Europe juggles growth, prices

Shortly after he was appointed Belgium’s economy minister this spring, Vincent van Quickenborne ordered an inquiry into the price of frites. Invented in Belgium but known to the world as French fries, these crispy national favorites had jumped in price by 4% over the prior year -- despite a 24% drop in the price of potatoes.

Suppliers immediately blamed the rocketing cost of energy and rent. Minister Van Quickenborne quipped that the price of fries just might be chasing the price of a barrel of oil. (Not that they’re cooked in such grease.)

In all seriousness, the minister made it clear that, through his inquiry, he was chasing a much larger problem affecting not only Belgium but much of Europe: inflation.

With the United States hovering on the brink of recession and the Federal Reserve deciding that slow growth is a bigger threat than inflation -- even with higher fuel and food costs -- Europe remains strong.

Euro-zone economies grew 0.7% in the first quarter compared to a year earlier, while the U.S. eked out 0.1% in the same period. Leading the way was Germany, Europe’s largest economy and biggest exporter, with a 1.5% expansion. But even France, which has been plagued by stagnation and social unrest, did moderately better than expected with 0.6% growth. Such figures have affirmed the European Central Bank’s steadfast refusal to follow the Fed in lowering interest rates, which can fuel inflation.

But the European public is fretting about rising prices. In Belgium, inflation hit 4.9% in March compared to a year earlier, its highest rate since 1985 and the steepest in the 15-country euro zone, where the average was 3.4%, according to Eurostat, a statistical agency. (U.S. consumer prices were up 4% in March over the previous year.)

The reasons for steady European growth and persistent inflation can be found here in Kortrijk, a flourishing city of 80,000 in Belgium’s Flanders region, not far from the French border, that has been modernizing in a powerful way.

Historically, the city relied on the textile industry and sold much of its wares in Europe. But in the last decade, many of its companies turned from making flax, steel and other commodities to high-tech specialty products. They also reduced their reliance on the United States and Western Europe, focusing more on Eastern Europe, Asia and Latin America.

For example, Barco, which started out in 1934 by assembling radio parts imported from the United States, is now a global company known for products such as light-emitting diode walls -- giant screens used at outdoor events like rock concerts.

Bekaert, one of Belgium’s oldest steel companies, is now generating annual sales in the neighborhood of $5.3 billion manufacturing advanced metal products, such as wires as fine as hair that are woven into carpets and textiles. The company adds 300 new people a year at its eight plants around Kortrijk and has 3,000 workers in Belgium (down from 8,000 in the 1980s).

But it has also followed its customers. The company is manufacturing and selling in Latin America, Russia and China, where it is adding 1,000 workers a year, a spokesman said. In the U.S., Bekaert is closing plants and has reduced its workforce by half in recent years.

“These companies restructured their operations in Belgium, but many are better off now because they’ve decoupled, so to speak, from the U.S. and the West and moved east,” said Geert Noels, chief economist for Petercam, a Belgian investment bank.

However many jobs were lost when Kortrijk’s companies restructured, its businesses remained vibrant enough -- and enough new ones started up -- to employ almost the entire workforce in town. In fact, 35,000 workers come over every day from French border towns such as Lille, which has 25% unemployment.

Kortrijk Mayor Stefaan de Clerck is encouraging the influx and hopes to build 4,000 new homes so people can live where they work.

“We don’t have a real estate crisis like you have in the U.S., but we have to invest in affordable housing now so we don’t have one in the future,” he said in an interview in the 16th century City Hall adorned with statues of the counts of Flanders.

De Clerck fired off a list of changes for 2009 aimed at spurring growth, including completing a new, 85-store downtown shopping mall, seven new bridges along the Leie River that will help connect the Belgian city of Antwerp with Paris, and street repaving that makes this old town feel strangely new.

De Clerck is also trying to get 14 regional governments in southern Belgium and northern France to ease barriers to growth, like eliminating a fee of more than $12 that commuters must pay to travel between the two countries.

“Prices are quite normal here so far, but we know our citizens are feeling the global pressures driving up the cost of food and gas, and we want to do everything to help them,” said De Clerck, referring to a study that showed the average Belgian couple with two children will spend an additional $1,050 on food and heating this year.

But the inflation problem wasn’t just created by the soaring cost of crude oil or by Belgians paying more for milk because of rising global demand. It is also fueled by policies in euro-based economies. In France, regulations limit the workweek and make it hard to dismiss employees -- rules that businesses say increase costs and reduce efficiency.

In Belgium, the government guarantees wage hikes tied to inflation. So starting this month, for the second time in four months, Belgian workers will take home an additional 2% in their paychecks.

Though this has cushioned household budgets, it hasn’t eased concerns about what is grabbing headlines almost daily: the buying power of ordinary Europeans.

Ubbe Descamps owns Brooklyn, a chain of seven clothing shops started by his parents 36 years ago. Sales in Flanders, he said, had been going up “but the consumers began postponing buying when they read they were spending 600 euros [$930] or so more on food and heating. Even though they also had more in their paychecks, they began panicking.

“We’ll never be the cheapest compared to the chain stores like Zara and H&M;, but we still attract a customer who wants variety and quality,” said the 32-year-old Descamps.

Surprisingly, Descamps isn’t dreading the new mall but rather is eager for the additional shoppers it will attract. “I’d rather have the competition next door,” he said, “than in another city.”

Fostering competition and creating new jobs are exactly what many European leaders hope will hold down prices and stimulate growth.

France’s finance minister, Christine Lagarde, spent last week lobbying the French Parliament for a plan to alleviate restrictions on the construction of supermarkets and shopping malls. She told reporters the plan should “lift the structural and regulatory factors weighing on our economy” creating 50,000 jobs by next year and giving the nation’s economic growth a nudge.

In Kortrijk, businessmen, shoppers, the mayor, even trade union members all expressed optimism that through entrepreneurship and innovation, they could make the changes demanded by the world economy without destroying their way of life.

At the Buda Cafe on Kortrijk’s riverfront, owner Jean-Pierre Martin has refused to raise most prices even though the cost of many commodities has gone up. He is building his clientele, welcoming new customers every weekend, he explained: “Several years ago Kortrijk was dead, but it’s finally turning around. I don’t want to miss this opportunity.”

After two years, he’s already had an offer to buy his restaurant for one-third more than what he paid. It’s too soon to cash out, but he recently made a concession to rising costs. He began charging an extra $2.30 for a side order of frites.

“Some things are unavoidable,” Martin said, smiling. “Prices are just going up.”

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geraldine.baum@latimes.com