Europe: Some Smoother Seas

By Frederick Painton

TIME'S board sees growth up and inflation down but frets about the jobless

After some hesitation, the signs of economic recovery that are now so evident in the U.S. have finally reached the countries of Western Europe. Buoyant American optimism about the strength of the recovery, however, has so far failed to make the transatlantic crossing. Meeting in Vienna last week, the TIME European Board of Economists showed a caution bordering on skepticism about early evidence that the three-year-long grueling recession was at last over. The board's forecast for the nine major European countries* predicted recovery, but it was hardly cheery: growth will be only 1.5% this year and 2.5% in 1984; inflation will recede from an average of 9.7% last year to 7.5% this year and next. On the debit side, the board agreed that unemployment, which now stands at 10.7% of the work force or approximately 12 million people in the European Community, will hardly decline during the next year.

Hans Mast, a University of Zurich lecturer and executive vice president of Credit Suisse, feared that persistently high interest rates could even abort the incipient European recovery. Warned Mast, who attributed the high rates, at least in part, to lingering worries about a resurgence of inflation in the U.S. and to the Federal Reserve Board's tight-money policy: "The prospects as seen from Switzerland are very chilling indeed. The three major short-term economic problems of our time have not been resolved." The first, in Mast's view, is unemployment, which "could rise to socially and politically dangerous levels." The second is the $600 billion debt of developing nations that is testing the stability of the international financial system. The third is the trend toward worldwide trade protectionism. Said Mast: "I have the feeling we are committing the same mistakes that led to the Great Depression. That is, we are continuing to fight an enemy that is no longer there. Inflation is no longer enemy No. 1."

Siding with Mast was Janos Fekete, deputy president of the National Bank of Hungary and a guest economist at last week's meeting. Said he: "I'm afraid that one day we will bring some flowers to the grave of the world economy with a note announcing that we won the battle of inflation, but unfortunately the patient died." For the first time since World War II, noted Fekete, the whole world--the Western industrialized countries, the Eastern bloc, the OPEC countries and the Third World--has been simultaneously caught in a slump. Fekete believes that budget deficits will cripple the American economic upswing and inhibit recovery in the rest of the world.

Jan Tumlir, Geneva-based chief economist for the General Agreement on Tariffs and Trade (GATT), warned that even when the recovery begins, it will not be like those of the past. Said Tumlir: "Some people talk as if this recovery were going to save us all or that we are returning to the 1960s, when straight-line, fairly steep growth paths seemed to be stretching from here to eternity. But this expansion is really just a cyclical one. None of us is willing to argue that it is going to last more than three years."

Tumlir, on the other hand, insisted that U.S. economic policy was not threatening recovery in Western Europe. In fact, he fears that the Reagan Administration program may be too stimulative and ignite new inflation.

Why is the West European recovery lagging behind the U.S.'s? The answer, according to Herbert Giersch, director of the University of Kiel's Institute for World Economics, is that European economies are too rigid to respond quickly enough to the rapidly changing world economy. Said he: "We are lagging in terms of flexibility of the labor market, in terms of product innovations and also in just entrepreneurial spirit in comparison with the U.S."

Sam Brittan, assistant editor of London's Financial Times, said that the mood known as "Euro-gloom" was due to the fear of an "employmentless expansion." "Outside of France and Italy," said Brittan, "we will get growth rates not all that different from the U.S.'s. But the difference is that they will not bring any relief for the jobless."

For the European Community's four leading nations, the board offered only moderately encouraging forecasts:

BRITAIN: This year the British economy will grow 2.5%, the highest rate among major European nations, according to Brittan. He pointed out that Margaret Thatcher's thumping electoral victory was partly due to the fact that the purchasing power of people still employed has risen over the past four-year period, as inflation fell from 13.4% to 5.8%. Unemployment, of course, doubled to 3 million during that period, but Brittan argued that there exists a vague public agreement that no easy remedy can be found for the worldwide scourge of joblessness.

In her second term, Thatcher will face first a leveling off, and then a decline, of North Sea oil revenues after some fields begin to go dry. This will mean that the Conservative government will no longer be able to count on the oil cushion that has so far helped it to soften the harsher effects of the recession. With inflation down, Thatcher is expected to take more risks to protect the recovery. To improve British competitiveness in world markets, Brittan expected the government to encourage a fall in interest rates, as it did last week, in order to slow the rise of the pound on currency markets. Brittan said that a prolonged recovery will above all depend on keeping wage increases under control during the next few months.

FRANCE: Laboring under a three-month-old austerity program that has increased taxes, slashed government spending and ignited street protests by groups ranging from farmers to travel agents, the French economy will actually shrink 1% this year, according to Jean-Marie Chevalier, professor of economics at the University of Paris Nord. Said he: "That is the price we now have to pay for the 1.5% growth in 1982, which was the highest of any major Western industrialized country."

The trouble facing France's Socialist government is that its 1981 attempt at expansion created first inflation and then a huge trade deficit. Chevalier said that a split in Socialist Party ranks continues between supporters of Finance Minister Jacques Delors's austerity program and left-wingers like former Industry Minister Jean-Pierre Chevenement, who favor spurring demand at any cost. In view of the government's severe financial straits, Chevalier noted, no alternative exists to the present, unpopular squeeze.

One of Chevalier's greatest worries is the disparity between French and West German wage settlements. He pointed out that while unions at Volkswagen accepted a 3.2% pay increase in 1983, Renault workers have won a 10% pay hike. Such a difference in wage contracts is likely to mean continued currency troubles between the two countries.

WEST GERMANY: "The upswing that had been talked about so much has started to the extent that the up is there, but the swing is still missing," said West Germany's Giersch. The consensus among forecasters, Giersch said, was for 2.25% growth this year, with inflation falling to 3%. Unemployment is likely to stay at 9% to 9.5% in 1983, and Giersch saw little improvement in that trend next year. He anticipated that the country's healthy current-accounts surplus, which is expected to total $4 billion this year, will remain near that level for at least the next year.

Giersch sees slow growth through the 1980s as economies continue to suffer from high real interest rates. He expects Bonn to continue a cautious course aimed at reducing budget deficits, though he said that he "would be prepared to run a deficit to stimulate the economy."

ITALY: Guido Carli, a former governor of the Bank of Italy and a board member, sent his forecasts from Milan, where he was campaigning for the Italian Senate in next Sunday's national elections. Said he: "I thought it would be better to jump in than stay on the sidelines criticizing." According to Carli, Italy faces perhaps the most serious troubles of all West European countries. He warned that unless the budget deficit, which is currently running at an annual rate of $60 billion, is reined in, "Italy will be prevented from participating in the recovery of other nations." The economic indicators already show there has been no turnaround. Inflation this year is nearly 14%, unemployment is 9.5%, and the gross national product is likely to decline by .4% for the year. Basically, said Carli, the country's problems are not economic but political. Last year's $53 billion budget deficit was 58% over target, and the central bank financed it, in part, with printing presses, overshooting its monetary target by 34%.

Throughout last week's meeting, the dominant theme was the dilemma of continued high unemployment in a mild recovery. Mast, who feared that this could lead to sociopolitical unrest, said that governments had used up all reasonable excuses for the armies of jobless. Said he: "First it was the fault of the oil-producing nations. Then it was the fault of inflationary social policies. But the better world has not come, and people will get nervous." In the U.S., said Mast, workers have been ready to accept less pay in order to stay on the job, but in Europe the unemployed often refuse to disrupt their lives to accept lower wages, preferring instead to go on a generous dole.

The board was less concerned about any immediate outburst of riots or demonstrations than about the long-term impact of joblessness on society. Giersch feared the development of a dual economy or dual labor market in Europe: "In the established economy, people will learn by doing, while others outside the system will fall behind and become an alienated part of society." Some labor unions and professional organizations are hindering the flexibility of labor and thereby fostering more unemployment.

Board members are keeping a close watch on the international debt situation. Countries like Brazil and Mexico are having problems meeting repayment schedules, and just one default could trigger a crisis. Mast, along with Fekete, felt that governments and central banks must step in as the "lender of last resort" to help private banks. Said Mast: "International financial institutions and governments will have to play a larger role in future financing."

Tumlir, on the other hand, argued that a rescue program by international institutions would shift the burden to taxpayers and allow both debtor nations and banks to get away with past imprudence. To avoid this, Tumlir proposed an international effort to improve the economic performance of the debtor nations by offering their exports greater access to Western markets. If that proves insufficient, he said, private banks should be forced to absorb some of the losses.

With the problems of international debt, global unemployment and growing protectionism so closely intertwined, the members of TIME'S board agreed that a common approach to solving them must be found. Said Giersch: "We need a vision, and the politicians need a vision. But where is that world leadership?" Giersch's cry reflected a general sense among board members that the chances of world recovery rest on a compromise in the clash between optimism and pessimism, between those who would push the frail expansion too fast and those who, out of fear of new inflation, would stifle recovery.

--By Frederick Painton

* West Germany, France, Italy, Britain, Belgium, The Netherlands, Spain, Sweden, Switzerland. This file is automatically generated by a robot program, so viewer discretion is required.