Mario Draghi: Deep interdependence - the transatlantic economy and its
prospects
Speech by Mr Mario Draghi, Governor of the Bank of Italy, at the Aspen Institute Italia
International Conference "Italy, Europe and the US - the transatlantic link and its future",
Rome, 1 July 2008.
* * *
1. Is there still a "transatlantic economy"?
How deep is the interdependence between the European and the American economies,
actually? Since the preferential transatlantic link was forged with the Marshall Plan sixty and
more years ago, the global landscape has been transformed. The economic distress of the
European economies, especially in the countries defeated in war, implied the risk of global
political instability in the face of the nascent Soviet bloc. The idea for financial aid to Europe
was conceived. In December 1947 President Truman had proclaimed that "Our deepest
concern with European recovery ... is that it is essential to the maintenance of the civilization
in which the American way of life is rooted."
For the United States, the Marshall Plan was also an investment in its own security and
prosperity. And quite an economical investment at that. The first fifteen months of the Plan's
application cost no more than one month of war.1 While America offered aid, it called on the
Europeans themselves, together, to organize a plan for the reconstruction of an open Europe
capable of sustaining its own growth. The American stimulus for Europe's gradual and
multilateral liberalization of foreign trade was crucial.
Italy played a special role in transatlantic relations. Through the mid-1960s its trade with the
United States was relatively more intense than that of the other large continental countries.
America provided 14 per cent of Italy's imports and took 10 per cent of its exports. For
France and Germany these shares were at least five points lower; Germany reached the
Italian level only at the end of the period. US leadership in direct industrial investment in Italy
was strengthened during the 1950s.
In the decades since, more than anything else the transatlantic link has meant cultural
fertilization. The United States, for centuries the beneficiary of European culture, found the
way to repay this debt, fecundating a war-wracked Old World not only with material aid but
above all with the culture of the market, the programme of spreading prosperity to the
masses, and innovative entrepreneurial approaches.
The Marshall Plan's Overseas Technical Assistance and Productivity Program was designed
to boost productivity by training and the transfer of American industrial practices to western
Europe. Even after the end of the Plan, US experts continued their missions to Europe as
industrial consultants, and European engineers continued to visit the United States for
training.
A good number of Italian public administrators took advantage, including the Bank of Italy's
Salvatore Guidotti, who learned "modern" national accounts methods in Washington. A
number of management schools on the Harvard pattern were founded in Italy. Two of the
leading figures in the Italian industrial renaissance, Vittorio Valletta and Adriano Olivetti, were
influenced by this climate.
Today the European economic community is an established fact, the Soviet adversary has
dissolved, Asia has stridden purposefully onto the world stage and other regions too are
clamouring for a larger role. The economic supremacy of the United States remains, but now
it must come to grips with a series of other economic power centres. How, and how
profoundly, have these developments affected the interdependence between the economies
on the two sides of the Atlantic?
Let us examine the facts. Economic interdependence must be assessed in three respects:
the real economy (trade and direct investment); the financial economy; and economic policy
(reciprocal influence and cooperation).
2. Trade and foreign direct investment
2.1 On trade. First, a premise: both the US and Europe were and are still relatively
"closed" economies. For the United States, foreign trade in goods represents scarcely a
fourth of GDP today. The openness of today's 27-member European Union is of about the
same order of magnitude.
However, this similarity conceals significant differences in trend. The United States built its
internal market much earlier than Europe, in the nineteenth century; and even in the 1950s
and 1960s American foreign trade was much more modest than now, accounting for just one
tenth of GDP.
The dynamics was very different. The US were a closed economy with a predominant
internal market until recently. The single countries of Europe were much more open versus
the US than vice versa before European integration. As this took off the ground, the internal
market replaced external trade.
America's "discovery" of the importance of the world around it is historically recent. It has
been fostered by globalization and spurred by the deficit of domestic saving. But the secular
dominance of the US domestic market makes American firms and policymakers alike
primarily inward-looking.
Europe does still consist of sovereign states, but every one has a strong propensity for
foreign trade, historically rooted both in corporate strategies and in economic policy
philosophy. A good part of that propensity has been channelled into the relatively recent
phenomenon of an opening up of national markets to bring them together in one single
market.
Transatlantic trade nevertheless remains the largest component of both areas' external
economic dealings. In 2007 each side took about a fifth of the other's exports; the United
States supplied 12 per cent of Europe's imports, Europe 18 per cent of America's. These
shares are still large, but smaller than just a decade ago. They have been lowered by the
emergence of major new trading powers outside the Atlantic area.
2.2 In the flow of productive capital too, the once very close interdependence between
Europe and the United States has been affected by the emergence of major new countries
that both receive and make foreign direct investments. However, the figures on the stock of
investment - which reflect the past and not, like flows, only the present - paint a picture of
still intense interdependence.
Today as thirty years ago, the United States and the European Union are the greatest
sources of foreign direct investment in the world, the origin of 70 per cent of the world stock.
They have been and still are highly attractive for foreign investment. Despite the competition
of the emerging economies, they are host to 60 per cent of the world's outstanding foreign
direct investment. The interdependence between them is evident. The value of American
capital in Europe and European capital in America now amounts to nearly one trillion euros.
Italy's overall foreign direct investment has been marginal, with annual flows amounting to
just 2 per cent of our GDP on average in the past 10 years, far below the levels recorded in
Germany, France or Spain. FDI in Italy have averaged 1 per cent of GDP, as little as in
Germany, against over 3 per cent in France and Spain.
3. Finance
In the financial sphere, the interdependence between the two sides of the Atlantic is harder
to isolate. Certainly, the American model deeply influenced developments in the financial
services industry and its legal infrastructure in Europe.
But finance is now global, not only transatlantic. In the past 20 years the financial markets of
the main advanced and emerging countries have become more and more closely integrated,
in response to technological progress and liberalization. Physical production too has played a
role. Today, the components of many industrial products are ordinarily made in one country,
assembled in another, and then sold throughout the world. This unbundling of production
requires high international capital mobility; but the global financial opening has far exceeded
that of foreign trade.
The co-movement, on a world scale, of national stock exchange indexes and bond yields is
empirically significant. Since the 1990s until now, the price variability of a stock has been
better explained by the company's industry than its country.
Transatlantic ties are less visible in today's global financial system than in the past. Good
examples are foreign exchange dealing and portfolio investment. The dollar and the euro are
still the most heavily traded currencies, being involved in 86 and 37 per cent of the exchange
rate transactions, respectively; but the share of the emerging currencies is rapidly rising, and
it is now equal to nearly 20 per cent. Europeans still own more than a third of all the US
stocks and bonds held by non-residents, but emerging-country investors are moving up
rapidly. The portion in Chinese hands has quadrupled since the turn of the decade to almost
10 per cent, owing above all to China's build-up of foreign currency reserves. That of
investors from Latin America has doubled to over 6 per cent.
4. Economic policies
Taken all together, the stylized facts I have set out so far make a composite picture.
Transatlantic links are still important, but less than in the past, in a globalized and polycentric
world. In the field of economic policy, however, they remain today more than ever the centre
of international relations.
The economic and financial governance of the world rests on a delicate balance between
competition and cooperation. The global economy sprang from the success of a model of
"democracy and market" that now - admittedly, differing in extent and varying in mix -
inspires a growing number of national systems around the world. The first and leading
purveyors of this model since World War II have been the United States and Europe. And it
is still up to them to set the example of good, fruitful cooperation.
Two major questions are on the order of the day: free trade and international monetary and
financial stability.
4.1 Free trade is under fire today as it has never been since the 1980s. The 2001 Doha
Round of talks for further liberalization has stalled. There is widespread disillusion and alarm
over globalization. The task facing governments is not an easy one. The prices of essential
goods are rising, the purchasing power of wages and salaries is decreasing, the tranquility of
savings is being threatened. And it is true that the fruits of the globalized economy have been
distributed unequally among the different social groups. Public opinion is bewildered by a
confused world; in the crisis citizens seek reassurance. I understand that governments
rediscover the value of protectionist formulas. Freedom of trade may appear a risk,
protectionism a form of relief. But problems of income distribution cannot be solved by drying
up one of the main sources of income.
Both sides of the Atlantic have an interest in preserving a climate propitious to the orderly
growth of international trade and investment, based on a set of rules that are above all
equitable.
The main emerging countries, which have benefited so greatly from global integration, should
undertake more substantial commitments to open their markets and accept stricter
international rules. Also it is hard to imagine that the transatlantic partners would not be able
to find a compromise solution involving a balanced reduction of European import tariff
barriers and US farm subsidies.
4.2 In recent months, we have been engaged in assessing the risks and malfunctions of
financial innovation and integration. Financial instability has revealed, among other major
flaws, serious regulatory inadequacies. Since the onset of the crisis, the G-7 Finance
Ministers have asked the Financial Stability Forum to review existing regulation with a view to
making the global financial system more resilient to future shocks. The FSF Report was
endorsed by the G-7. It addresses the perverse incentives that have produced a level of
leverage both excessive and misperceived, and introduces new capital and liquidity
requirements.
On the foreign exchange front, the dollar, in spite of its present weakness, remains the
currency of the world's largest economy, with deep, open and liquid financial markets and a
central bank with a firmly established reputation for independence.
Today, however, these same qualities can be claimed by the euro and the area that has
adopted it as single currency. Already the euro is widely used internationally for commercial
invoices and as currency of denomination of debt instruments. Since 1999, for instance, the
share of instruments denominated in euros has risen by more than 10 percentage points to
over 30 per cent of the world total; that of the dollar stands at 44 per cent. For the time being
the currency is still mainly regional, its use outside the area being largely confined to
bordering countries. But the premises would appear to be in place for an extension of its
international role in both trade and finance.
The transatlantic link is extremely precious and must be cultivated at the policy level. New
prospects will open up shortly. To overcome today's challenges, it will be necessary for
objectives to be shared and decision-making to be based on solidarity. The United States
and Europe, more closely united, are a guarantee for the world's stability.