February 12, 2007
HP-258

Remarks of Deputy Secretary Robert M. Kimmitt
Before the American Chamber of Commerce
On Open Investment:
The Foundation of the German-American
Economic Relationship

Frankfurt, GERMANY –  Vielen Dank, Herr Dombret, für Ihre freundliche wenn auch vielleicht etwas übertriebene Vorstellung!                                              

Es freut mich sehr, wieder in Frankfurt zu sein und ich bedanke mich bei Ihnen, Fred Irwin, daß Sie so eine hoch geachtete Gruppe heute Abend zusammengebracht haben.

[Thank you, Mr. Dombret, for the friendly introduction, even though it was a bit exaggerated!  I am pleased to be in Frankfurt again, and would like to thank you, Fred Irwin, for bringing together such an illustrious group this evening.]

Ladies and gentlemen, it is a pleasure to join so many distinguished guests, including Ambassador Timken, Minister Genscher, and President Weber this evening.  And sincere thanks to the American Chamber of Commerce in Germany for your continued outstanding contribution to the German-American relationship.  Your membership and engagement represent the core element of our transatlantic economic relationship: German companies and entrepreneurs investing in America and U.S. companies and entrepreneurs investing in Germany. Even when the German-American relationship experiences its periodic political difficulties, as happened earlier in this decade, we know we can count on a strong commercial and cultural foundation to keep us close.

As I speak to you this evening, I am reminded of the counsel I received before coming to Germany as Ambassador in 1991.  My predecessor, Vernon Walters, passed along to me only one bit of advice: "Never forget that speeches are very important to Germans.  They like to give speeches, listen to speeches, and analyze speeches far more than is the case in the United States."  He once spoke for 40 minutes to a distinguished group like this evening's, and when he sat down – rather pleased with his performance – he was surprised to hear his host say, "Mr. Ambassador, thank you so much 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 only "remarks," since I would like to leave time for your questions at the end of my presentation.

In discussing the economic relationship between Germany and the United States this evening, I would like to highlight some of the economic challenges each country faces, both internally and externally; our shared interests in an open system of global trade and investment; and the significant new initiative recently proposed by Chancellor Merkel to deepen our transatlantic economic ties. 

The 2007 Economic Outlook

Let us begin with the economic outlook, which I am happy to say is positive in each country and serves as a sound basis for enhanced cooperation. As Secretary Paulson noted after the G–7 Ministerial this past weekend, we are enjoying one of the strongest and most prolonged global expansions in memory, and the United States is doing its part. The U.S. economy grew strongly last year. Although the residential housing market has been cooling, growth is being supported by good consumption on the back of solid job creation and wage growth. Net exports are also contributing. Looking ahead, the outlook is very encouraging. Housing activity appears to have stabilized; labor markets are firm; consumer confidence is rising; wages are rising; and inflation is easing. We are looking for solid growth in 2007, in line with potential of near 3 percent.

The role of the United States as an engine of global growth is well-established.  Still, the global economy clearly benefits from multiple strong engines running.  Germany is the key to Europe being one of these engines.  Put simply, Germany must grow for Europe to grow. 

After a first half of this decade that saw slow growth, the near-term economic outlook in Germany is now also positive. The German Institute for Economics recently raised its growth forecast for the year – up from 1.4 to 1.7 percent.  In the wake of estimated 2.5 percent real GDP growth in 2006 -- the fastest growth since 2000 – unemployment recently reached its lowest rate since April 2002 at 9.5 percent.  Strong investment growth and exports have driven the economic rebound.  While initial fourth quarter GDP figures will not be available until tomorrow, investment through the first three quarters of 2006 was up approximately 7.4 percent on an annualized basis, and 2006 exports rose 14 percent over 2005, creating a trade surplus of just over 7 percent of GDP.  Germany is regaining its place as Europe's economic engine. 

However, despite sharing robust short-term outlooks, Germany and the United States both face significant long-term economic challenges, which must be addressed to ensure continued prosperity more broadly.  When both the U.S. and German economies are growing, this creates additional opportunities for deepening the transatlantic relationship that serves as a fundamental source of global stability.  Before I address these transatlantic opportunities, please allow me first to outline what I see as the some of the top economic policy challenges in both countries.

The German-American Economic Relationship

In the United States, sound fiscal policy remains a top priority, and we will continue to work to cut our fiscal deficit. The good news is that we have made substantial progress.  The deficit has been cut in half three years ahead of President Bush's 2009 goal; it was 1.9 percent of GDP in 2006 and is expected to come down further this year. The President's 2008 budget released last Monday envisions further declines in the deficit over the next five years to produce a balanced budget by 2012.  In addition to raising public savings, we also must also address low national savings by providing better incentives for private saving. 

But the recent progress on the budget deficit and efforts to boost private savings will have a limited impact if more is not done to address the long-term growth in spending on entitlement programs: Social Security, Medicare, and Medicaid. Without fundamental reform, entitlement spending as a percent of GDP is set to rise by nearly half from 2010 to 2040, thereby significantly impairing our fiscal sustainability by crowding out all discretionary spending over the next several decades. Without reform, these programs will also erode our competitiveness by placing massive obligations on the backs of 21st century American workers and their families.

In the United States, our flexible labor market is one of our greatest economic assets: it fosters an innovative and productive workforce, motivated by healthy competition and merit-based compensation.  It also maximizes employment and minimizes unemployment, thereby reducing fiscal costs.  Data on labor demand in the United States show that over 2006, hires exceeded separations by the widest margin since the U.S. government began tracking this information in 2000.  And data released last week indicates that the job openings rate climbed to a six-year high in December. Our workers continue to lead the international marketplace in this trend.  Job tenure averages 6.6 years for Americans, compared with an average of 8.2 years for Britons, 10.6 years for Germans, and 11.2 years for the French.  The average American worker now has 10 different employers prior to age 40.  As they make these changes, the majority of American workers gain increased experience, pay, and responsibility.  Labor flexibility in the United States creates "employment security" not necessarily "job security".  Still, to better institutionalize this labor market dynamism, we need to develop a system of health, pension, and other benefits that is equally flexible.  This is the principle behind the Administration's push to expand the use of health savings accounts and use tax incentives to increase access to health insurance that can be purchased in the private market. 

In Germany, recent progress on fiscal, labor, and pension reforms has played an important role in the economic rebound, but more needs to be done.  The weak link in the German recovery remains private consumption, which would benefit from more flexible and efficient labor and capital markets.  In the context of a rapidly aging population, structural rigidities lead to an excessive level of precautionary savings and have helped limit potential growth to under two percent.  If left unchanged, the IMF expects potential growth to decline to 1.1 percent by 2020 before recuperating.

Germany, like most of the developed world, is also facing a demographic shift that represents a critical challenge to long-term fiscal sustainability and economic prosperity.  According to the IMF, Germany's dependency ratio – the ratio of the population over the age of 65 to the population between the ages of 15 and 64 – will increase to nearly 42 percent by 2050, from approximately 33 percent currently.  Only Japan and Italy face more severe demographic challenges.  As a result, the IMF estimates that age-related, annual public spending will incrementally increase 4 percentage points of GDP by 2050 creating a 30 percent of GDP cumulative short-fall.  Recent pension reforms have reduced the future financial short-fall, but Germany's long-term fiscal sustainability is not yet assured.  Just as in the United States, additional entitlement reform is critical.  When Bismarck designed the country's entitlement programs, even a visionary like he could not have predicted that a German girl born this year would have a life expectancy of 90 years. 

Reforming entitlement programs will also help lower non-wage labor costs and stimulate employment and investment. The Hartz IV reforms have increased labor flexibility by expanding part-time employment.  This has helped reduce unemployment, limit wage inflation, and increase external competitiveness.  However, barriers to job creation remain high, stifling employment growth and sending German jobs abroad.  For example, the cost of dismissing redundant workers is 60 weeks of wages, double the average for the OECD, and the share of foreign inputs in German value-added exports expanded from 31 to 42 percent between 1995 and 2005. 

In addition to labor market reform, financial sector consolidation and market deepening in Germany would improve allocation of capital and reduce financing costs.  The German banking sector is large and sound but also segmented, resulting in one of the least profitable sectors in Europe.  The after-tax return on average German banking assets is approximately one-fifth of the return on banking assets in the United States.  Despite the cancellation of state guarantees in 2005, consolidation across and within banking pillars has not been realized.  Beyond the banking sector, both German equity and corporate bond markets are small by international standards, restraining commercial access to financing.  The United States' equity market capitalization is nearly 14 times larger than Germany's and 2.5 times larger as a percentage of GDP. 

As Secretary Paulson has made clear, we at the Treasury Department see financial market

competitiveness as critical to the economic vitality of the United States. We, too, know we must act to be more competitive in an increasingly interwoven global marketplace.  We are organizing a one-day conference to take place this spring that will bring together some of the best minds in the private and public financial sectors to address financial sector constraints in regulatory and accounting structures, and to discuss legal and enforcement challenges.  While the focus will be on U.S. financial markets, I am certain the discussion will be relevant to a wider audience in Europe and Germany.

Importance of Open Investment in the German-American Economic Relationship

As two of the biggest beneficiaries of the unfettered flow of goods and capital in a global market, our countries must also face the growing threat of investment protectionism.  Our combined weight in the global economy and our common interests make Germany and the United States natural partners in ensuring the fundamental principles of free and fair trade; flexible exchange rates; and the free flow of capital across borders.  In Davos, Chancellor Merkel and I heard from members of the Transatlantic Business Dialogue that they are in particular concerned that insufficient attention is being paid to cross-border capital flows and maintaining open investment policies.  TABD's point was well-taken.  As investment flows are many times larger than trade flows, openness to investment is and must remain the sound foundation of our economic partnership.  

The unique history of the German-American economic partnership exemplifies the benefits of cross-border investment.  In 1989, the stock of U.S. foreign direct investment in Germany was around $23 billion.  By 2005, it had grown to more than $86 billion. And even more impressive is the growth in the stock of German foreign direct investment in the United States, which increased from around $28 billion in 1989 to $184 billion in 2005.  The employment benefits of this economic relationship are striking. Altogether, German-American bilateral investment and trade provide over 1.2 million direct jobs in our two countries, and sizably more indirect jobs.  Today, there are more than 3,000 German companies in the United States, with almost 670,000 employees; over 1,450 American companies in Germany provide over 600,000 jobs.  

Looking back to my time as Ambassador, as American soldiers withdrew from Germany as the Cold War ended –an ending in which Hans-Dietrich Genscher played such a pivotal role – these soldiers were replaced by an almost equal number of new jobs in American firms operating in Germany.  Literally, swords were beaten into plowshares.  Foreign investment in all its forms – including foreign direct investment and portfolio investment –is a growth engine that must run smoothly for our countries to continue to prosper.  We must tackle the growing perception that the United States and Europe are becoming less open to investment.  In the United States, over five million Americans work for companies headquartered overseas. Although these jobs comprise only 4 percent of our workforce, they account for 10 percent of our capital investment, 15 percent of annual research and development (R&D), and 20 percent of our exports. And over 30 percent of these FDI jobs are in manufacturing, while only 10 percent of our overall workforce is in this sector.

In spite of these statistics, the past year has seen headlines on both sides of the Atlantic about restrictions on foreign investment.  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.  In the United States, critical attention has been focused on the review process undertaken by the Treasury-chaired Committee on Foreign Investment in the United States, or CFIUS.  These developments have raised questions in the minds of global investors about whether the doors to foreign investment remain open both in Europe and in the United States. 

We must come together to act and make clear on both sides of the Atlantic that we are open to investment and trade, and actively reject the rise of protectionism across the Atlantic or elsewhere in the world.  For our part, the United States is keenly focused on balancing open investment with national security concerns by 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 reviewed by CFIUS continue to be processed expeditiously and without controversy within the initial 30-day review period. Let me make my message crystal clear: the United States is open to investment from abroad, especially from countries like Germany that are similarly open to investment from the United States.

An Emerging Challenge to Open Investment One important way to encourage political support for the free flow of capital across borders is to ensure that terrorists, proliferators, counterfeiters, drugs syndicates, and organized criminal elements cannot use the efficiency of the global financial system to facilitate their illegal activities.  To counter these threats, the U.S. has developed and applied various measures designed to protect our banks and financial institutions, but in an increasingly interdependent global financial marketplace, we must work more closely together to secure the global financial system from those who threaten its integrity. 

But it is not sufficient for only government agencies to increase their vigilance.  It is also incumbent on the private sector – and in particular financial institutions – to work proactively to protect the international financial system from abuse.  We have learned that a robust public-private sector dialogue is critical to this effort.  Governments, with all of their resources, are uniquely placed to inform the financial community about the risks posed by illicit actors. 

Recently, the Department of the Treasury has stepped up our efforts to do just that – share information with key financial institutions around the world about the potential risks of doing business with those who misuse the financial system.  Specifically, this endeavor to educate the financial community has involved informing banks of the deceptive financial practices Iran employs to conceal its pursuit of a nuclear program and its support of terrorism.  Our experience has shown that banks and financial institutions are willing partners in this effort and are appreciative of the information.  They want to identify and avoid dangerous customers who could harm their reputations and business.  Cooperation is in banks' self interests: banks need to manage risk, and knowing their customers is one of the most critical components of risk management.

Revitalizing the Transatlantic Economic Relationship In Chancellor Merkel's remarks in Davos last month at the annual meeting of the World Economic Forum, she discussed the importance of working together to confront challenges across the world.  I was struck by the African proverb she quoted: "If you want to go fast, go alone. If you want to go far, go together."  It was in this spirit, and in Germany's current capacity as President of the European Union, that the Chancellor recently put forward her timely, outstanding proposal for "A New Transatlantic Economic Partnership."  

We strongly support the Chancellor's initiative and look forward to working together with Germany and the European Commission to make this initiative a success.  This proposal has an important political dimension –when any European Union Presidency, but especially Germany's Presidency, makes a transatlantic initiative a central element in its program, it signals a strong political as well as economic impulse, something very important at this time of transatlantic challenge.

On the economic and financial aspects of the initiative, it is important to make clear this is not a proposal for a Free Trade Agreement between Europe and the United States. The priority in the trade arena remains success in the Doha Round, to which both the United States and Germany are engaged and committed. Instead, the Merkel Initiative focuses on improved cooperation to address non-tariff barriers and regulatory cooperation to expand economic activity between Europe and the United States.

We are discussing a number of promising areas where we can redouble our efforts to foster an improved transatlantic economic relationship.  These include: extending regulatory cooperation in a range of sectors; advancing cooperation on enforcement of intellectual property rights; encouraging progress on the work-plan aimed at promoting consistent application of IFRS and US GAAP; integrating our efforts on energy security and addressing climate change; and advancing work on biofuels, energy efficiency, and clean coal.  Many of these topics are already part of the transatlantic dialogue, including in the U.S.-EU Economic Initiative, but we now have the opportunity because of Chancellor Merkel`s leadership to engage governments at the political level and to commit to improved regulatory – and, importantly, deregulatory – cooperation based on shared principles.  The progress we make both during the German Presidency but also beyond will further strengthen the foundation of our deep economic relationship and provide greater stability for the global economy.  

Conclusion

As our nations face challenges in the years ahead, let us never forget the personal dimension of our ties – political, security, and economic. Germany remains the world's largest goods exporter, and the United States is a respectable second.  I stand before you today as an example of German-American export prowess.  My parents met and married in March 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 Berliner," and, in my case, "Made in Germany!"

I am certain that each of you also shares a personal perspective about the German-American economic relationship.  You play a vital role in the link between our economies through your efforts to promote commercial growth and cultural awareness.  Just as important, you can help demonstrate the importance of open investment. For those of you with major investments in the United States, I urge you to visit Washington to meet with members of the Administration.  And, accompanied by your American plant managers, also call on the Senators and Representatives from those states where German capital has created American jobs, and invite the legislators to visit your U.S. plant operations to see Americans at work based on investment decisions made here in Germany. This personal contact will drive home the important economic – and political – point that foreign investment creates American jobs.

Thank you again for your very personal, very significant contributions to our common goal of a stronger German-American relationship at the core of stronger ties between Europe and the United States. I would now be pleased to take your questions. Thank you for your attendance and attention.