one-time transatlantic economic laggard, Europe, has pulled ahead of the perennial transatlantic growth leader – the US. The US economy has been battered and bruised by a housing recession and attendant sub-prime credit squeeze that has constrained economic activity. On average, the US economy expanded by roughly 2 per cent in the first half of last year, following 2.9 per cent annual growth in 2006. Prior to 2006, US economic growth easily outpaced that of Europe.
The global earnings of US corporations have taken an added importance this year on account of weaker-than-expected growth in the US.
Simply put, strong global earnings staved off a US profit recession last year.
Without the overseas boost o earnings last year – with Europe at the forefront – US earnings would have been far weaker than reported, adding even more uncertainty and volatility to the US financial markets.
Given the depth and breadth of US-European trade and investment linkages, both economies are so tightly linked that when things go awry in one market, the effects are felt in the other. More often than not, a problem in either the US or in European economies becomes a transatlantic problem.
The UK, France, Ireland and Spain were the markets of choice for US investors last year, with many investors actively adding more global securities to their portfolios as a hedge against a US market downturn and a weaker US dollar.
The transatlantic services economy continues to deepen
The services economies of the US and Europe have become even more intertwined over the past year, with cross-border trade in services and sales through affiliates posting strong gains in the past year. By sectors, transatlantic linkages continue to deepen in financial services, insurance, education, telecommunication, utilities, advertising and computer services.
Other services – such as aviation, are gradually being liberalised and deregulated, albeit slowly. Services represent the sleeping giant of the transatlantic economy, or the one key area where significant opportunities exist to strengthen and deepen the transatlantic economy.
No commercial artery in the world is as large as the one binding together the US and Europe. No two regions of the global economy are as economically fused as the two parties straddling the Atlantic, making the transatlantic economy the largest and wealthiest in the world.
It is foreign investment – the deepest form of global integration – that binds the transatlantic economy, not trade. Trade, which involved the cross-border movement of goods and services, is a shallow form of integration and often associated with early phases or stages of bilateral commerce.
In contrast, a relationship resting on the foundation of foreign investment is one where both parties are extensively embedded and entrenched in each other’s economies. The transatlantic economy epitomises the latter. American affiliates in Europe are