the United States and Europe work together in our approach to growth, and to those who don’t share our values.

American businesses and their allies in the transatlantic community must take the lead. We should prepare a campaign to drive transatlantic economic integration to the top of the political agenda after November’s elections. There is a tremendous amount of political stagnation and retrenchment on both sides of the Atlantic – not helped by the euro zone crisis. So it should be business, the most dynamic part of the transatlantic relationship, that lays out the path through the quagmire.

That will mean doing a few things:

• Making the case frequently, consistently, and compellingly that deepening transatlantic economic ties is a core part of renewing economic growth, and ensuring our global influence. I praise the Chamber for taking the leading in this respect.
• Pulling together influential business leaders with policymakers – especially in Congress – to develop a strategy to advance the effort. There are some thorny questions that need addressing – such as the timing of an effort and whether it should be piecemeal or comprehensive, and how to handle agriculture on the European side and public mandates on the American side – issues that came up with President Obama at the G8 meeting.
• Galvanizing action with our European counterparts so that the usual differences don’t booby trap our approach.

The engagement of the business community is absolutely crucial to a successful effort. And I’m incredibly pleased to be here with you today to make that case.

I look forward to your questions.

Thank you.