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

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?

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

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

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, All Countries Grew Exports; Some Also Improved Competitiveness

Source(s): OECD and Manufacturers Alliance/MAPI Productivity and Costs, Average Annual Growth Rates, All Countries Are Productive; Some Control Costs Better Than Others

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

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 Motor vehicles Chemicals Computers & electronics Electrical equipment Rubber & Plastics Fabricated Metals Paper & products Textiles Machinery & Equipment Food, beverages, tobacco products Wood & products Non-Metallics Petroleum & Coke Construction 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 Computers & electronics Paper & products Machinery & Equipment Motor vehicles Rubber & Plastics Electrical equipment Fabricated Metals Textiles Chemicals Wood & products Petroleum & Coke Food, beverages, tobacco products Non-Metallics Construction 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)

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