A European Minirecession

TIME'S foreign economists see a milder downturn abroad than in the U.S.

Since 1969 the TIME Board of Economists has provided the magazine's readers with insightful analyses of the U.S. economy. Now, in recognition of the increasing interdependence of the world's economies, TIME has formed a European Board of Economists. Last week in Paris the group met for the first time.

Despite the darkening economic clouds blowing from the U.S., the five members of the TIME board (see box) view Western Europe's prospects as brighter. With the exception of Britain, Europe seems headed for a modest slowing of growth but not recession. West German and French expansion may decrease from last year's levels, but neither country will fall into economic decline.

Although the economies are weakening, the five experts warned against any heavy increase in government spending and championed a calm, "steady as she goes" policy. Increases in unemployment, which is already at levels unknown in Europe since World War II, are viewed as an inevitable consequence of slower economic growth. But they are considered little threat to social stability. Said Italy's Guido Carli: "Unemployment is less important than it was in the past, provided that it is not geographically concentrated."

In Western Europe, in contrast with the U.S., there is generally a better realization of the tremendous changes in world economics that have been brought about by the nearly twentyfold increase in oil prices since 1972. European governments and citizens both accept the fact that the vast outflow of money to pay for staggering oil bills means that living standards cannot grow as fast as they have for the past generation. Workers cannot receive real wage increases without productivity gains, consumers cannot buy as much, and governments cannot spend money on social programs unless they have the tax revenues to pay for them. The result will be a slight fall-off in growth for some countries this year and perhaps next, but stronger and basically more healthy Western European economies on the other side of the downturn.

One of the greatest concerns among members of the TIME board was over the ability of banks to continue recycling the money being earned by the oil producers. Since 1972 the OPEC countries have been depositing their surplus income largely in Western banks, which have then loaned the funds to oil importing nations. Those banks are increasingly concerned about the $366 billion debt built up by the Third World countries, and OPEC members are growing leery of leaving their money in Western banks because of the U.S. Government's seizure last year of Iran's deposits in American banks. Said Switzerland's Hans Mast: "Private banks did an excellent job of recycling in the past, but they cannot go on like this. In 1981 and 1982 there will be increasing difficulties in financing the debt of the less developed countries."

Board members felt that governments or international organizations will now have to pick up a bigger share of the banking problem. One suggestion: they should develop new bonds or other financial securities that would guarantee the OPEC countries that their investments would not be eroded by price rises. This might be done by Unking the interest rate to the inflation level of Western countries. The OPEC countries would thus have an added incentive to continue the oil production that is vital to the West.

The board's economists believe that higher oil prices need not wildly fan inflation, provided governments continue their steady policies of tight budgets and strict monetary restraint. Inflation in Western Europe now ranges from Switzerland's 4.3% to Britain's 22%.

Some board members saw a correlation between the perception of U.S. power in the Persian Gulf and the price of crude. Said Carli: "It is not surprising that after the failure of the U.S. mission to rescue the Iranian hostages, Saudi Arabia, followed by Kuwait and the United Arab Emirates, raised prices."

The high cost of oil is not entirely to blame for rising prices. Government budget deficits and indexation of salaries also stimulate increases. In the so-called consensus countries of West Germany and Austria, where there is greater agreement about management of the economy, inflation is controlled by discussion among business, labor and the government. Not all countries are so well off. In Britain, rival union leaders vie with each other in escalating wage demands; so do French unionists. In Italy, inflation affects mainly civil servants who are responsible for the protection of government institutions; most workers receive regular cost-of-living pay increases. Whatever the inflationary pressure, the board suggested that an incomes policy is not the answer. "One of the few clear-cut lessons of recorded history," said Britain's Samuel Brittan, "is that you do not control inflation by wage and price controls."

Partly as a result of these policies, unemployment is expected to grow moderately in Western Europe this year. The number of jobless could reach more than 1.5 million in France and 2 million in Britain. Even robust West Germany expects to see 1 million out of work.

Each European economy has its own unique strengths and weaknesses. The outlook for the major nations:

WEST GERMANY: The strongman of European economies is headed for a slowing of its recent healthy growth. Herbert Giersch of West Germany forecasts a G.N.P. increase of about 1.5% in 1980, after last year's 4.5%. Investment in plant and equipment and construction remains strong. One reason is the hefty demand from OPEC countries for West German goods. So far wage demands have been moderate. Inflation is expected to rise from last year's 4.7% to 7% this year.

BRITAIN: Prime Minister Margaret Thatcher's ambitious program to push Britain out of its economic stagnation with tight budgets and strict monetary control will continue to make that country the sick man of Europe. Economist Brittan forecasts a 3% decline in the G.N.P. in 1980 and another 1% drop in 1981. The fall-off is likely to push unemployment from its present 6% to 8% or even 9%, but that should reduce inflation from the current 22% to 15% by year's end. One consolation: the work force is likely to be trimmed down to its most productive members. "We are going to have what we have been awaiting for many years, a productivity miracle," said Brittan. "There is no doubt that our famous surplus labor is being shed in manufacturing."

FRANCE: French industry is facing old and new problems. According to Economist

Jean-Marie Chevalier, industry is too concentrated and the labor force lacks mobility, causing stagnation and declining productivity. French corporations are therefore looking abroad for investment "because expectations of return are greater than in France." Also, French companies are finding it harder to land export orders. In the Airbus project, a cooperative venture between France, West Germany, Britain and Spain, orders have shifted to West Germany because parts can be produced there at a lower cost. At best, predicts Chevalier, France can expect 1% growth this year; at worst, none at all. Inflation is projected at 13% this year.

ITALY: The Italian economy remains as unfathomable as the Gioconda smile. Growth forecasts for 1980 range from 2% to 4%. The variation is due to Italy's dependence on fluctuating export markets and exchange rates and a great disparity in the performance of economic sectors.

The auto industry, for example, is expanding, but chemical and shoe manufacturing are suffering. Says Carli: "If the demand for furniture, a sector that has developed in the past four or five years, falls abroad, the consequences will affect certain regions more than others." For this year he foresees a modest growth of about 2% in the Italian economy as a whole.

In sum, Western Europe this year will have the luxury of viewing the difficulties of the U.S. with some degree of lofty isolation. Consumer and business spending are likely to remain moderately strong in Europe while they are falling fast in the U.S. Though unemployment in Western Europe is rising, inflation is under greater control than in the U.S. Moreover, the worldwide shortages of oil and other commodities that touched off the severe 1973-75 recession are not as serious today. For the continent that gave the world the miniskirt, this will be a minirecession.

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