A Very Delicate Question

Though the economic health of Western Europe is good, the Continent is bothered by a troublesome Achilles' heel. The difficulty is the failure of postwar Europe to generate enough investment capital either to meet its own needs or to enable it to play an overdue role in world financing. So inadequate are its capital markets that Europe has to depend heavily on the New York money market, thus contributing to the U.S. balance of payments deficit.

Last year foreign governments and companies borrowed a record $1.2 billion on Wall Street; Europe not only took a fourth of that for itself, but saddled the U.S. with the investment needs of many developing countries that should be partially served by European capital. Treasury Secretary Douglas Dillon and Under Secretary Robert Roosa have complained publicly to Europeans about this drain.

Controls & Ceilings. As Europe's economies get stronger, their demands on the U.S. capital market steadily mount. Last year European countries borrowed nearly twice as much in the U.S. as they did from one another. The French South European Pipeline Company raised $40 million; Holland's Philips Lamp sold an $80 million stock offering; West German electrical equipment maker Siemens & Halske borrowed $25 million, and the European Coal and Steel Community took another $25 million. Most of them would have been hard-pressed to raise as much at home. Britain has a long line of municipalities waiting for capital, and West German Shipbuilder Willy Schlieker went broke last year after overextending himself with short-term credits because long-term loans were so hard to get.

Throughout most of Europe, getting investment capital is a major business problem. Britain, the most highly developed capital market in Europe, effectively limits most of its loans to the Commonwealth and the sterling area. France imposes such heavy restrictions on capital that only 15% of the investment of its own businessmen comes from the capital market. The Dutch and the Swiss both clamp ceilings on what they will lend. Most German interest rates are so high--and bankers demand so much control over companies that they lend to--that earlier this year the prosperous Neckermann mail-order house sought almost all of a $10 million loan outside Germany ($1.2 million in the U.S.) to keep out of the bankers' clutches.

Outside of Britain, Europe has no tradition of a free capital market. Its many family-held enterprises have long preferred to scrimp to finance expansion out of profits rather than to float stock issues that might bring in outsiders. Many of today's rigid controls are a heritage of the desperate need of postwar European governments to ration every asset. Now that more capital is available, most of it is soaked up by expensive government welfare programs. Little risk capital comes from wage earners, who are still wary of risking their savings on the Continental bourses.

No Illusions. Europeans at first regarded the U.S. fretting about their thin capital markets as merely raising "a very delicate question.'' But now that European businessmen are beginning to undergo the rigors of a profit squeeze and need more outside capital, they are feeling the capital shortage strongly. The Common Market has ambitious plans to free capital movements among the Six by 1967, and the Organization for Economic Cooperation and Development is meanwhile urging liberalization within each country. A French study commission has recommended such measures, and Italy has passed regulations forcing banks to put more funds into long-term loans.

This file is automatically generated by a robot program, so reader's discretion is required.