The Shape of the Future: The Transatlantic Economy by 2025

8/8/2019 The Shape of the Future: The Transatlantic Economy by 2025

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Summary: The foundation of the

world economy has rested squarely

on the shoulders of the transatlantic

economy for the past 60 years.

It is the largest, most powerful, and

most productive economy in the

world. And while the rst decade and

a half of globalization was largely

driven and shaped by the United

States and Europe, the world of to-

morrow will be different. It will be less

U.S.-centric and more crowded as

new players, like China, Russia, India,

and Brazil, from the developing na-

tions reshape the global landscape.

There are many complementary and

convergent interests that can bind

together the transatlantic economy

and the rise of developing nations.

The task for the coming decades is to

identify these interests and construct

working relationships for all parties.

Failure to do so will come at a high

price. While the transatlantic economy

remains one of the most vibrant

components of the world economy,

maintaining this position will not be

easy. Avoiding the twilight means

the transatlantic partnership must

undergo a period of transformation.

Economic Policy Program

Policy Brie

Executive Summary

Despite losing some ground to

developing nations, the transatlantic

economy the United States plus the

EU-27will remain one o the largest

and most powerul economic entities

in the world in 2025.

Today, the transatlantic economy

remains a leader in many key metrics

o global economic activity, including

output, trade, investment, andconsumption.

During the next 17 years, we expect

global economic power to gradu-

ally shit by 2025, developing

nations will account or just over 60%

o world output in purchasing power

parity (PPP) terms; the developed

nations will make up roughly 40%

o the total. In 2000, the gures were

reversed.

Globalization will continue, but it will

be less Westernized, less centered on

the United States and Europe. The

biggest winners o globalization will

be those nations (in both the developed and developing nations) that can

access and adapt to new technologies,

and those nations that best align

stakeholder interests with a more

globalized economy.

Notwithstanding some domestic dis

locations, globalization is not a zero-

sum gamethe rise o the developing

nations entails signicant opportuni-

ties (as well as risks) or the

transatlantic economy.

Globalizations benets are not

irreversiblegoverning bodies and

policymakers in the United States,

Europe, and other parts o the world

need to educate and enlighten domestic

constituents to the overriding benets

o greater global interdependence.

In 2025, Chinas share o world GDP

(on a PPP basis) will be roughly equa

to the United States and slightly larger

than the European Unions. A large

part o Chinas rise will come at the

expense o other nations, notably in

Asia (Japan and others).

The Shape of the Future: The Transatlantic

Economy by 2025

by Joseph Quinlan, Transatlantic Fellow, The German Marshall Fund of the

United States*

1744 R Street NW

Washington, DC 20009T 1 202 745 3950

F 1 202 265 1662E [email protected]

*Joseph Quinlan, a non-resident transatlantic fellow with the German Marshall Fund of the United States (GMF) since 2003, is a

leading expert on the transatlantic economy and well-known global economist. His research centers on regional and global trade

and investment ows. He regularly debriefs and advises senior U.S. congressional leaders on global economic/nancial affairs on

Capitol Hill, and has testied before the European Parliament on transatlantic trade issues. The views expressed here are those

of the author and do not necessarily represent the views of GMF. A side note on GDP measurements: In general, comparisons at

market exchange rates overestimate the average incomes in rich nations relative to poor countries, since non-tradable services are

much cheaper in poor nations. Exchange rate uctuations can further muddle calculations. PPP rates correct for inter-country price

differences and therefore allow for more meaningful comparisons of levels of real output and expenditures. GDP at PPP measures

the volume of goods and services produced at a common set of prices.


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Still, there is nothing preordained about the rise o China

the Middle Kingdom aces intense social, political, andeconomic pressures over the next 17 years (widening income

inequality, environmental destruction, massive corporate

restructuring, and demographic imbalances among them).

The same is largely true o India.

Global manuacturing output will continue to shit toward

developing nations, although the United States and the EU

will collectively remain a key source o high-end, advanced

manuactured products. As more production shits toward

the developing nations, high-end, sophisticated manuacturing

and service activities will become increasingly important to the

economic health o the transatlantic economy.

The uture strength o the European Union will pivot on its

large market, single currency, stable democratic governments,

and unied trading bloc. Further territorial enlargement will

help determine the EUs global clout, as will the ability to

adapt to rising opportunities and risks associated with the

ascent o the developing nations. A more fexible micro-

environment will be critical to Europes uture success. The

EU will ace two key challenges: an aging population and a

shrinking labor orce.

Aging populations in Europe, Japan, and even key emergingmarketsnotably Chinawill emerge as critical issues

aecting economic growth.

New and stronger corporate players will emerge rom the

developing nations, challenging many U.S. and European

corporate leaders in a number o sectors (think autos, phar

maceuticals, telecom, banking, steel, and capital goods).

Trade and investment protectionism will remain a constant

threat to the global economy.

Critical economic inputs (capital, natural resources, and

labor) will increasingly be concentrated outside the United

States and Europe, and in the rest o the world (ROW). The

ROW will seek more weight and infuence to govern and

infuence multilateral institutions and shape the global

economic agenda.

The global demand or skilled labor and talent will intensiy

during the next 1520 years. Attracting this talent will be

critical to the economic success o the transatlantic economy.

Demand or ossil uels will remain intense; resource

nationalism could become more prevalent in the mediumterm.

The rise o developing nations will orce domestic adjustments

in the United States and Europe how well both parties

adapt to these changes (especially through their social welare

systems, immigration, and labor orce fexibility) will deter

mine the health o the transatlantic economy.

The rise o China, India, Russia, and Brazil may usher in an era

o new international alignments, both in oreign policy and

economics. Money talkshence the rising power o sovereign

wealth unds rom developing nations.

Other wildcards: the spread o radical Islam, the potential or

catastrophic terrorism, and the impact o religion on the

political/economic structure o the global economy.

A nal thought: Just as the world accommodated the

rejuvenation o Europe in the post-War world, it must now ac

commodate the rise o new Asian economies in the years

ahead. What this means is that we need global institutions

and new global rules o the game that can acilitate the

peaceul rise o new nations in Asia. It also means that

existing global institutions and rameworks o cooperationmust evolve and change to accommodate this new reality.

Manmohan Singh, Prime Minister o India, December 2006.

The Primacy of the Transatlantic Economy

The oundation o the world economy has rested squarely on

the shoulders o the transatlantic economy or the past 60 years.

Since the end o World War II, the United States and Europe

have been the world economys standard-bearers the rule

makers, regulators, and enorcers, controlling global institutions

(including the World Bank, the International Monetary Fund,

the World Trade Organization, and its predecessor, the General

Agreement on Trade and Taris) that have long shaped and

controlled the global economic agenda.

For more than a hal century, the United States and Europe have

also been the main engines o global growth and wealth creation,

leading the world in consumption, innovation, and competition,

and accounting or a disproportionate share o global production,

trade, and investment.


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Even today, the transatlantic economy remains the global

leader by many key metrics o economic activity. For instance,the transatlantic economy (the United States + the EU-27)

accounted or nearly 57% o world GDP last year, based on

market exchange rates. Based on purchasing power parity (PPP)

ratesa better indicator o average living standards or volumes

o outputs and inputsthe transatlantic economy still ranked as

the largest in the world in 2007, representing 44% o world GDP.

The equivalent gure or developing Asia was roughly 24%.

On the trade ront, the transatlantic economy accounted or 47%

o total world exports in 2007 and 52% o world imports. On a

standalone basis, Europe remains the largest trading entity in the

world. Notwithstanding all the talk about the rise o China andIndia and their seemingly unstoppable ability to export, Europes

share o world exports has actually increased this decade, rising

rom 40.8% in 2000 to 42.5% in 2007. Germany remains the

worlds top exporter o goods, with a global share o 9.5% last

year, up rom 8.6% in 2000. The United States, or its part, re-

mains the second-largest exporter o goods in the world. When

exports o goods and services are combined, the United States

emerges as the largest exporter in the world, a little-recognized

act among policymakers. What the United States exports in

goods and services a month, roughly $155 billion in April 2008,

is equivalent or greater than what some countries (Turkey, Indo-

nesia, Nigeria, South Arica, and Hungary, to name a ew) exportin a year.

In terms o oreign direct investment, both the United States

and Europe remain popular recipients o investment as well

as key suppliers o capital. In any given year, the United States

attracts more oreign direct investment than China; cumulative

FDI infows to the United States o $1.2 trillion were more than

double infows to China, at $463 billion, between 2000 and 2007.

EU enlargement, contrary to popular expectations, has not led

to a large-scale diversion o FDI within the EU rom high-cost

nations like Germany and France to low-cost producers like

Hungary and the Czech Republic. The combined infows to the

accession nations totaled roughly $40 billion in 2006, hal the

level o infows to France and roughly 30% o infows to the U.K.

Since 1995, FDI infows to the accession members have been a

raction o total EU infows, amounting to just 7.3% in 2006,

down rom a high o 11% in 1995.

Against this backdrop, more than 60% o the worlds total FDI

inward stock was sunk in the transatlantic economy in 2006, up

modestly rom the beginning o the decade. The percentage o

global outward FDI stock in the United States and Europe waseven higher, at 71%. The transatlantic economy accounted or

71% o world merger and acquisition (M&A) sales last year and

74% o global M&A purchases.

By three other key metrics personal consumption, house-

holds wealth and private xed capital ormation the United

States and Europe are at the oreront o the global economy.

The United States and Europe accounted or more than 60%

o total global personal consumption outlays last year, which

is more than $19.2 trillion out o $32 trillion total. The United

States and Europe also accounted or nearly hal (49%) o global

private capital investment last year. Finally, the transatlanticeconomy has opened up a substantial gap in household wealth

with the rest o the world. The average net worth per house-

hold in China ($18,000 in 2007), Russia ($31,000), and Brazil

($44,000) are a raction o the average net household worth in

the U.S. ($565,000), France ($518,000), and the United Kingdom

($599,000).

The transatlantic economy remains the largest and most dy-

namic economic entity in the world. Individually, the United

States and Europe rank as economic heavyweights in their own

right. They have dierent economic strengths and weaknesses,

and they benet rom dierent endowments. Combined, thereis little doubt that, early in the 21st century, the transatlantic

economy is the largest, most powerul, and most productive

economy in the world.

The Rise of Rest of World (ROW)

While the rst decade and a hal o globalization (rom about

1990 through 2005) was largely driven and shaped by the United

States and Europe, the world o tomorrow will be dierent. It

will be less U.S.-centric and more crowded as new players rom

the developing nations reshape the global landscape.

Powerul new players like China, Russia, India, and Brazil dene

this multipolar world. Led by these developing juggernauts, the

emerging markets represent a potent new orce in the global

economy. As part o this process, the world economy is under-

going another proound period o integration an unsettling

transition whereby a new, large economic entity is born, upset-

ting the existing economic order.

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We have been here beorebetween 1870 and 1913, the world

economy was orced to adjust to the emergence o Germanyand the United States; in the quarter century ater 1950, Japan

emerged as a new powerul global entity. Early in the 21st cen-

tury, China, India, and the emerging markets in total are at the

oreront o shaping a new economic order, which has applied

new pressure to points o tension around the world.

As a group, the developing nations have nearly achieved eco-

nomic parity with the developed nations on a purchasing power

parity basis. By this metric, the developing nations accounted or

more than 47% o world output in 2007, up rom a share o 39%

in 1990. Based on market exchange rates, however, the develop-

ing nations share o GDP is small yet expanding, coming in atroughly one-third o total GDP in 2007, up rom 25% in 1990.

Looking orward, the ollowing trend is hardly preordained but

a reasonable predictionthe global economic infuence o the

developing nations is expected to expand and rise relative to the

developed nations. Developing nations will increasingly drive

real output growth and the pace and direction o cross-border

trade and investment, refecting the new global spread o eco-

nomic power.

Today, the global infuence o the developing nations is already

evident in the global currency, commodities, and credit markets.The doubling o the global workorce, courtesy o the developing

nations, has had a direct bearing on global wages, prices, interest

rates, and prots, all o which, in turn, has challenged and ben-

eted the United States and the European Union.

Emerging markets have increased their geopolitical infuence

in such areas as the Middle East, Central Asia, Arica, and Latin

America in parallel to their growing economic clout. These

regions no longer walk in step with the United States and Europe.

Witness the ailure o Doha, the nuclear stalemate in Iran, Chinas

rising infuence in Aricaeach one o these developments has an

element o Us versus Them. Us represents the developed na-

tions and the status quo o the past hal century. Them encom-

passes the developing nations, their growing economic clout, and

their desire to reshape the world economic order.

Preventing the divide between Us and Them rom widen-

ing is a critical challenge or the global economy over the next

decade. Notably, it is critical or the United States and Europe to

maintain access to the basic inputs to economic growth that are

increasingly controlled by developing nationscapital, natural

resources, and labor.

The Growing Economic Might of the Developing Nations

I economic power and potential are determined by the posses-

sion and availability o critical resources, then the developing

nations have emerged as an economic orce to be reckoned with.

In a global economy that runs on ossil uel, with a premium

attached to crude oil and proven oil reserves, the developing na-

tions are clearly in the drivers seat. While oil production in the

developed nations ell by nearly 13% between 2000 and 2007,

production in the developing nations rose nearly 16% duringthe same period. Thanks in part to new production coming on

line in such places as Russia and West Arica, oil production in

the developing nations rose rom more than 57 billion barrels in

2000 to 66.2 billion barrels in 2007. World oil production is now

even more concentrated in the developing nations: the latter ac-

counted or more than 81% o global oil production last year, up

rom a share o 76.3% in 2000.

In terms o proven oil reserves, the developing nations global

advantages verges on monopoly. The developing nations sit atop

nearly 94% o proven oil reserves, with reserves rising 12.6%

between 2000 and 2007. During the same period, reserve levelsin the developed nations rose only 4.5%.

Capital is another key input increasingly under the domain o

the developing nations. While Europe and Japan do put their

savings to work in the global markets, the bulk o the worlds ex-

cess savings resides with the oil-rich nations o the Middle East,

Arica, and Russia, as well as with the trading powers o Asia.

The developing nations accounted or over 70% o total global

international reserves at the end o 2007, giving this group ex-

traordinary infuence when it comes to global capital fows and

purchasing power.

The United States is the worlds largest consumer o oil and

largest debtor nation, so Americas economic dependence on the

developing nations has increased signicantly during the past

two decades. So, to a degree, has Europes. The region remains

vulnerable to resource nationalism, namely rom Russia, which

has fexed its muscle in the past by cutting energy supplies to

European customers.


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While Europe is not as dependent on the developing nations

or capital, the EU and the United States have grown increas-ingly wary o the size and clout o sovereign wealth unds the

massive pools o investment capital controlled by state govern-

ments in the developing nations. A key risk o sovereign wealth

unds is that these state-owned rms use their nancial clout to

buy strategic companies in the United States and Europe, plac-

ing fagship companies under the direct or indirect control o

oreign governments.

Finally, developing nations dont just control natural resources

and capital, they also possess another critical input people,

or more specically, workers. The bulk o the worlds labor orce

and uture consumer baseroughly nine out o every 10 peoplein the worldresides in developing nations. In many cases, these

people represent both a blessing and a curse, an economic input

and economic cost.

Although the earnings o many workers in the developing na-

tions remain meager, consumption among the emerging middle

classes o China, India, Brazil, Turkey, and others is becoming

more pronounced. Global imports in the developing nations

have soared during the past ew years. The developing nations

share o global imports surpassed 41% o the total last year, and

by 2025, that share will be comortably above 50%. The baton o

global consumption is slowly being passed rom the developednations, notably rom the United States, to millions (potentially

billions) o consumers in the developing nations.

In a world where the developing nations claim the bulk o the

worlds critical inputs, the economic tables have turned on the

transatlantic economy. The well-worn assumption that the

developing nations march to the beat o the developed nations is

outdated. Europe and the United States are increasingly ex-

posed to and dependent on the developing nations or markets,

resources, capital, and labor.

Mutual interdependence will become the norm over the next de-

cade. And because o this interdependence, the growing chasms

between the developed nations and developing countries on a

number o ronts represent a key risk and challenge to the global

economy during the next ew decades. Some o the widest or

most challenging chasms come to us courtesy o China.

Chinas Effect on the Global Economy

In the past quarter-century, no nation in the world has done

more to alter global trade fows, shit global oreign direct invest

ment patterns and recongure global demand or commoditiesthan China and that is just at the macro level. At the micro

level, Chinas rapid economic rise and reintegration into the

global economy has directly aected employment, wages, and

income levels worldwide, including in both the United States

and Europe.

In many cases, Chinas global economic infuence has produced

contradictory and countervailing results. The mainlands capac-

ity to produce and export massive volumes o consumer goods

has helped lower the relative costs o household goods in the de-

veloped nations, while simultaneously pushing up prices or the

critical ingredients o Chinas industrialization basic materiallike aluminum, steel, copper, and petroleum. While cheap goods

exports rom China have largely been defationary, the main-

lands soaring demand or raw materials has been infationary.

Similarly, while low-cost imports rom China have been highly

benecial to U.S. and European consumers, surging Chinese im-

ports have been blamed or job losses in some nations in Europe

(notably Italy) and parts o the United States. Chinas reintegra-

tion into the global economy has greatly expanded the global

labor orce during the past two decades, putting a huge new

pool o skilled and unskilled labor into the reach o American

and European rms. Unsurprisingly, outsourcing and leverag-ing low-cost labor in China have become key strategies or many

U.S. and European multinationals.

The Threat and the Opportunity

Like Americas global economic emergence in the late 19th

century, Chinas ascent and integration into the global economy

represent a huge boost to both global supply and demand.

Chinas boost to global supply is well documented, with the

mainland increasingly characterizedominouslyas the

actory to the world. To a large degree, the description ts:

Chinese actories now assemble and manuacture 70% o the

worlds toys, 60% o its bikes, hal o its shoes, and one-third o

its luggage. Among other consumer items, China builds hal o

the worlds microwave ovens, one-third o its televisions and air

conditioners, and one-quarter o its washing machines.

Against this backdrop, Made in China has become one o the

most common and visible labels in the world, spawning protec-

tionist sentiments in the United States and Europe. However,


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Made in China needs to be claried and quantied. While

Chinas rapid industrialization and surging export prowess havebeen nothing short o breathtaking, they have been underpinned

and underwritten by large infows o oreign direct investment.

Since opening its economy to the outside world in the late

1970s, China has attracted more FDI than any other developing

economy, the majority o it in various manuacturing sectors.

On a cumulative basis, China has absorbed more than $600 bil-

lion in FDI since the start o this decade, with more than 36%

originating in Hong Kong.

(As a side note, investment infows rom Hong Kong to China

tend to be infated by the so-called round-tripping o capitalin and out o the mainland; hence the gures need to be treated

careully.)

Thanks to oreign investment-led growth, Chinas exports have

soared since the late 1970s, creating a great deal o riction with

the United States and Europe. However, many policymakers in

the United States and Europe ail to recognize that a great deal o

what China exports to the United States and the world are goods

rom so-called oreign-invested enterprises oreign subsid-

iaries o various global multinationals. That is, many goods

stamped Made in China generate prots that eventually accrue

to the balance sheets o multinationals based in the UnitedStates, Europe, and elsewhere.

Indeed, the contribution o oreign enterprises to Chinas export

ascendancy is nothing short o staggering. From a share o 2% in

1985, aggregate exports o oreign-owned subsidiaries accounted

or more than hal o Chinas total exports in 2006. In products

like computer parts and consumer electronics, the oreign share

is even higher.

China the Consumer

China the consumer is not nearly as powerul as China the

producer, although it is on the rise. While much has been written

about low-cost Chinese labor, the bulk o Chinas labor orce

desires the same material goods and services many in the West

take or granted. By liting more than 200 million people out o

poverty since 1978, China has created a resh supply o consum-

ers. Chinas middle class remains small relative to the overall

population, but the World Bank estimates that it currently num-

bers 56 million people a consuming cohort greater than most

populations in Europe. Whats more, the World Bank estimates

that the mainlands middle class will swell to more than 360 mil-

lion people by 2030.

While China the producer o labor-intensive goods has squeezed

the incomes o lower income workers in the developed nations,

China the consumer has sparked growing demand or more

capital goods, aircrat, sotware services, and similar goods

and services. It has helped create jobs and raise the incomes o

many highly skilled workers in the developed nations. Across a

variety o sectors, China has emerged as one o the astest-grow-

ing markets in the world. China ranking as the second-largest

automobile market in the world in 2006, surpassing Japan, is just

the latest example o this trend. However, the economic chal-

lenge beore China is to rebalance growth moving away romexports and investment and embracing personal consumption.

The Shape of the Future: The Transatlantic Economy at a

Glance in 2025

The next decade and a hal will bring massive change to the

global economy. This change, though, is expected to gradual and

orderly, albeit with ts and starts. Globalization will proceed, bu

will become less Westernized.

The transatlantic economy (the United States + EU 27) will

remain one o the largest and most powerul economic entitiesin the world in 2025, accounting or roughly 33% o global GDP

on a purchasing power parity basis. This assumes an annual real

GDP growth rate o 3% in the United States and a slower pace

o growth in the European Union o around 1.7%. Owing to its

more fexible labor market, entrepreneurial culture, and avor-

able demographic prole, the United States will outpace the EU

and Japan. The latter conront signicant structural barriers to

growth and demographic challenges.

Similar to the past quarter-century, the developing nations will

continue to grow at a aster clip than the developed nations. We

assume 6% annual real GDP out to 2025 or the developing na-

tions, led by China, India, and similar levels o growth in parts o

Arica, the Middle East and South America. Based on these rates

o growth, the developing nations will account or just over 60%

o world GDP in 2025.

While the combined output o China and India in nominal dol-

lar terms is expected to be on par with the EU 27 in 2025, at 14%

o the total, China, India, and many other developing nations

will remain ar poorer than many developed markets. This will


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limit and constrain the wealth, power, and prestige o the devel-

oping nations and open the door or cooperation and collabora-tion between the developed and developing nations.

There are multiple risks to the outlook the baseline assump-

tion is or global trade and oreign direct investment to remain

relatively unbound, but this is hardly a given. I trade or invest-

ment protectionism takes hold and becomes embedded in vari-

ous countries and regions, global growth will slow and trigger

other negative, unintended consequences or all parties. Energy

and ood security will remain key priorities and tension points

or nations over the near-term.

Finally, a vibrant and robust global economy in 2025, with thetransatlantic economy beneting rom such a backdrop, assumes

a rising degree o mutual interdependence between the devel-

oped and developing nations, which is not a oregone conclu-

sion. Greater global interdependence requires the developed

nations to display a more accommodating and accepting stance

and mindset about the rise o the developing nations, as well as a

more collaborative spirit rom the developing nations on trade,

investment, and such specic issues as energy security, intellec-

tual property rights, and industrial deregulation.

In the end, in the ace o growing domestic opposition, pro-

moting and championing global interdependence is one o thegreatest challenges beore the United States and Europe. Making

this process a success requires a three-prong strategy on the part

o the United States and Europe.

The Transatlantic Economy: Twilight or Transformation?

The transatlantic economy remains the largest and most dynam-

ic commercial artery in the world. However, there is a general

eeling, as well as mounting evidence, that the primacy o the

transatlantic economy is in its twilight.

Unsurprisingly, this backdrop has triggered a wave o angst in

the United States and Europe, long the standard-bearers o the

global economy. On both sides o the Atlantic, alarm bells are

ringing over the potential or lost jobs, lower incomes, and a

food o imports courtesy o the new global economic hierarchy.

The benets o globalization are increasingly being questioned,

with a powerul undertow slowly eroding support or a pro-

cess that has been hugely benecial to stakeholders in both the

United States and Europe.

Globalizations demise would produce only losers. The challenge

beore the transatlantic economy, quite simply, is to dispose othe mentality that the developing nations rise goes hand-in-

hand with the decline o the Unites States and Europe, and to do

so quickly. Transatlantic peoples must develop a more dynamic

and orward-looking mindset that embraces the core principle

that integrating nations rom Poland and Turkey to South Arica

and Vietnam into the global economy will benet all parties

involved.

The transatlantic economy needs to transorm its thinking and

actions. The United States and Europe need to ollow a three-

pronged strategy:

1. Identify and cooperate in areas of mutual interest

The United States and Europe should engage and work with the

developing nations in a number o key areas that are mutually

benecial to all parties, including global climate change and the

environment, energy security, and the challenges associated with

rapidly aging populations.

Where possible, the United States and Europe should col-

laborate on how best to tackle these issues. The transatlantic

partnership needs to actively engage China, India, and others

on creating new energy technologies, tapping renewable energysources, and setting global warming regulations that steadily

reduce carbon emissions. Virtually every nation in the world

conronts a rapidly aging population, so joint eorts should also

be directed at securing the uture or the global elderly.

In addition to the above, the United States and Europe should

work to increase the participation and involvement o China

and other key developing nations in the deliberations o vari-

ous multilateral organizations, such as the G-8, the Organisa-

tion or Economic Co-operation and Development, the World

Trade Organization, and the International Energy Agency. Such

a strategy would help acilitate and coordinate global macroeco-

nomic policies.

2. Continue to strengthen the transatlantic partnership

The stronger the transatlantic economy, the better positioned the

United States and Europe will be to meet the challenge poised by

the rise o the developing nations. In this respect, strengthening

the transatlantic partnership is critical to ensuring a smoothly

unctioning global economy.


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Among all the commercial arteries in the world, the transatlantic

economic ties are the deepest and thickest. However, varioustransatlantic taris and non-taris, regulations and bilateral

industry impediments have slowed the pace o transatlantic

integration, notably in service areas. The transatlantic economy

could become even more competitive and dynamic i various

protectionist layers on both sides o the Atlantic were removed,

allowing or an even deeper level o integration across various

sectors. The task or policymakers is to nd mutual areas o

cooperation and convergence that will ultimately strengthen the

overall transatlantic economy.

Above all else, the United States and Europe need to work dili-

gently so as not to allow specic bilateral tension points to ester,thereby precipitating a transatlantic split. Neither party can

aord a divorce. Such a scenario would devalue the global infu-

ence o the transatlantic partnership; it would undermine joint

eorts to integrate others into the global economy and would

represent a leap backward in ostering global prosperity.

3. Get things right at home

Adjusting to the competitive challenge o China and other de-

veloping nations requires that the United States and Europe get

their own economic house in order, which would help boost the

condence and competitiveness o the transatlantic partnershiprelative to the rest o the world.

The to-do list in the United States includes increasing the na-

tional savings rate, reconciling unsustainable Medicare and Med-

icaid payments, reorming Social Security, addressing Americas

energy decit, strengthening Americas public school system and

cutting the ederal budget decit.

In Europe, creating the right conditions or sustainable eco-

nomic growth is imperative. Toward this end, the EU should

implement measures that would lead to labor market reorm,

the creation o a pan-European capital market, the deregulation

o the service economy, and the implementation o the Lisbon

Agenda.

The Bottom Line

In the end, there are many complementary and convergent

interests that can bind together the transatlantic economy and

the developing nations. The task or the coming decades is to

identiy these interests and construct working relationships or

all parties. Failure to do so will come at a high price. While the

transatlantic economy remains one o the most vibrant compo-nents o the world economy, maintaining this position will not

be easy. Avoiding the twilight means the transatlantic partner-

ship must undergo a period o transormation.

8

Aid Effectiveness

Policy Brie

The German Marshall Fund o the United States (GMF) is a

nonpartisan American public policy and grantmaking institution

dedicated to promoting greater cooperation and understandingbetween North America and Europe. GMF does this by supporting

individuals and institutions working on transatlantic issues, by

convening leaders to discuss the most pressing transatlantic themes,

and by examining ways in which transatlantic cooperation can

address a variety o global policy challenges. In addition to its head-

quarters in Washington, DC, GMF has seven oces in Europe: Berlin,

Bratislava, Paris, Brussels, Belgrade, Ankara, and Bucharest.

www.gmfus.org

Documents

The Shape of the Future: The Transatlantic Economy by 2025