A Sudden Surge in Europe

Though the world recession hit Western Europe later and less severely than the U.S., it also lasted longer. For example, unemployment began declining in the U.S. last June, but kept climbing in Europe well into the winter. Now, however, recovery in Europe, as in the U.S., is proceeding faster than had been expected. After two years of sagging demand, European auto sales are rising so rapidly that one executive of Simca in France says that his company cannot make cars as fast as customers want to buy them. Businessmen have got their inventories down, and their order books are filling up. Even the two countries with sick currencies, Britain and Italy, are deriving some benefits. Tourists are pouring into Britain to snap up bargains: a South American lawyer recently bought 2,000 lightweight suits from Marks & Spencer in London. Italian exporters are taking advantage of a cheap lira to post remarkable increases in foreign sales of clothing, appliances and machine tools.

German Lead. Two statistics chart the vigor of the rebound. The Common Market Commission now estimates that the output of goods and services in the nine nations of the European Community will expand by 3.5% this year, v. its decline of 2.5% in 1975. And the number of jobless workers in the Nine has fallen from a peak of 5.7 million in January to about 5.4 million now.*

As usual, the European recovery is being led by the powerful West German economy. In the first quarter, industrial production in West Germany was 3.3% higher than a year earlier, and new orders were up a thumping 17%. The country's five leading economic research institutes now predict that West Germany's gross national product, which fell 3.5% last year, will rise 5.5% this year. One concern: the mark has become so costly in terms of other currencies that many West German exports could become uncompetitive.

France too is happily revising its forecasts upward. French G.N.P. is expected to expand 5% or more this year rather than the 4.7% anticipated earlier. Exports should climb by 6.4%, and auto sales already are up 20%. Another barometer: champagne sales, after two bad years, are bubbling almost 40% ahead of the 1975 pace.

Inflation continues to be a formidable threat to the European comeback, but even the price front showed promising news last week. Leaders of Britain's powerful unions tentatively agreed with the government to accept stringent new voluntary wage controls, to take effect Aug. 1.

The accord calls for limiting all wage increases to an average of 4.5%. Under this arrangement, weekly increases for the 40% of the work force earning between $90 and $144 a week will be 5%. No worker's raise will be less than $4.50 or higher than $7.20. The government's part of the bargain is to cut income taxes by $1.7 billion a year.

Though the limit on raises is more lenient than the 3% that Chancellor of the Exchequer Denis Healey originally proposed, it is considerably tighter than the policy now in effect, which holds pay boosts to <-L-6, or about $11 a week. Impressively enough, Healey did not have to agree to any onerous conditions, such as import curbs or price controls, to win the union leaders' assent. When the -L-6 limit took effect last summer, British prices were rising at a blistering annual rate of 25%; now the pace has slowed to 12%. The government hopes to halve the inflation rate again by next year.

The prognosis for Europe's other problem economy, that of Italy, is less favorable. The lira last week was trading at 890 to the dollar, v. 680 less than four months ago. Though the drop has started a boomlet in Italian exports, it has also fanned Italy's inflation rate, now a devastating 30%, by increasing the price of imports. The trade deficit for the first quarter was $1.5 billion, equal to the gap during the whole of 1975.

Last week, in an effort to bolster the price of Italian currency by reducing the growing amount of lire circulating in world money markets, Prime Minister Aldo Moro slapped stiff controls on imports. The new measures could well drive struggling concerns out of business and add to the nation's already high 7% jobless rate. Meanwhile, inflation is likely to go on climbing. Two weeks ago, the Mechanical Trades Union set a pattern for the rest of Italian labor by signing a contract that, including cost of living adjustments, provides pay increases of 18% a year.

New Optimism. Some economists are still concerned that the recovery in the rest of Europe is not balanced--specifically that it is too heavily dependent on export sales and consumer spending and is getting little help from investment in new plant and equipment. In France, for example, business investment is expected to rise a mere 1 % this year. But even this weakness could be overcome in the not too distant future. A recent Common Market business survey found European industrial leaders generally more optimistic than they have been in three years.

*In the U.S., the unemployment rate in April remained at 7.5% of the labor force, unchanged from March, but down from a recession high of 8.9% last May.

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