Euromania

Is the recent attention given to Europe in the US press reflective of
finally coming to with US decline?  Or is it simply the globalization
script of the last 10 years rewritten as Euromania?  Here are some
thoughts, many sober, on the potential of the European economy in the next
few years. 

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February 2, 2001  



As U.S. Economy Slows Down, Europe Is on the Upswing


By EDMUND L. ANDREWS


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The New York Times 

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RANKFURT, Feb. 1 — Even as the economic mood of Americans has shifted almost
overnight from exuberance to anxiety, Europe has emerged as an oasis of
tranquillity and prosperity.
After years of lagging far behind the United States, Europe now stands a
good chance of outpacing its economic rival by a significant margin.
Consumer confidence, which has plunged to its lowest level since 1993 in the
United States, is running at nearly record levels across most of the
Continent. European unemployment, stuck for much of the decade above 10
percent, is now at its lowest level since 1991.
It is not a boom, at least not yet. What constitutes a wonderful year in
Europe — growth of 3.4 percent for 2000 and overall unemployment down to
about 8.7 percent — would not long ago have been considered mediocre if not
depressing in the United States, where annual growth has averaged about 4.5
percent the last several years and joblessness is now only 4 percent.
But mood is largely a matter of perspective, and the contrast could not be
more stark. While many Americans fear their spectacular boom may be ending,
most Europeans feel they are finally shaking free of their doldrums.
European markets have become more open and competitive and European
companies have emulated many American practices to help deliver better
performance. State-owned monopolies have been privatized and stripped of
their protections. Governments are lowering taxes, at least modestly. Wage
increases have slowed to a crawl and labor markets have become more
flexible, as companies skirt traditional job-protection rules by hiring
part-time and temporary workers.
Yet even as the United States struggles with a slowing economy, few experts
believe Europe can jump in to fill the gap for the global economy. Most
economists believe Europe's long-term potential growth is still
significantly lower than that of the United States. And neither European
consumers nor corporations have the same lust for imported goods that helped
pull Asian countries out of crisis two years ago.
"If we were to get into a global recession, I do not think Europe would be
strong enough to play the consumer of last resort," said Christel Rendu, who
analyzes European business-cycles for Morgan Stanley Dean Witter. "I doubt
that it could pull the world out of a recession."
At the same time, Japan remains mired in a decade-long slump that shows no
signs of ending, and the rest of Asia, while on the rebound from its
financial turmoil of a few years ago, is not strong enough to keep growing
without a healthy American economy.
Indeed, many business executives here base their current optimism on the
assumption that the American economy will start recovering by the second
half of this year.
"The United States is the only real consumer market," said Wolfgang Ley,
chief executive of Escada, which designs and sells fashion clothing around
the world. "No other country can pull itself out of a recession as fast as
America."
Many European companies, in fact, have more reasons than ever to worry about
the United States, not because of exports but because they have bought major
American companies. From DaimlerChrysler and British Petroleum to Unilever,
European companies have spent hundreds of billions of dollars buying
American corporations the last few years. For companies like
DaimlerChrysler, which lost about $1.7 billion at Chrysler last year,
America means heartburn. But over the longer term, many economists argue,
Europe's underlying potential for growth will remain lower than that of the
United States.
For one thing, Europe's population is not growing, which means comparatively
fewer consumers and workers. And even though unemployment is still a major
problem, many countries have acute shortages of skilled workers and some are
short workers in all fields.
Beyond that, productivity growth has been slower in Europe than in the
United States, in part because European investment in new factories and
technology has consistently been more cautious.
"The big difference is that the potential growth of the United States is
higher than that of Europe," Philippe d'Arvisenet, director of research at
BNP Paribas, one of France's biggest banks, said. "In the U.S., because you
have had 10 years of very dynamic investment, you have a great deal of added
capacity. As a result, the potential growth is higher than in Europe."
But given how dark the mood has long been in Europe, the current pace feels
just fine to a lot of people. It may or may not be a coincidence, but Mr.
Ley of Escada said that European women had abruptly lost their interest in
fairly cheerless, minimalist clothing.
"There is a comeback in flamboyant colors, rich materials that have the
feeling of luxury," he said. "It might be an expression of new excitement."
To Mr. d'Arvisenet, the new excitement is evident, too. "What we experienced
in Europe for two-thirds of the last decade is a rate of growth of about 1.5
percent," he said. "Coming from 1.5 percent to 3 percent, suddenly
everything is fine," creating, he added, "a big difference in climate."
Perhaps the most important reason for the shift has been a significant
change in labor markets. Europe suffered from double-digit unemployment and
generated almost no additional jobs for seven long years, from 1993 until
June 1999. Since then, unemployment has dropped to 8.7 percent and is now at
the lowest level since 1991.
Much of the reason is that Europe's once-powerful unions have become weaker
and settled for wage increases that are actually lower than the rate of
inflation. Equally important, employers have been able to escape the
rigidity of the tough European job-protection rules by hiring temporary and
part-time workers.
Ms. Rendu, of Morgan Stanley Dean Witter, argued that these changes had
fundamentally changed the hiring equation in Europe. By 2007, she predicted,
joblessness in Europe could drop as low as 5.7 percent.
European analysts and government leaders believe that growth across the 12
nations that have adopted the euro will slow from 3.2 percent last year to
about 2.5 percent or a bit less this year. Countries like Germany and Italy,
which depend heavily on exports outside Europe, are more likely to be hit
harder than others. But analysts here expect a gentle dip rather than a full
stop in growth as in the United States.
"The United States is slowing down after a very long race of spectacular
growth," said Carlo Monticelli, co-head of European research at Deutsche
Bank. "In Europe, we are in a situation where the good phase is just
starting."
The contrast between prospects in Europe and the United States was
highlighted today by the European Central Bank, which decided against
following the Federal Reserve's move on Tuesday to reduce interest rates in
the United States. Wim Duisenberg, president of the European Central Bank,
told reporters at a news conference here today that conditions in Europe
remained "broadly favorable" and that European economic prospects would
mainly be determined by "domestic factors."
Stefan Bergheim, who follows European economics for Merrill Lynch in
Frankfurt, said Europe differed from the United States in several basic ways
right now. The first is that both consumer and business confidence are
running at nearly record highs across Europe. Even in Germany, which depends
heavily on exports of industrial goods and was severely set back by the
Asian financial crises in 1998, recent surveys show that confidence is
running far above normal levels.
Many European companies believe they can shrug off an American downturn, as
long as it is relatively short. Exports to the United States account for
less than 3 percent of Europe's annual economic output, a smaller share than
the value of exports to Central Europe and Russia. And many manufacturers
here are convinced that their real growth markets are elsewhere.
Consider the case of Heidelberger Druckmaschinen of Germany, the world's
biggest manufacturer of large printing equipment. In the six months ended
last September, exports to North America accounted for about one-third of
total sales.
But by far the biggest source of growth came from the Asia Pacific region,
where sales soared 57 percent to more than $400 million. Orders from within
Europe jumped nearly 40 percent in the past year, one of the biggest
increases in that region in years.
"We think we are in a moment of special momentum in Europe," Herbert Meyer,
the chief financial officer of Heidelberger, said. "As long as we can expect
a soft landing in the United States — growth higher than 2 percent — we
expect this momentum can be maintained."
But Mr. Meyer also added a crucial caveat: if the United States goes into a
severe downturn, exports from Asian countries to American consumers will
plunge and European countries will not be able to escape the downturn.
"Due to better and better working of the European common market, Europe is a
bit better protected from heavy shocks from outside," Mr. Meyer said. "But
if you have a big recession, Europe would not be able to compensate."


 


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