Some Unfamiliar Optimism

By Frederick Painton

TIME'S European Board of Economists foresees a year of U.S.-led growth

Pessimism has become so ingrained in Western Europe that even a modest economic upturn catches people by surprise. Six months ago, TIME'S European Board of Economists feared that the incipient recovery might be aborted by persistently high interest rates or a sudden crisis in the world's strained financial system. That did not happen, and, at their latest meeting in Paris, TIME'S board indulged in some unfamiliar, if mild optimism.

While trailing behind the more dynamic performances in the U.S. and Japan, Western Europe nonetheless can expect average growth of 2.5% this year. At the same time, the inflation rate will continue falling, from last year's 7.5% to 6.8% in 1984. Unemployment is not expected to decrease, but the rise in the number of jobless will halt and remain at this year's level of 10.5%. Said Samuel Brittan, assistant editor of London's Financial Times: "Europe clearly is a tortoise when com pared with the U.S. and Japan, but it is not a tortoise in relation to its own recent performance."

The recovery, however, is uneven. Northern Europe is leading the move out of three years of recession and near stagnation. Britain, once the laggard of the European Community, is now in the forefront of the Common Market, followed closely by West Germany, The Netherlands, Belgium and Switzerland. The southern, Socialist-led countries, France, Greece and Spain, are expected to miss out on the first stages of the upswing. Only Italy will probably join the north in a spurt of growth this year.

Hans Mast, a University of Zurich lecturer and executive vice president of Credit Suisse, was encouraged by some of the trends he sees accompanying the economic expansion. He predicted that the drive for greater efficiency and profitability is likely to push firms toward more capital investment and increased emphasis on exports. He expected that the nine major European economies would produce a surplus of $30 billion in their trade of goods and services this year. That compares with a rough balance in 1983. The U.S. last year had a deficit of about $40 billion, and could incur a shortfall of twice that much in 1984. Mast also noted that the less developed countries were finally emerging from two years of recession and financial crisis, a situation that should help to spur world trade.

Government budget deficits should decline, said Mast, even if they remain be tween 14% and 16% of gross national product in Italy, Belgium and Sweden. Given this background, Mast expected that "1984 could be the year of declining interest rates in both the U.S. and Europe." Other board members, though, remained skeptical about any significant drop in the cost of money.

While lower U.S. interest rates would reduce the dollar's value against European currencies, the board was split over whether the U.S. currency would fall much this year. For Brittan, a cheaper dollar would be "the best new year's gift that countries, not excluding the U.S., could get." But both Mast and Guido Carli, former governor of the Bank of Italy, predicted dire consequences for the European Community if the dollar took a sudden plunge. Mast talked of "new tensions in the European monetary system." Carli observed that a weaker dollar would ignite "the usual wrangle" over an adjustment between strong-currency countries (West Germany and The Netherlands) and weak-currency ones (France, Italy and Belgium). Said he: "The Common Market would be put in jeopardy more than ever, and perhaps the U.S.-European relationship could be damaged."

Despite their guarded optimism, board members were careful to point out pitfalls ahead. Said Mast: "One of the major weaknesses in the present economic picture is the rise of new social tensions all over Europe." He cited huge public service strikes in Belgium and The Netherlands, but he could have included violence at the Peugeot auto plant in the Paris area earlier this month that injured more than 80 people.

Board Member Herbert Giersch, director of the University of Kiel's Institute for World Economics, mentioned growing "confrontational rhetoric" between West Germany's unions and government over reducing working hours without corresponding decreases in pay. Behind the social tensions, said Mast, is the drop in purchasing power suffered by union members as a result of the continent-wide austerity efforts. He added, "Now that the employment situation seems to be improving, they are asking for better conditions." Excessive wage increases, Mast warned, could jeopardize the recovery.

Surveying the European Community's four major economies, the board offered a surprising mix of forecasts:

WEST GERMANY. The Kiel Institute's Giersch was happy to point out that he had been a bit too pessimistic six months ago in forecasting a 2.25% growth rate for West Germany in 1983. The real upswing began in the last half of the year, he said, pushing growth for the entire year to 3%.

Giersch predicted that the recovery in West Germany would continue in 1984 but at a slower pace, dipping slightly to about 2%. But unemployment will decline only a fraction, going from 9% to 8.75%, while inflation, now running at an annual rate of just 2.5%, is expected to stay at roughly the same extraordinarily low level. Giersch told the board that there were fears in West Germany that high interest rates along with the decline in the money supply could choke off recovery in 1985. Giersch, however, believed that slow growth could be maintained, helped in part by exports. Other weak spots were visible in what Giersch called "the rust belt"--those industries such as coal, steel and shipbuilding that are in urgent need of government help to survive. Giersch lamented the lack of venture capital in West Germany and the inability of business and government to adapt to changing markets at home and abroad. "Unlike the U.S.," he said, "we have not made many attempts at deregulating businesses." The result is what he called industrial "Eurosclerosis."

BRITAIN. "Nineteen eighty-three was a bad year for forecasters and a worse year for pessimists," said Brittan, pointing out that British economists had been overly gloomy about their country's capacity for a significant business pickup. The British growth rate last year reached 3%, and Brittan predicted it would go to 3.5% in 1984. Inflation, which fell from 5.5% in 1982 to 5% last year, will decrease further, to 4.5% this year. Under those conditions, Brittan forecast that the number of jobless workers will go down nearly half a point, to 11.9%. Consumer spending, which was responsible for much of the good news last year, will quicken even more this year, according to Brittan. Exports too are expected to rise in a broader range of industries than was the case last year. Brittan credited part of his country's perky economy to weakening union power, which has meant that workers are willing to settle for smaller pay increases.

FRANCE. Still paying for the Socialist government's ill-timed gamble for quick growth in 1981, the French economy this year will stagnate once again. Gross national product is expected to rise only a single percentage point or so. According to Jean-Marie Chevalier, professor of economics at the University of Paris Nord, 1983 and 1984 "will be the first time in 30 years that we will have two consecutive years with a growth rate of less than 1%." Yet inflation stubbornly refuses to yield much ground to the government's austerity program. The official target for 1983 was 8%, and the result was closer to 9%. For this year, Chevalier predicted that inflation will slow to 7.5%. Unemployment, meanwhile, may be running higher than official figures. According to Chevalier, 9.1 % of the job force was without work in 1983, though the official rate was 8.5%. This year he expects unemployment to reach 9.7%. One of the few clear-cut successes the government can point to is the 50% drop in the French trade deficit, to an estimated $5.5 billion last year. Chevalier expects the decrease to continue.

ITALY. The battle against inflation, which reached 12.5% last year, pushed the Italian economy into virtual stagnation. Carli, however, expects a rebound of 2.5% in G.N.P. this year, with inflation inching down to 11%. That prediction, though, hangs on wage negotiations now getting under way among the government, employers and unions. Said Carli:

"In Italy, we have rediscovered the so-called incomes policy." The main source of worry and uncertainty in Italy, according to Carli, is the budget deficit, which now represents 15% of the G.N.P. and threatens to grow beyond that. The present political argument in Rome concerns whether to raise taxes or reduce government spending as a means of cutting the deficit, estimated at $50 billion in 1983. Carli is skeptical that government expenditures can be cut deeply enough to begin to solve the problem.

Carli launched the board on a discussion of the continuing struggle over Common Market programs. He called for fundamental reforms in the financing of the Community and its common agricultural policy, which eats up two-thirds of the organization's $22.5 billion budget. Said

Brittan: "The enormous expense of the agricultural policy is reducing the standard of living throughout Europe. Only landowners are benefiting; not even the small farmers are getting anything."

Brittan was critical of the Community's industrial policy, saying, "The Community risks having the same kind of mess in industry that we have in agriculture. It is absurd for Brussels to try to determine which industries can grow."

The drift in Common Market policies was criticized last week in a speech by French Foreign Minister Claude Cheysson, who warned that the European Community "has fallen far short of its original objectives" and faces difficulties that could destroy it. Cheysson said the Community lacks "cohesion and solidarity" and has had too little impact on international events.

When asked to prescribe some policies to spur Western Europe to faster economic expansion, the board found broad consensus. Giersch led off by pointing to the success the U.S.

is having in creating new companies. He argued that better prospects for profit were necessary to create new investments in Europe. Above all, Giersch said, Europe needs to create incentives so that entrepreneurs can succeed in creating new firms and new jobs. Brittan called for a standstill on real-pay increases so that Europe can catch up competitively. Such a measure, he said, "would break the back of the unemployment problem." Chevalier confessed that one mistake to avoid repeating was France's attempt to establish an overall government-led industrial policy. This, he said, has mainly produced unnecessary official spending, especially in the nuclear-power industry.

Jan Tumlir, the chief economist for the General Agreement on Tariffs and Trade (GATT), maintained that protectionism remains one of the most pressing problems facing the international economy. Tumlir pointed out that 48% of world trade is now hindered in some form or other and said that freer world commerce was the foundation for sustained growth. In recent weeks, however, trade frictions have been increasing. Angered by U.S. restrictions on specialty-steel imports, the European Community retaliated two weeks ago by slapping curbs on a variety of American-made products, including chemicals and sporting goods. The Common Market action, to take effect March 1, is scheduled to last four years.

Even though business is starting to pick up, the political situation could pose a threat to the European economy. The peace movements, Carli maintained, have created doubts about Western Europe's security that are affecting its economy. Said he: "The possible 'Finlandization' of Europe has introduced an element of uncertainty. If this uncertainty is not removed, I see difficulties getting investments of the size needed to create jobs, no matter what economic policy we follow." --By Frederick Painton