Signs of a Pickup Abroad

By Frederick Painton

Signs of a Pickup Abroad TIME's European Board of Economists sees a timid recovery

Tantalizingly visible on the horizon, a weak and exceedingly vulnerable economic recovery will at last begin to take shape for the struggling nations of Western Europe during the second half of 1983. That was the cautious view of TIME'S European Board of Economists, which met in Geneva last week to survey the West's hesitant forces for recovery--most notably the falling interest rates around the world--and to weigh them against the twin recessionary demons of global debt and rising protectionism that are threatening the economies of nations everywhere.

In the six-hour meeting, marked by more disagreement than usual, the six economists also sought to put into perspective the deep pessimism that has gripped Western Europe-an officials in recent weeks. There are in factl some bright spots. Indeed, at a time when protectionist pressures are mounting everywhere, Board Member Jan Tumlir, chief economist for the General Agreement on Tariffs and Trade in Geneva, argued that the chances of a full-scale trade war, particularly between the U.S. and its European partners, remain remote, if only because both sides fear the economic carnage that would ensue. Tumlir even found a "silver lining" in the GATT meeting two weeks ago, which pitted U.S. negotiators against the European Community over the issue of agriculture subsidies. Although the meeting generally was regarded as at least a setback to world trade, Tumlir saw in the desperate last-minute efforts to prevent an impasse proof that the main participants recognized the grave consequences of total failure. Concluded Tumlir: "If everybody were as pessimistic as the politicians, it would be inconceivable that the Western economies would have held so steadily."

Debt as well has so far proved a manageable problem. By cooperation on a case-by-case basis, the board noted that banks and governments in the industrialized world so far have staved off the nightmare of a major default by cash-starved borrowers ranging from Mexico to Poland. And though unemployment is currently at 10.5% of the labor force in Western Europe as a whole, and rising, the specter of inflation is receding. By next December, according to Board Member Hans Mast, a University of Zurich lecturer and executive vice president for Credit Suisse, inflation should have been driven down from a current level of 8.5% to an annual rate of no more than about 7.5%, the lowest in more than a decade.

Sam Brittan, assistant editor of London's Financial Times, pointed out that the recent downturn in the value of the U.S. dollar and the British pound should help ease protectionist pressures both in the U.S. and throughout Western Europe. The U.S. and Britain, whose exports have suffered from overvalued currencies for more than a year, are now expected to be less inclined toward curbing imports. Reason: foreign-made goods will become relatively more expensive, and thus less competitive, in the U.S. and British markets, thereby helping to stimulate sales for domestic manufacturers and reduce demands for protectionist measures.

Meanwhile, countries like West Germany, which had tightened monetary policy to protect the deutsche mark, can now begin pursuing a more expansionary credit policy. But, cautioned Brittan: "The trouble is that the world trade situation has grown so delicate that steps toward protection, which might have been averted if the currencies had changed earlier, may now prove more difficult to stop."

The board agreed that the business outlook in Europe is gloomier than in the U.S., which also faces postwar record unemployment and stagnating output. Said Brittan of the difference: "For all its problems, the U.S. still has a fairly flexible labor market. There has been hardly any increase in remuneration per head, after adjusting for inflation, since 1967. Europe suffers from rigid labor markets in which costs never go down or even stabilize. As a result, recessions in Europe now tend to be severe, while booms prove short-lived."

Guido Carli, former governor of the Bank of Italy, noted that in the past ten years, 15 million jobs were created in the U.S., compared with virtually none in the European Community. The jobs, he said, were in the service sector, not in manufacturing, where unemployment has continued high on both sides of the Atlantic. Said Carli: "Employment has to be created in services and small businesses, but I believe that in Europe we are not moving in that direction."

Against that backdrop, board members offered 1983 growth forecasts ranging from merely modest to barely visible for the Community's four leading economic powers:

WEST GERMANY. After a decline in growth this year, expected to be around 2.5%, the West Germans can look forward to a modest 2% growth in G.N.P. in 1983, beginning in midyear, according to Herbert Giersch, director of the University of Kiel's Institute for World Economics. Inflation, now running at 4.5%, will fall to 3% by next December if wage increases are limited, as the government seeks, to 3.5% during 1983. That will be tough, said Giersch, since militant trade unions are already demanding salary hikes of about 7.5%. The government's recent efforts to stimulate the housing industry are not expected to make any dent in unemployment, now at 7.8% of the work force. Joblessness is likely to grow to 9.5% by the end of next year, said Giersch.

BRITAIN. Board Member Brittan, while acknowledging that he had overestimated the growth in Britain during 1982, argued that in 1983 the U.K. economy could expand by as much as 2.3%, in contrast to the current 1% consensus forecast of most analysts. Said he: "Either the economy will not take off at all or it will grow a good deal faster than most believe." Brittan based his forecast on the stimulative effect of a planned March 1983 tax cut, as well as the impact of the recent decline in interest rates, which has not yet been felt in the economy. Though unemployment, at 12.9%, is already the highest in Western Europe, Brittan predicted a further rise to 14% by the end of next year. He foresaw inflation's dipping a bit in the process, from 6% at present to about 5.8% by the end of 1983.

ITALY. Normally governments produce only one economic forecast at a time, but this year Italy's Budget and Economic Planning Ministry is hedging its bets, offering not one but two differing views of the year ahead. The first assumes firm action against out-of-control public spending and a roaring budget deficit, and the alternative outlook assumes no action at all. According to Carli, the bizarre bureaucratic maneuver was a dramatic demonstration of the political dilemma facing the country. The present mountainous deficit of $52 billion amounts to fully 15.5% of the gross national product, and threatens if unchecked to push inflation, currently at 16.5%, to 21% during the year ahead while holding back growth to no more than about 1.5%. Even so, the newly formed coalition headed by Christian Democrat Prime Minister Amintore Fanfani is in no position to cut the budget deficit to the 11% of G.N.P. that most economists say is necessary, suggesting that Italy will remain mired in stagflation no matter what happens to other Community members during the year.

FRANCE. Despite skepticism inside the country and abroad, the Socialist government's decision to impose price and wage controls last June has been "a sort of success," in the view of Jean-Marie Chevalier, professor of economics at the University of Paris Nord. As a result, he was less pessimistic about the French economy than he was six months ago, now predicting a growth rate of about 1% for 1983 along with a continuing fall in inflation. The rate of price rise in the economy has already been slowed from 12% to 9.8% during 1982, and Chevalier expects further fractional improvement during the year ahead if unions continue to show wage moderation. Meanwhile unemployment, now at 9% of the French labor force, will creep up to 9.8% before peaking.

During the meeting, Chevalier stressed that expanding world trade would not by itself bring economic growth for any nation in the year ahead. He argued that, in what he called the "Mexican effect," excessive dependence on world trade had pushed many Third World nations into debt in the first place, risking their economic independence in the process. Chevalier suggested that some nations would need to protect domestic industries to encourage investment. By contrast, Board Member Tumlir argued that investment would slump alarmingly without free trade. Said he: "Investment is extremely sensitive to uncertainty, and if you create uncertainty about trade, exports and access to markets, then one-third or maybe even 40% of contemplated investment projects will be postponed. So to say that we have to worry about investment but not trade today is irrational."

There was disagreement too on the direction of the European Community as a whole. In Chevalier's view, European cohesion has been strengthened by clashes with the U.S., particularly over the Reagan Administration's economic sanctions against European companies engaged in building the Soviet gas pipeline to Western Europe. Moreover, said Chevalier, at the trade talks in Geneva, "there was a serious consensus among the European partners" to resist U.S. demands for an end to agricultural subsidies in the Community and for a stronger commitment to freer trade. Replied Carli: "The Community has found unity only in the form of being antagonistic to the U.S., and that is the worst form of unity we could aim for. It is a sign that the Community is getting into a crisis."

Carli, Brittan and Mast all professed disillusionment with the current drifting aimlessness of the Common Market. Mast found that the Community had lost its political will and now was split between countries with free-market philosophies and those that were less dedicated to that idea, which he listed as France, Italy and Greece. Though Chevalier insisted that the current slump was acting as a cohesive force by making member states unify their economic policies, Carli argued that the Market was really being ripped apart by the huge economic disparities of its members, with chronically troubled Italy at one extreme and West Germany, still a model of economic discipline, at the other. Whatever the state of European unity or the chances of the longed-for recovery, there was at least agreement that the meeting took place on the crest of an unpredictable period of transition.

--By Frederick Painton

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