Slowing Down

Throughout its remarkable postwar prosperity, Western Europe has reacted fast to fight inflation. Lately, it may have overreacted: with country after country splashing cold water on overheated economies, icicles have started forming. After clipping along at a 5.6% pace in 1964, the Continent's overall economic growth rate dropped to 4% in each of the past two years, is likely to slow down in 1967 to 3.5%--the smallest increase in more than 15 years. And in many countries, incipient recession is a worse threat than inflation.

Basic to the situation is the fact that Western Europe's two biggest economic powers, West Germany and Great Britain, find themselves in slumps at the same time. Hoping to combat inflationary pressures and reverse nagging balance-of-payments deficits, Bonn and London deliberately moved last year to brake domestic demand, in Germany's case mainly by tightening credit, in Britain's by means of last July's sweeping price-wage freeze.

The measures have had the desired cooling effect--and then some. In West Germany, industrial production rose by only 1.7% in all of 1966, and not at all in the last three months of the year. With business investment declining sharply, German unemployment jumped to 673,000 (or 3.1%) this month v. 269,000 a year ago. In Great Britain, moreover, the government's austerity program did not prevent the cost of living from soaring to an alltime high in mid-January. The British and German slowdowns have complicated the efforts of other European countries to steer their troubled economies on a course between inflation and recession.

Examples:

sbBELGIUM. With its obsolescent coal industry ailing and unemployment on the rise, Belgium expects to see its growth rate dip as low as 2% this year, v. 3.5% in 1966. At the same time, the country continues to be plagued by inflation and hefty government expenditures.

sbDENMARK. Demand for Danish goods abroad has fallen, with agricultural exports especially hard hit by the country's continued exclusion from the Common Market. But consumption at home remains high. To curb inflationary spending and level out incomes, Prime Minister Jens Otto Krag's socialist government has proposed higher taxes.

sbFINLAND. Helsinki's movie houses are doing big business, the reason being that Finns forsake more costly entertainment for the cinema when times get tough. Chief woes: tight money and the crimp in European markets for Finland's wood products, which account for 70% of all exports.

sbFRANCE. The gross national product grew by a robust 5.5% last year, and is expected to do as well in 1967. But a few clouds are gathering. Though exports rose fast (10%) last year, imports increased even faster (15%). And with markets weakened in other European countries, France stands to see its balance-of-payments surplus turn into a deficit before 1967 is out. Continued prosperity depends on France's ability to hold the line on prices.

sbITALY. Toughened by its 1964 slump, the Italian economy expanded last year (growth rate: 5.3%) with less inflation than it has had in years. The auto industry produced a record 1,366,000 cars; steel production increased by 8% while most European steelmakers were in decline. One danger is spending by local governments. Milan is the only major city with a balanced budget; in the Sicilian city of Messina (pop. 262,000), budgeted expenses exceeded revenues by a staggering 350%.

sbTHE NETHERLANDS. Because of sharp inflation and a mounting balance-of-payments deficit, the central bank has introduced hardfisted monetary policies. The result: the economy is cooling off considerably. Responding to the slowdown, local governments have started putting unemployed Dutchmen to work on public projects.

sbNORWAY. Imports to satisfy Norway's craving for such consumer goods as television sets, cars and appliances led to a bigger trade deficit last year than had been expected. As a result, the populace is being urged to cut back on its spending; worried bankers are hoping that the coalition government will do the same.

sbSPAIN. Years of unprecedented prosperity, besides sending Spain's annual economic growth rate soaring to 9%, have caused inevitable growing pains. To combat an alarming lurch toward inflation, the Franco regime last year introduced new monetary restraints and tightened up on installment-buying. Spanish workers have expressed their discontent in a wave of walkouts, demonstrations and riots.

sbSWEDEN. Unemployment, largely the result of troubles in the textile industry, has doubled (to 48,000) in the past year, but the biggest problem is still inflation--brought about in large part by government spending.

sbSWITZERLAND. Price inflation remains a problem despite the country's three-year-old stabilization program. But Switzerland's economic growth rate, which slowed from 5.1% in 1964 to less than 3% last year, is expected to improve slightly in 1967, thanks in part to the elimination of restrictions on foreign investment.

For all the inflationary pressures that still exist, Western Europe's economy is more troubled by recessionary tugs. Whether the Continent's economic picture improves in 1967, says Common Market Vice President Robert Marjolin, depends almost entirely on "how business shapes up in Germany." To stimulate the economy, Bonn's Bundesbank last month lowered the country's bank rate from 5% to 4 1/2%, last week reduced it to a flat 4%. Though he welcomes such stimulants as "the first signs of a change in the economic trend," West German Economics Minister Karl Schiller cautiously adds that "there is no reason for hasty optimism."

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