Has Europe's Growth Peaked?

By Christopher Redman/Interlaken

Like a team of climbers nearing the top of a steep and dangerous mountain face, Western Europe's economies are beginning to show signs of fatigue. Though still pressing onward and upward, they face perilous obstacles, most notably the weak dollar. While Britain, Italy and Spain are still moving forward at a relatively brisk rate, such countries as West Germany, France and Sweden are faltering. And just as climbers roped together for safety can progress only at the pace of the slowest team member, growth is now being threatened by the economic laggards.

Such was the picture that emerged from a meeting last month of TIME's European Board of Economists, held at Interlaken, in the shadow of the Swiss Alps. If all goes well, the economists said, Europe's five-year-old expansion could last at least through 1988 and the average growth rate of the major nations could be maintained in the current 2.5% range. TIME's board acknowledged, though, that dangers are looming and that pessimism is on the rise in Europe. Said Board Member Hans Mast, senior economic adviser to the Credit Suisse First Boston investment bank: "In today's climate of high real interest rates, Third World difficulties, heavy corporate debt and increased protectionism, many businessmen now share the view that a financial and economic collapse is a possibility."

Even a mild slowdown in Europe's growth rate would be bad news for the U.S. economy. Washington has been counting on increased exports to Europe to help curb America's huge trade deficit, which hit a record $169 billion in 1986. But there is no assurance that Western Europe can keep up its present consumption of American imports ($59 billion last year), much less develop a greater appetite.

Blocking the path to robust European growth is the low value of the dollar. Despite recent gains, the U.S. currency is still down more than 40% against the West German mark and the French franc since early 1985. That decline has damaged many of Europe's export-driven economies by making their products more expensive in relation to American-made goods.

Among the countries hit hardest is West Germany, whose GNP actually declined at a .5% annual rate in the first quarter of the year. Nonetheless, Herbert Giersch, an economist at the University of Kiel, predicted that more stimulative government policies would push the growth rate to 2% for 1987 as a whole. The outlook may be bleaker for France, which is heavily dependent on such exports as aircraft and telecommunications equipment. Said Economics Professor Jean-Marie Chevalier, of the University of Paris Nord, who predicted a 1.3% growth rate this year for his country: "There is now a mood of melancholy, anxiety and uncertainty about France's economic prospects."

A serious impediment to European expansion is the high level of interest rates. In Sweden, where GNP growth is expected to be only 1.5% this year, the interest rate charged by banks to prime corporate customers can be as high as 11.5%, compared with the 8.25% levied on similar loans in the U.S. Nils Lundgren, vice president of Pkbanken, a major Swedish bank, argued that the U.S. was responsible for pushing up interest rates around the globe because Washington must borrow so much money abroad to help finance the federal budget deficit ($221 billion last year). Said Lundgren: "The U.S. is using up the savings of the world."

Europe's pacesetter is Britain, which is growing at a 4% pace. British businessmen are enjoying a new rush of confidence now that Conservative Prime Minister Margaret Thatcher has won a third term. But Samuel Brittan, an economics columnist for London's Financial Times, noted that Britain faced a real challenge in trying to remain an "island of rapid growth without an improvement in its main trading partners." The same task confronts Italy, which is expected to expand at a 3% rate this year. Said Guido Carli, former Governor of the Bank of Italy: "I doubt that Italy can sustain a growth rate that is higher than the overall average for the European Community."

Several of the economists agreed that an improved performance by West Germany was a key to continued European prosperity. Mast, for one, maintained that West German economic policy has been much too conservative. Said he: "Despite high unemployment and virtually stable prices -- factors that would suggest an expansionary policy -- the German government is stubbornly refusing to make any courageous move in that direction." Giersch pointed out, however, that the West German central bank had already increased the money supply to bring down interest rates and that a $7.6 billion tax cut scheduled for Jan. 1 would also help boost growth. He recommended that further tax reductions worth $10.8 billion, which are scheduled for 1990, be put into effect earlier.

West Germany and the rest of Europe may need lower taxes and a more expansive money supply to help stimulate sluggish investment. High interest rates have discouraged many European companies from borrowing to build additional capacity or buy new equipment. Even cash-rich firms often hold back because they think they can earn a better return by lending out funds than by making capital investments. Complained Giersch: "We don't have enough investment because our firms would rather buy U.S. bonds."

As much as America needs foreign capital at the moment, the U.S. might benefit more in the long run if the European nations increase domestic investment and build up their economies. Only a healthy Europe can boost its imports and thus help the U.S. curb its dangerous trade deficit.

CHART: TEXT NOT AVAILABLE

CREDIT: TIME Chart by Cynthia Davis

CAPTION: Forecasts by TIME's European Board of Economists

DESCRIPTION: Mountain with men climbing contains chart comparing Britain, France, Italy, Sweden, W. Germany, W. Europe and U.S. in relation to Growth, Inflation and Underemployment for years 1987 and 1988.