Stagflation or Recession?

A dark vision haunts Western Europe these days--the specter of economic decline. Even before the Arabs unleashed their oil weapon, the anti-inflationary measures of European governments, widespread uncertainty about the future and political and labor unrest were combining to slow the rate of growth. What can Europe expect in 1974, which will be a year of rising energy costs and possibly of continuing scarcities?

Last week TIME brought together in Brussels a group of ten economists, bankers and businessmen to survey the prospects. They spoke as individuals, rather than as official representatives of their institutions. After a weekend of discussion, the group was in broad agreement that:

> The best that Europe can hope for in 1974 is "stagflation"--an uncomfortable mixture of stagnating output ac companied by continued inflation. Living costs are likely to rise by 10% or more in many countries. Recession --that is, an actual decline in output -- is a possibility, though far from a certainty.

>Even without a recession, unemployment will rise in most countries be cause slow or zero growth will fail to provide enough new jobs for youths leaving school and other people entering the labor force.

>Real personal income will stagnate as unemployment rises, the cost of living increases, and overtime work be comes rarer. The decline in income will cut painfully deep in regions heavily dependent on industries hit hard by the oil weapon, such as autos, steel and rubber.

>Hard times will almost certainly sharpen social and class conflicts. A recession could stampede many people into seeking solutions on the extreme right or left.

Most members of the economists' group concluded that there was cause to be deeply concerned--but not to be unalterably pessimistic. Recession can be avoided if the Arabs loosen the oil spigot and Europeans recover their confidence. Professor Rolf Krengel of West Berlin's Institute for Economic Research emphasizes: "The psychology is extremely important. If people believe there will be a recession and start cutting their expenditures so as to increase their savings, they will help to bring about the very thing they fear." A fear voiced by some American economists that a prolonged Arab oil squeeze would really devastate the European economy found little echo in the group. Most members assumed, rightly or wrongly, that the Arabs simply will not force Europe to its economic knees.

The key to forecasting the future for Europe as a whole is the performance of the three biggest economies--those of West Germany, France and Britain. Smaller nations are so heavily dependent on them that they cannot hope to immunize themselves from the Big Three's economic ailments. Professor Jan Pen of the University of Groningen says: "To forecast employment and output in The Netherlands, we must first ask how our chief trading partners will fare." Reports from the key economies:

WEST GERMANY. Before the oil cutbacks and price rises, the Institute for Economic Research forecast growth of only 3% in 1974, or half the rate achieved this year. A study completed this month and assuming that energy supplies fall 10% to 11% short of meeting demand suggests that growth may be virtually zero. If that happens, unemployment will more than double, to about 2.7% of the labor force; the hardest blow, however, will fall not on Germans but on the many foreign workers in German factories. Real personal income will fall. Output of the auto, construction and household-appliance industries could well go down.

FRANCE. Still believing themselves to be virtually immune from oil shortages, thanks to their government's Middle East policy, the French appear to be less apprehensive about their future than many other Europeans. Their confidence is not entirely justified though.

Without the oil shortage, French economic growth would have been 4.5% to 5%. Professor Pascal Salin of the University of Paris thinks that there will still be some real growth, but forecasts rises in unemployment and the cost of living.

BRITAIN. Growth was already slowing when the oil emergency and a coal miners' ban on overtime work caused the government to order drastic austerity. Now, says W.A.P. Manser, adviser to a London merchant bank, the political situation makes economic forecasting virtually impossible for the short term. The outcome for the year will depend not only on the Arabs but also on how long the government holds to a mandatory three-day week for industry --which in turn depends on its negotiations with the Mineworkers Union.

Manser does opine that if the three-day week lasts only a month or six weeks into 1974, industry can probably recover the lost output in the remainder of the year--provided that the Arabs decide to make enough oil available.

A combination of energy-saving measures and stagnation or even recession could reduce European demand for oil. But that is not likely to reduce its price, warns Professor Jean-Marie Chevalier, an energy expert from France's University of Grenoble: "We have seen already that the producers can increase then" revenues by selling fewer barrels at higher prices. I see no reason why they should not continue that policy."

By 1980 Europe may well have developed alternatives to imported oil--coal, nuclear power, and North Sea oil--that will loosen the grip of Middle East politics on its economy. Chevalier cautions, however, that the alternatives will not be cheap: "The era of inexpensive abundant energy has ended."

Though the mood of the symposium was not despairing, it was somber. Some of the economists saw difficulties lasting well beyond 1974. Professor Pen suggested that 1974 "could be the first year of the new future"--one in which economists cannot automatically assume that there will be growth every year. If so, he fears, "many people who are now poor will have to renounce any hope of real progress" unless there is a massive redistribution of income.

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