Stability and Security - A Transformed Transatlantic Partnership
Thank you, Kurt Lauk, for the kind introduction and for your years of support for stronger transatlantic relations, especially in business and finance.
Before coming to Germany as Ambassador in 1991, my predecessor, Vernon Walters, gave me only one bit of advice: never forget that speeches are very important to Germans. They like to give them, listen to them, and analyze them far more than is the case in the United States. He had once spoken to a distinguished group like this for 40 minutes. When he sat down, rather pleased with his performance, he was surprised to hear his host say, "Mr. Ambassador, thank you for your remarks. If you ever have time for a real speech, please come see us again!" Well, if 40 minutes is where a "real speech" starts, you will receive from me today only "remarks," since Kurt Lauk asked me to limit my presentation to 35 minutes. A longer version of my presentation is available with the conference materials.
I am honored to be on this distinguished program, and especially to speak between my friends Chancellor Angela Merkel and Professor Klaus Schwab. The Chancellor and I met fifteen years ago, when I was a young American Ambassador and she was a younger Federal Minister. In the intervening years, in Berlin and Washington, as well as in her constituency on Rügen and on long walks in the countryside north of Berlin, we have exchanged views on how our two countries can work even more closely together to advance peace and prosperity in the transatlantic community and beyond.
Making globalization work for our citizens
Over the last five months, a new energy in the German-American relationship has been palpable. Our two leaders and their key ministers are speaking more often and more candidly on key issues. This stronger German-American partnership, standing at the center of a strong European-American partnership, is critical to face global threats and seize global opportunities to enhance our prosperity and security.
Global challenges require a level of leadership that only a true European-American partnership can provide. The new German government has taken important steps to bring back the tradition and spirit of German-American and transatlantic cooperation.
Global leadership, including a strong transatlantic relationship, must be grounded on a strong economic base. Indeed, the title of my presentation -- "For Stability and Security - A Transformed Transatlantic Partnership" makes clear that while stability and security continue to have an important political-military dimension, the true transformation in the transatlantic relationship must have at its core an economic relationship that also makes an integral contribution to stability and security.
Today, domestic strength is increasingly a function of whether an economy can adapt to the challenges and exploit the opportunities of globalization. Both Germany and the United States benefit enormously from globalization. Germany is the world's largest goods exporter; its exports to China and India alone, for example, have more than doubled since the year 2000. As the world's number one destination for foreign investment, the United States depends on global investors to provide the capital beyond what our own domestic savings can provide. Last year, private inflows to the United States exceeded $1 trillion.
For the U.S. economy, globalization has been a source of economic dynamism and a huge job creator. The U.S. economy has created on average 1.6 million new jobs per year since 1995. But these job figures are net the difference between jobs eliminated and jobs created. They hide a huge amount of "creative destruction," to use Joseph Schumpeter's term. For example, last year, the net number of payroll jobs in the United States rose by about 2 million. A separate survey estimates that this solid increase resulted from about 57 million new hires and about 55 million separations during that period. That is a job turnover rate of a little more than 40%, and roughly one-third more than the size of the entire German labor force.
Another way to look at this trend is job tenure. In the United States, the average worker holds a job for 6.6 years; in Germany the number is 10.6 years. And tenure is trending downward in the United States: studies show that, on average, a U.S. worker works for 10 different employers between the ages of 18 and 38. This mobility is generally productive, both for the individual and the economy, because each move to a new employer can involve greater responsibility, greater pay, or both. These multiple opportunities highlight a fundamental reality of globalization: there tends to be much less individual job security but there is ample employment security because of the constant supply of new opportunities generated by the global marketplace.
Unfortunately, what usually gets the headlines in the United States is when a big company lays off workers. What gets less coverage are the 32 consecutive months of jobs growth we have recently enjoyed, historically low unemployment of 4.7%, and record tax revenues.
U.S. productivity numbers also highlight how flexible job and product markets increase both the number of jobs and the productivity of those holding jobs. Productivity in the United States has steadily accelerated over the last three decades, originally driven by information technology, but more recently also by more effective adoption of new technology in the service sector. What makes that acceleration possible is a dynamic job market and a flexible regulatory structure that readily accommodate the new market opportunities technology creates.
"Creative destruction" thus clears the way for people, ideas, and capital to flow to better investment and better jobs. It allows innovation and human capital to be turned into higher opportunities and rising incomes.
Still, what is dynamic in economic terms can cause stress in personal terms. Americans, like Europeans, worry about the effects of globalization on their jobs and families. Even with many opportunities, changing jobs is not painless, and often requires retraining and relocation by workers. But the answer to dealing with the stress of job dislocation is not to slam on the brakes of the growth engine of the economy by restricting labor flexibility. Just the opposite: the answer is to make our economic and social infrastructure supportive of dynamism.
The case for reform
The impact on growth and jobs from increasing labor and product market flexibility is clear. OECD research shows that countries' adopting best practices in product market regulation could increase Europe's per capita GDP by 3.2% an additional 850 euros per year for every man, woman, and child in the EU. For labor market reform, Europe's adopting flexible labor market policies would increase employment rates by six to nine percentage points an increase of 22 million jobs in the EU.
Importantly, this applies regardless of the level of social benefits, meaning flexibility need not come at the expense of a generous social contract. I often find in Europe that the response to U.S. arguments for more economic flexibility is: "Well, the United States can tolerate more income disparity, but this is incompatible with the European social model." But a country like Denmark shows this to be a false trade-off. In a program sometimes called "flexsecurity," it combines generous unemployment benefits with flexible labor rules and active policies to help workers find new jobs. Denmark's 5% unemployment rate is roughly the same as in the United States. Its average job tenure is the same as Britain's and only marginally higher than in the U.S. Every country must choose its own model according to its own set of social preferences, but there is no reason that Germany cannot increase its economic flexibility while preserving the basic nature of its social contract.
Indeed, I believe Germany can play a vital role in leading Europe toward a realistic approach to its economic future. America would like to see Germany return to its historic role as the engine of European growth, and Germany is poised to make real strides in leading the way toward ambitious, pro-growth reforms. German firms have returned to competitiveness and now are in a position to respond to an improved environment by investing and hiring in Germany as well as abroad. The effects of the reforms under the prior government, which so far have not been apparent, also may begin to be felt, and the new coalition has solidified its position with voters and extended its mandate in recent regional elections. The government's initial focus on deficit reduction, helped by improved growth, has put the deficit on a downward path. This provides some fiscal space in the future to ease transition costs.
An accelerated reform process in Germany would have repercussions throughout Europe. The Lisbon Agenda was designed to use peer pressure to motivate difficult but necessary reforms. What it has been lacking is real leadership by example. If Germany becomes that leader, the rest of the continent will follow.
This does not mean reform will be easy transitions rarely are. But Chancellor Merkel led a CDU campaign that sought to be honest about the economic challenges Germany faces and proposed real, if not always popular, solutions. Her vision of German economic resurgence based on a "creative imperative" that she laid out in her speech to this year's World Economic Forum, which compliments President Horst Köhler's call for Germany to be a "nation of ideas," is compelling and captures the breadth of the challenge from globalization. This vision takes the idea of innovation beyond simply looking at R&D and education to examine the basic economic factors that give individuals the freedom and opportunity to be productive and creative in a knowledge economy. The Chancellor takes inspiration from Ludwig Erhard, who said in a 1957 book, "Prosperity for All", "I want to prove myself on my own initiative. I want to bear life's risks myself, be responsible for my own fate. You, Country, should ensure that I am able to do so." She then asks the question in more practical terms, "What regulatory framework does our changed world need to allow every individual to enjoy the fruits and benefit from the progress provided by our society and our world?" The Chancellor's answers to that question are beginning to emerge in her calls for reforms of Germany's collective bargaining, "co-determination," and health systems.
The framework must provide the incentives and flexibility for companies and jobseekers to match skills and needs in the labor marketplace efficiently. Nothing degrades creativity more, from an economic perspective, than unemployment. The answer also must recognize that we must look ahead at what the global economy is becoming, not just what it is now. It is the equivalent of running to open space in football (soccer), anticipating where the ball will be rather than where it is.
I do not need to go through the German reform agenda with this audience. You know it far better than I. But I will mention a few principles:
1. First, in many cases reforms need only formalize actions that are already happening informally in the German economy. The improved competitiveness of German companies is at least partly the result of informal labor agreements that allow for more flexible work rules and longer hours in spite of labor regulations. The magnitude of the informal sector is also a symptom of a job market finding a way around an overly rigid regulatory system. Formalizing these arrangements will make the economy more efficient and potentially improve revenue performance as the grey economy shrinks.
2. A second principle is that Germany must find ways to lower the labor tax wedge which, at 52% of total labor costs for an average worker, remains one of the highest in Europe. This applies to other taxes as well. There has been considerable debate recently about the scheduled 3% VAT increase. With consumption and employment still the weak links of the German recovery, it is important that deficit reduction measures not stifle growth in these areas.
3. Third, there should be a particular focus on women. Germany has untapped productive potential from women who may want to work or to work more but lack the infrastructure to be able to do so. Female labor force participation in Germany is 66% vs. 69% in the U.S., and 76% in countries like Denmark, where there is more active support for working women. Changes like extending school hours and providing after-school programs and school lunches can have a real impact. A German girl born in 2006 has a life expectancy of 90 years. She must be given the chance to maximize her economic potential both for her and her family's own well-being and to help meet pension demands of an aging society.
4. Which brings me to a fourth principle, which applies equally to the United States, that changing demographics an aging population and declining birthrates must be at the center of the policy debate. These changing demographics require us to re-think the nature of retirement and how we provide for a population living thankfully far longer than we ever envisioned when we created our pension systems. It means thinking creatively about how to extend productive working lives of older people and even what "older" will mean in the future and also about immigration, which can create a larger workforce to finance pension obligations.
Ladies and gentlemen, it is not just German companies that are poised to respond to reforms with more investment. U.S. and other foreign investors are also anxious to bring capital, jobs, and management resources to Germany as the investment environment improves.
The benefits that cross-border investment brings to both of our economies are enormous. Foreign direct investment flows into the United States reached $129 billion in 2005, double the average from the mid-90's. We estimate that foreign firms provide 5.1 million jobs, with German firms accounting for over 15% or 800,000 jobs. Forty percent of these are in manufacturing, as compared to 10% in the overall U.S. workforce. In Germany, U.S. cumulative fixed investment is worth about $80 billion, and U.S. firms account for 500,000 jobs. Foreign investment in all its forms including foreign direct investment, like AMD in Dresden; private equity; and portfolio investment is a growth engine that must run smoothly for our countries to continue to prosper.
The last few months have seen headlines on both sides of the Atlantic about restrictions on foreign investment. In the United States, the Dubai Ports case raised important security issues and sparked a debate in Washington about the paradigm for foreign investment in the United States. In Europe, some countries have attempted to thwart takeovers of perceived "national champions," while other countries have continued to raise concerns about the free movement of labor and capital within the European Union.
These developments have raised questions in the minds of global investors about whether the doors to foreign investment truly remain open both in Europe and in the United States. Together we must make clear that the answer to that question on both sides of the Atlantic is a resounding "Yes." As our governments debate how to deal with the legitimate national security concerns raised by globalization, we must make sure that creeping protectionism is kept fully at bay. If we do not, a fundamental driving force of both our economies will be put at risk.
For our part, we are keenly focused on addressing national security concerns while ensuring that proposed changes to the process for reviewing foreign investments do not create unnecessary and counterproductive barriers to participation in the U.S. market. I want to make clear that the vast majority of foreign investments over 90% are processed expeditiously and without controversy.
In this regard, it would be helpful to add another voice to the debate, that of foreign investors who are responsible for those 5 million jobs I mentioned earlier. I would urge CEOs of German firms with major investments in the United States to meet in Washington with members of the Administration and also with Congressmen and Senators from the states where they have operations, and to have Administration officials and legislators visit your U.S. plant operations to see Americans at work based on investment decisions made abroad. This personal contact will help drive home the important economic and political point that foreign investment creates American jobs.
For Europe's part, it is particularly important that Member States support the effort of the European Commission to enforce European takeover rules and resist protectionist trends aggressively. This is one of the first big tests of deeper market integration. Failure to enforce the new rules would be a major blow to one major founding principle of modern Europe: free movement of capital among EU Member States. State-owned firms in Europe complicate progress in this area. As we saw in the recent Enel bid for Suez in France, the state-owned firm Gas de France was used as a tool for blocking a foreign investment bid. Germany so far has resisted such temptations. For example, the recent investment by the Blackstone private equity group in Deutsche Telekom sent a positive signal about Germany's investment environment.
Another important signal to investors is our two countries' agreement to modernize our tax treaty relationship. German government officials and I will sign a protocol to our existing treaty later this afternoon to eliminate source-country withholding taxes on most dividends paid from a subsidiary to its parent company. We believe this will increase returns on cross-border investments and ensure that U.S. investment is not diverted to Germany's neighbors that already have such agreements with the United States.
The protocol also eliminates a long-standing problem regarding our pension funds, by eliminating source-country withholding taxes on dividends paid to such funds. This provision will put U.S. pension funds on an equal footing with German pension funds and should increase U.S. portfolio investment in Germany. I hope that both countries work together to bring this new agreement into force this year.
Leading global economic change
Our combined weight in the global economy and our convergent interests make the United States and Germany natural partners in leading global economic development based on three fundamental principles: free flow of capital, free trade, and flexible exchange rates. We must also work together to adjust global imbalances to sustain the remarkable rate of global growth we are now experiencing. This is a shared responsibility that requires greater exchange rate flexibility in Asia, particularly China; faster growth in Europe and Japan; and higher U.S. national savings, both public and private. This approach was recently reiterated by the G-7 finance ministers and also in direct conversations between President Bush and Chancellor Merkel, as well as in their separate conversations with Chinese President Hu.
It is vital that we speak with one voice on these issues and vigorously tackle our respective policy challenges. The United States is committed to tackling its deficit. It was $318 billion last year, 2.6% of GDP, and is on a downward trajectory based on rising revenues and spending discipline. But no part of the global economy, including the United States, can be effective acting alone. In fact, history and empirical research show that cutting the U.S. fiscal deficit is likely to have only a marginal impact on our current account deficit, especially if others do not do their part. For example, between 1996 and 2000, the U.S. federal fiscal balance moved from a deficit to a surplus, yet the current account deficit increased from 1.6% to 4.2% of GDP.
The Federal Reserve and the IMF conclude that, at a maximum, bringing the U.S. federal budget into balance would only reduce the U.S. current account deficit from the present 7.0 percent of GDP to 5.9 percent. Yet this adjustment would probably come at significant cost. The IMF study suggests a five-year loss of more than $300 billion in U.S. output and thousands of jobs, while the Fed study suggests much higher costs. These studies make clear that any unilateral attempt by the United States to eliminate the current account deficit by increasing national savings in other words reducing demand in the absence of more dynamic domestic demand in Europe and Asia to take up the slack, would be disastrous for the world economy.
What is critically needed is an orderly rebalancing of global savings and demand. As the United States increases its savings and reduces its deficit, Germany, for its part, must reverse the decline in domestic demand growth of the last decade. These have seen both German investment and private consumption decline as a percentage of GDP. We share a compelling common interest in growth and an orderly adjustment in imbalances, and this should remain at the center of our economic partnership. We both need to act.
Creating an open trading system should also be at the core of our global economic cooperation. As I noted, Germany is the world's largest goods exporter, and I stand before you today as an example of German export prowess. My parents met and married in 1947 in Berlin, and I was born exactly nine months later in the United States. So, like President Kennedy, I am proud to say "Ich bin ein Berliner," and, in my case, "Made in Germany!"
Germany benefits enormously from trade liberalization and thus has a responsibility and an interest in leading EU trade policy. A successful Doha round that achieves progress on tariffs and market access for agricultural and industrial goods and services is in both of our countries' vital interests but risks being sidetracked by Europe's farm sector interests. I have heard it said that, for historical and other reasons, Germany's interests on trade must take a back seat to the interests of other EU members or Europe as a whole. In my view, that is a false dilemma. As was the case with the recent negotiations over a new EU budget, Europe as a whole would benefit if Germany actively leads it toward a new consensus on trade.
With U.S. Trade Promotion Authority often called "Fast Track" authority set to expire in mid-2007, there is very little time left for a breakthrough. Germany should exert its maximum influence to help steer the EU toward a position that can break the deadlock in agriculture market access. If it does so, we can work as partners in pressing for ambitious results and thereby bring these talks to a successful end.
With energy prices now a major risk factor for the global economy, energy cooperation is also being elevated to the top of our bilateral agenda. Our cooperation must embrace both supply and demand:
must develop the technologies for new cleaner fuels, including considering next-
generation nuclear technology.
Ladies and gentlemen, I also want to highlight the important role that finance ministries around the world have to play in combating our most pressing national security threats, including terrorism and the proliferation of weapons of mass destruction. In the post-9/11 world as terrorists, proliferators, and other criminal actors seek to use banks to store and move their money these ministries carry a new burden. As U.K. Chancellor Gordon Brown noted in February, finance ministries have now become departments for security, working closely with the traditional security ministries to meet any government's first responsibility: ensuring the safety of its citizens.
In the U.S. Treasury Department, we have created a new office and re-focused resources to meet this challenge. The financial tools we have at our disposal not only help protect the financial system from abuse, but can also help to identify, track, and combat illicit actors operating within the financial system. Indeed, targeted financial sanctions and other financial authorities can be incredibly effective offering a powerful tool to support diplomatic efforts. When we are confronted with a threat that is not susceptible to diplomatic pressure, financial authorities are among the rare measures short of military force that we can use to exert leverage.
In the terrorism context, the international community has made great progress, and Germany has been a key ally in this fight. As Chancellor Merkel said recently in Washington: "No country on its own can fight the threat of international terrorism. Europe and America must stand together." Together, we have designated and frozen the assets of al-Qa'ida financiers through U.N. Security Council Resolution 1267. Through the Financial Action Task Force, we have strengthened international standards to prevent money laundering and terrorist financing. Since 9/11, Germany has revised its laws and its regulatory regime to enable faster and more complete scrutiny of financial accounts.
The financial tools we use to fight terrorist financing can also be used to combat nuclear proliferation. Proliferators, like terrorists, require a substantial support network. By cutting off the support lines of that network, we can isolate individual proliferators, paint a clearer picture of how, and with whom, they operate, and erode the infrastructure that supports them. There is no doubt that terrorists would like to acquire weapons of mass destruction. This is perhaps the gravest threat we face today. That is why the U.N. Security Council and the G-8 have called on all of us to develop laws aimed at stemming the flow of financial and other support for proliferation activities.
For its part, the United States has a new Executive Order signed by President Bush in June 2005 that authorizes freezing assets of nuclear proliferators and forbids U.S. persons from engaging in commercial transactions with them. Under this order, eight entities from North Korea, Iran, and Syria were initially designated, and we have continued to pursue additional designations. We have discussed these designations with the German government, as well as others in Europe, Asia, and the Middle East. We want to work with you to ensure that these proliferators are given no quarter anywhere in the international financial system. This necessarily involves not only government-level cooperation, but also partnership between governments and the private sector. Our mutual national security and long-term economic health are dependent on safeguarding our financial systems from abuse.
Pursuing shared strategic interests
Our cooperation on anti-terrorism is only one facet of our broad cooperation in areas vital to our common strategic interests. Other key areas are:
Spreading Democracy in Eastern Europe: Events in Georgia and Ukraine have inspired us in the last two years, but consolidating democracy and prosperity, and extending them to places like Belarus, will take close cooperation especially in the economic area among the United States, Germany, and the rest of Europe. The EU and U.S. decision to apply financial sanctions on Belarus' leadership following that country's fraudulent election and repression of the opposition is a good example of how our combined efforts can keep pressure on authoritarian regimes.
Afghanistan: The U.S. is grateful for the strong leadership role Germany has played in the reconstruction of Afghanistan, including hosting the landmark Bonn Conference in 2002. The international conference on Afghanistan in London in February laid out an ambitious set of policy commitments by Afghanistan, backed by pledges from the international community, including Germany. A strong German role, including through NATO, is key to enhancing domestic security and promoting economic development in Afghanistan.
Iraq: We look forward to cooperating with Germany as we engage with the new Iraqi government to help them realize their vision of a vibrant, market-based economy. Iraq's leaders warrant our strong support in their efforts to develop sound, credible institutions and construct the infrastructure necessary to ensure the realization of their enormous economic potential especially to bring into the international oil market the second largest proven reserves in the world.
Iran: As Chancellor Merkel and President Bush made clear recently, the United States and Europe agree that Iran must be prevented from obtaining nuclear weapons. We are committed to working with our European partners to resolve this issue. As Secretary of State Rice said yesterday, the United States is prepared to join our European partners in direct talks with the Iranians, as soon as Iran fully and verifiably suspends its enrichment and reprocessing activities. Iran has been presented with a clear choice; the time has come for the Iranian regime to benefit from behaving like a responsible member of the international community or face increasing isolation.
Ladies and gentlemen, the years ahead will be difficult in many respects, but I am confident they will not be difficult years for U.S.-German relations. On the contrary, I see this relationship blossoming to the benefit of both our countries and the world. As you in the CDU, the Grand Coalition, and the German business community continue your work to enhance economic opportunities for your citizens and pursue Germany's global interests, you will find a steady partner in the United States. Germany's success is, after all, in our own vital national interest.
I am honored to have been invited to speak to you today, and thank you for your kind attention.
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Diplomatic Mission to Germany
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Updated: August 2006