Europe's Outlook Darkens

By Frederick Painton

Last December, just before Western Europe's third year of slump began, TIME'S European Board of Economists saw some glimmers of hope that an upswing might start in the latter half of 1982. Reunited last week in London, the same six board members agreed that the glimmers were gone. They have been extinguished mainly by persistent and punishingly high interest rates. The panelists now foresee a further slowing in Western Europe's economic growth for the rest of the year, accompanied by a steady rise in unemployment, which is already at a postwar high of 9.8%.

Some board members regarded the prolongation of the recession as the painful price of wringing inflation out of the system. Others, like Hans Mast, a University of Zurich lecturer and executive vice president for Credit Suisse, feared that the deflationary cure has become too dangerous. He noted that trade protectionism is growing and that there is also the risk of an international financial squeeze that could dry up bank lending. It was time, said Mast, "to go on the economic offensive" against present policies.

In contrast to the prevailing view among European government officials and economists, a majority of the board did not consider that the U.S. should be held responsible for high world-wide interest rates and the dollar's excessive strength. Jan Tumlir, chief economist for the General Agreement on Tariffs and Trade in Geneva, described European complaints as a "demand that the U.S. create more money in the hope that interest rates will fall." He said that this would be a recipe for more inflation. Samuel Brittan, assistant editor of London's Financial Times, agreed. Said he: "Whatever the U.S. economy does, the Europeans are going to grumble. If the U.S. concentrates on stabilizing its economy, that is the best it can do for itself and for the world."

The board agreed that Western European leaders have little choice but to continue their anti-inflationary policies. France's go-it-alone attempt during the past year to attack unemployment through an expansionary economic policy ended embarrassingly last month in the devaluation of the franc and the establishment of wage and price controls.

A summary of the panel's prognosis for the four largest countries of the European Community:

WEST GERMANY. The economy of Western Europe's most important industrial power will decline 1% this year, according to Herbert Giersch, director of the University of Kiel's Institute for World Economics. He believes that the upswing will finally come in 1983, when growth will reach 1.5%. Unemployment is expected to rise to 7.5% of the work force this year. Inflation, which was 6.3% last year, will drop to 4% by the end of 1982.

Giersch blames excessively high wages in West Germany and most of the rest of the European Community for the persistence of the recession. Readjusting the price of labor is a painful process that he expects will take the rest of this decade. Said Giersch: "We hope that the political consensus will be strong enough to support this development."

ITALY. With an underlying dynamism and a notable talent for improvisation, the Italian economy, for the moment, is weathering the recession better than its European partners. Guido Carli, former governor of the Bank of Italy, expects that growth this year will reach 2%.

Italy's expansion, however, is accompanied by the highest inflation among the major countries in the European Community: 16% during the past year. Moreover, unemployment will stay high, perhaps as much as 11% by year's end.

The most imminent threat to the economy and to political stability, says Carli, comes from a monumental budget deficit that is expected this year to reach $46.3 billion. That is a stunning $10.7 billion more than the government's target. This huge spending is mainly for government subsidies of Italy's depressed regions, social security and public health.

BRITAIN. Estimates for growth this year have again been scaled downward. Samuel Brittan now predicts an increase in the gross national product of just .75%, instead of the 2% he foresaw in January. On the positive side, he points out that private investment has held up remarkably well, and inflation, which was running at 20% annually in 1980, will drop this year to 8%.

Unemployment in Britain, already the highest in the European Community, is expected to reach a high of 12.6% this year. Said Brittan: "I do not think that even this government will be able to let unemployment go on rising beyond this point." He expects some job-creation programs and other policy tinkering later in the year.

FRANCE. Despite the efforts of France's year-old Socialist government to stimulate growth, Jean-Marie Chevalier, professor of economics at the University of Paris Nord, says he is being optimistic in foreseeing a 1% increase in the G.N.P. this year. One of the main effects of the government's effort to foster public consumption has been a rush of imports. The most dramatic example was foreign automobiles, which in May accounted for 32% of all new sales. French exports, on the other hand, have declined 3% so far this year.

Plagued by uncertainty about economic trends at home and abroad, the French business outlook is clouded. Industrial investment continues to decrease, and Chevalier doubts that French industry will get many benefits from last month's devaluation of the franc. He believes that French businessmen, unable to raise prices at home, will be tempted to increase them on exports and thus not enjoy larger foreign sales. As a result, Chevalier expects a trade deficit this year of about $10.4 million.

The new wage and price controls will undoubtedly lead to a slowdown in inflation. For the first six months of the year, prices rose in France at an annual rate of 13.5%, which was more than twice the pace of inflation in the U.S. and West Germany. The big question, though, is what happens when price and wage controls are lifted in October. Chevalier foresees a 1% increase in the last three months of the year, which would result in an annual inflation rate of 10.5%. Said he: "This is not a very big success, but it is acceptable."

Meanwhile, he expects unemployment, the No. 1 concern of the Socialists a year ago, to reach 9%, or 2.1 million people, by the end of the year. Chevalier concluded that international pressure on the franc has forced the country to stop giving higher priority to fighting unemployment than to combatting inflation. Said he: "I do not think that any country now can fight unemployment alone, with success, because of the openness of the world economy."

During the past year, international politics and international economics have become increasingly intertwined. The Reagan Administration has been trying to influence Soviet foreign policy through economic sanctions. The members of TIME'S board strongly opposed most of these policies.

They unanimously rejected Reagan's policy of trade sanctions against the Soviet Union that are aimed at halting or delaying construction of a pipeline that will deliver natural gas from Siberia to Western Europe. Said Giersch: "Contracts must be fulfilled. I dislike any politicization of commerce, because once you start, you will end up with a kind of trade war for one cause or another. You also unleash protectionist pressures inside your own country."

The economists maintained that the damage to European industries, even though limited, will undoubtedly be greater than that inflicted on the Soviets, who have the basic pipeline technology to finish the job without U.S. equipment or licenses. Tumlir also warned that the American effort to assert national sovereignty over American firms abroad conflicts with very basic principles of international law.

The board members generally agreed, however, that Western Europeans in the past few years have extended far too much cheap credit to the Soviet bloc. Giersch estimated that if Western companies had been trading on a strictly commercial basis, without credit guarantees and subsidies by governments, there would have been perhaps as much as 30% less East-West business. Carli maintained that Western nations should reconsider all their past generous policies toward trade with the East.

Another pressing East-West financial issue concerns the $25 billion that Poland owes Western creditors. Some officials have been urging the banks to declare Poland in default in order to increase pressure on Warsaw. The European economists were split on that issue. Although the board disapproved of using economic measures for political purposes, Brittan questioned the wisdom of continual rescheduling of the debt. He called the process "default by a slightly sweeter name." Carli replied that the banks had little choice. Said he: "If banks requested all their clients, developed or developing, to pay at once, they would cause the collapse of the financial system." At a time when the global economy seems so precariously balanced, this and other measures of economic warfare look like dangerous weapons that should be handled with extreme care. --By Frederick Painton

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