Sturm und Drang : Slowing Economies Dampen Europeans’ Mood--and Hopes for Monetary Union

Although seen more as a brief pause in growth than the onset of recession, an unexpected slowdown in Western Europe’s bellwether economies has become the stuff of front-page headlines, heated debate and dire projections.

In Germany, the government announced Thursday that the ranks of unemployed had soared past 4 million, the most since World War II. In France, the government announced tax breaks and the central bank slashed interest rates to a 25-year low in a bid to generate jobs.

The economic woes have dented public confidence as national leaders attempt to rally support for sweeping changes they see as essential to reviving the region’s economic vitality and keeping it a major player in global affairs in the 21st century.

“The mood is gloomy,” said Antonio Borges, dean of the Institut European d’Administration des Affairs in Paris.

To an outsider, the relatively mild nature of the current slowdown and the widely held belief that renewed growth could begin possibly as early as midyear hardly seem to justify such a drastic reaction.

For example, Germany has lowered its 1996 growth estimates from a 2.5% rise in gross domestic product (made last summer) to 1.5% in an official prognosis issued last week. But even the most alarming scenario, offered by the Berlin-based German Economic Institute, still calls for 1% growth for the year, with an upturn starting during the second half.

“No one is predicting recession, and everyone expects a revival by the third quarter at the latest,” said Eckhardt Wohlers, an economist at the HWWA Institute for Economic Research in Hamburg. “The real question is about the strength of the recovery.”

The picture is similar elsewhere.

In France, growth projections for the year are also down, but Borges and others call the slackening temporary. In Britain, figures released Tuesday show an unexpected drop in industrial output for December, but projections remain strong for the second half of the year. And in Sweden, Stockholm investment banker Sten Westenberg called the slowdown “more a hiccup than a real recession.”

Those predicting a quick rebound contend that many of the conditions that triggered the slowdown have already vanished. In Germany, the drop in economic activity has been blamed on a combination of tax increases, persistently high interest rates, hefty industrial wage settlements and a strong mark, which collectively undermined consumer demand in key areas for much of 1995.

But the Bundesbank has already cut interest rates twice since August, the government recently announced a reduction in a unification tax surcharge, and major industrial trade unions--admitting for the first time a linkage between high pay settlements and unemployment--are now offering to give up wage increases in return for more jobs. The mark has also softened in recent months.

As Germany, Europe’s economic locomotive, begins to pick up steam, it will pull others with it, the reasoning goes.

But it is not the intensity of the current decline that has given it such impact. It is the timing.

It comes as both the public and industry wallow in a new wave of European pessimism--a mood fueled by a future that seems long on uncertainties and problems and short on solutions.

“Industrial confidence continued to slide in almost all member states in December,” concluded an EU business and consumer study published last month. “This was also true for consumer confidence.”

Stunning developments since the study was published--such as the Daimler-Benz announcement of a $4-billion loss for 1995, the possible closure of Dutch aircraft maker Fokker and major layoffs at the Grundig electronics group--have only added to the gloom.

For European governments, even a modest economic slowdown in the current mood brings unexpected complications as they grapple to find new direction. For example, the downturn virtually precludes any immediate progress in cutting unemployment in a region where it remains stubbornly high. At more than 10%--twice the American rate--it simmers as the single most pressing political issue in European Union member states.

The slowdown also exacerbates plans to trim elements of Western Europe’s burdensome welfare states and meddling, overregulating bureaucracy--factors that have become growing barriers to global competitiveness. (According to one statistic, a worker in Hong Kong pockets 91% of his gross wage, while in Belgium he ends up with less than a third.)

Even before the initial signs of the current slowdown surfaced, Paris experienced a convulsion of strikes and protests in December when Prime Minister Alain Juppe tried to launch a tightening of state assistance programs. Any additional attempts to cut government spending in the current, less-favorable climate would be political suicide, analysts believe.

Speaking here last week at the World Economic Forum meeting, which drew about 2,000 global business and political leaders for a week of meetings and seminars, Deutsche Bank management board member Ulrich Cartellieri said subsidies and overregulation cost the 15 EU states the equivalent of 5% of GNP, or about $100 billion annually.

“The result of this is nearly 20 million jobless,” he said. “Europe hasn’t yet decided if it wants to get competitive so it can keep its present living standard, or whether it will sink into decline.”

More important for the region’s longer-term stability, the slowdown adds to mounting doubts about the EU’s ability to launch its most ambitious project ever--a European monetary union--by January 1999, as called for in the Maastricht Treaty.

At German insistence, a monetary union imposes stringent fiscal criteria on any nation adopting the single European currency, called the Euro, including reducing the size of budget deficits to less than 3% of gross domestic product.

The fiscal implications of the slowdown now make it highly unlikely that France can bring its deficit to less than 3% in time. Even Germany has become a question mark.

That could conceivably leave Luxembourg and the Irish Republic as the only two viable candidates.

Although Americans tend to view monetary union as half pipe dream, half gimmick, for many European policymakers it is nothing less than the glue needed to hold the European Union together. For them, failure equals disaster.

“If we don’t achieve monetary union, the single market won’t hold,” Belgian Prime Minister Jean-Luc Dehaene told leaders here.

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Continental Question Mark

Germany and France, two of Europe’s biggest economies, are facing slowdowns that add to the mounting doubts about Europe’s proposed monetary union. The monetary plan calls for strict fiscal criteria for any nation adopting the common currency, including reducing the size of budget deficits to less than 3% of gross domestic product. The present slowdown makes it highly unlikely that France can reach that goal by the 1999 deadline, and even Germany is in question.

FRANCE

Unemployment rate

Dec. 1995: 11.7%

Gross domestic product

Percent change from previous year:

1996*: 1.5%

GERMANY

Unemployment rate

Dec. 1995: 11.1%

Gross domestic product

Percent change from previous year:

1996*: 1.5%

* Estimates

Sources: Datastream, Bank of America World Information Services