Is Europe Still Living Beyond Its Means?

FOR Western Europe's factories, 1955 was the biggest postwar year. Production of steel, autos, chemicals, coal products and other goods soared to new records. In its latest report, the European Payments Union, clearinghouse of trade for 17 nations, said that free Europe's combined industrial production index went up from 127 at mid-1954 to 138 at mid-1955. For practically every E.P.U. member the story was the same: gross national product up, wages up, unemployment down. Nevertheless, in the midst of prosperity and plenty, there is one great flaw: Europe is living far beyond its means. It is dragging its feet on the big job of balancing governmental budgets, ending inflation and putting itself on a solid economic footing.

Never has France been so well off. Gross national product was up 6% to $41.6 billion last year, and unemployment was down to less than 1/4% of the 2.2 million work force--lowest figure in the Western world. But though Frenchmen earned more than ever before (wages up more than 9% since 1954) and paid record high taxes, the government went $3 billion deeper into the red. Despite France's $41.4 million favorable trade balance for 1955's first eleven months, inflated wage and raw-material costs are pricing its industries out of world markets, e.g., shipbuilding costs are 30% higher than Germany's. But the biggest threat of all to the French economy is inflation: last week the franc sank to a new low of 400 to $1 on the black market v. the legal rate of 350.

Italy also made impressive economic gains last year. Italian shipyards, virtually idle in 1954, now have 400,000 tons of ships on the ways and enough orders to keep them busy for three years. Industrial production, paced by a 22% climb in auto output, helped boost the gross national product to a record $21 billion, and Italy is whittling away at unemployment. Though taxes are nominally high, collections are poor. Last year Italy tacked another $550 million deficit onto its $7 billion national debt. Italy stabilized wholesale prices for a short time in 1955, but the cost of living has been edging up.

A prosperous Britain balanced its domestic budget last year and expects a $1.2 billion surplus for 1956. Business profits were up; so was employment. Not in the postwar decade has the British wage-earner been better off; he brought home a fat $18.8 billion wage packet last year, used it to buy, among other things, 1,335,000 new TV sets. But Britain cannot afford such spending. The gap in its balance of payments is widening dangerously, e.g., last year Britain imported -L-768 million more than it exported, and its dollar reserves slumped 25% to $2.1 billion. Only in the last six months has Britain tightened up on credit, but domestic consumption is still too high, exports too low.

Trade deficits, unbalanced budgets and the threat of inflation are also worrying Europe's smaller nations. Sweden is trying to nip inflation with special taxes, but such measures are not enough. With a 10% gain in wages last year, Swedish workers jammed retail stores and created a huge new demand for imported products. As a result, Sweden ran a $50 million trade deficit last year, twice as much as in 1954. Denmark, on the other hand, held its imports down and boosted exports $70 million last year, thereby cut its $200 million trade gap to $135 million. Yet Denmark is still having trouble. Only a fortnight ago, for example, the retail price index jumped five points to 408.

Germany has built up a dollar reserve of $1.3 billion, balanced its budget, and expects to bank a $600 million surplus this year. But its good showing was possible chiefly because of vast grants of U.S. aid, and because Germany spent relatively little for rearmament (see FOREIGN NEWS). In an effort to liberalize foreign trade, Belgium lifted virtually all exchange restrictions on the franc and established a free gold market. But Belgium is having trouble staying within its income, has run up a $6.2 billion national debt. Gradually, however, Belgium is getting the problem in hand, expects its deficit this year to be $240 million v. $380 million last year.

The one shining exception to Europe's spendthrift ways is The Netherlands. While the thrifty Dutch enjoy their boom, they are keeping it well in check. Real wages moved up 20% over the last two years. As national production climbed (up 12% last year to $7 billion), Holland cut taxes twice to step up capital investments and increase production. Not only has Holland dropped import controls on more than 92% of its foreign trade, it has built up a dollar reserve of $1.3 billion. Despite the heavy burden of war indemnities and flood damage, Holland in six years chopped its national debt 25% to $5.3 billion. Said one Dutch official proudly: "Our house is in order."

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