1. CRISIS AND CHANGE IN EUROPE WHAT IT MEANS FOR U.S. BUSINESS Presented by Kris Bledowski Economist and Council Director kbledowski@mapi.net

2. Outline Two-Pronged Analysis o Structural change: long-term risks and opportunities for U.S. exporters o Medium-term change: cyclical outlook for European manufacturing Beyond the Crisis o Europe as long-term partner in manufacturing o Competitiveness, convergence, integration, cohesion o Emphasis on longer-term trends Beyond Headline Numbers o Europes manufacturing business cycle o Risk areas o Detailed European industrial outlook by sector Will the Eurozone Break Up?

3. 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

4. … 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

5. 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

6. 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

7. 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

8. 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

9. Source(s): Eurostat and Manufacturers Alliance/MAPI Exports and Wages, 2000-2007 All Countries Grew Exports; Some Also Improved Competitiveness

10. 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

11. Eurozone Consumers Are Absent – Weak Growth Supported by Public Spending Contribution to Eurozones GDP Growth, 2010Q1 Source(s): Eurostat and Manufacturers Alliance/MAPI Contribution to Eurozones GDP Growth, 2009Q4

12. Central European Growth is More Robust But Also Uneven GDP Forecast, Czech Republic, Hungary, Poland (CEE3) Source(s): Eurostat and Manufacturers Alliance/MAPI

13. 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

14. Recovery Held Back By Depressed Bank Lending Lending to the Private Sector Source(s): European Central Bank and Manufacturers Alliance/MAPI

15. 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

16. The Industrial Side of the Economy Holds Up Better Than the Rest Manufacturing Growth Rates, 2010Q2 Source(s): Eurostat and Manufacturers Alliance/MAPI

17. Sector200920102011 Motor vehicles-23.819.54.0 Chemicals-10.810.51.4 Computers & electronics-21.18.31.2 Electrical equipment-21.66.2-1.1 Rubber & Plastics-13.75.9-0.9 Fabricated Metals-22.84.03.2 Paper & products-9.43.9 Textiles-19.13.5-7.8 Machinery & Equipment-27.02.65.9 Food, beverages, tobacco products-1.10.1-0.8 Wood & products-16.3-2.2-2.7 Non-Metallics-19.5-4.0-2.3 Petroleum & Coke-8.0-4.42.3 Construction-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)

18. Sector200920102011 Computers & electronics-1.931.8-2.1 Paper & products0.514.83.3 Machinery & Equipment-17.214.89.5 Motor vehicles-14.613.17.8 Rubber & Plastics-7.711.46.6 Electrical equipment-9.711.311.2 Fabricated Metals-17.38.77.2 Textiles-11.35.3-2.4 Chemicals-8.75.1-0.9 Wood & products-3.93.51.1 Petroleum & Coke-9.31.62.8 Food, beverages, tobacco products0.90.5-1.1 Non-Metallics-14.63.6 Construction0.9-14.51.0 Source: Eurostat and Consensus Forecasts and European Commission and Unicredit and Manufacturers Alliance/MAPI Central Europes Industry Will Post Few Weak Spots in 2010 Manufacturing Production, Central Europe (Annual Percentage Change)

19. Will the Eurozone Break Up? Monetary Union as a Political Project o Politics trumps economics o But economic costs of break-up matter What to Expect in Medium Term o Revisions to Stability-Growth Pact o New/improved fiscal rules o Institutionalized macro-prudential oversight? Total Break-up vs. Individual Defections o High cost of individual countries leaving (e.g., Greece, Germany) o More probable than total break-up but probability still low o Sovereign defaults possible o Permanent improvement in regional imbalances unlikely even in long term