For the Old World, an Economic Renewal

Europe. A continent stuck in the past, a sort of theme park for tourists with well-preserved castles and quaint customs, right? As for the economy, it must be about as exciting and dynamic as Poli-Grip.

Flat wrong--that was then, and this is now. In mid-1998, as much of once-hot Asia has gone stone cold, Europe’s economy is plugging along again nicely and may be on a roll.

Indeed, California’s exports to Europe are surging, helping to offset slumping sales to Asia. Stock markets in Paris, Frankfurt and other continental cities are setting record after record, consumer confidence has reached historic heights and even unemployment, an endemic social scourge, has dipped recently in the biggest economies, Germany and France.

“Discretionary spending is going up and up,” reports Joroen Sloendregt, 32, a wholesaler in the canal-laced Dutch city of Utrecht who imports wooden back rubbers, massage oil and bath salts from a California manufacturer. “We’re going to be one European market, and that is going to be a huge advantage for us.”

In the 15-country trade bloc officially known as the European Union, where a single currency will begin to be phased in next January, specialists forecast average growth of between 2.5% and 3% this year.

That may not sound like much, but given the EU’s $8-trillion economy (the world’s largest, outweighing even America’s $7.8 trillion in gross domestic product), it means adding the approximate wealth of a South Korea in two years.

Across the EU, industries are humming again, car sales are up 8% over 1997 and plans are in motion to increase competition in such key sectors as telecommunications and energy.

Companies in Germany, which boasts the region’s largest economy, are flush again and bullish enough about the future to make large foreign acquisitions, including the high-profile proposed purchases of Rolls-Royce, Chrysler and Random House.

“We’re really in an economic boom at the moment,” said Belgian economics historian Karel Lannoo. “There’s a stock market boom, a slide in interest rates, a commitment to EMU [economic and monetary union].”

The Old World’s rebound may appear even more spectacular because of Japan’s ongoing recession and the defanging of such Asian tigers and dragons as South Korea, Thailand and Indonesia. Around the time such Asian markets were becoming the darlings of venture capitalists and multinational companies, the derogatory term “Eurosclerosis”--for Western Europe’s seemingly eternal economic torpor--was coined.

“Asia become the fashion. And fashions come and go, don’t they?” quipped David Wright, advisor to European Commission President Jacques Delors.

As U.S. Commerce Department official Paul Bucher points out, Europe is still “our largest trading partner as a region.” According to a study by the European-American Business Council, a private business group, the transatlantic relationship, though marred occasionally by a headline-grabbing dispute over pasta, canned fruit, movie exports or some other trade squabble, continues to dwarf all others: more than $800 billion in two-way investment and $411 billion in trade in 1996, the most recent figures available.

And, though President Clinton’s recent trip to China spotlighted that country’s potential, the plain fact is that at present, the U.S. sells more to Belgium and Luxembourg ($14.1 billion in 1997, according to the Commerce Department) than to China ($12.8 billion).

And if anything, the woes of many of Asia’s economies and Europe’s own great ambitions are likely to make U.S.-European trade even more important in the short and medium term, experts say.

“If three years ago, people were ready to assume nothing could go wrong in South Korea or Southeast Asia, they aren’t ready to assume that now,” said Paul E. Atkinson, head of the economic prospects division at the Paris-based Organization for Economic Cooperation and Development.

Signs of revival in Europe were apparent as early as mid-1996, economists say, but it still has come as a surprise to many, including officials in faraway California.

European countries have long been the biggest direct investors in California. In the first quarter of 1998, exports to Europe surged unexpectedly by 20.5%, to $5.9 billion; the EU countries bought far more products stamped “Made in California” than did Japan or Mexico.

At California’s Trade and Commerce Agency, officials admit having been amazed at first but now believe the trend will continue.

“As Europe recovers and the EU comes together to build a single market, it’ll become even more important to us,” said Jesus Arredondo, a high-ranking agency official for international trade and investment.

At some California exporters, like Tender Loving Things in San Leandro, that’s already the plan. The 6-year-old company racked up $6 million in sales last year. Since February, Sloendregt, the Utrecht-based distributor, has been receiving and shipping the company’s signature wooden massager and the rest of TLT’s line, including foot cream and bath salts, to retailers in the Netherlands.

Twenty percent of Tender Loving Things’ sales take place outside the U.S. Purchases have been off recently in Asia, though, and international sales rep Zora Gastelumendi hopes a more prosperous Europe, which takes 35% of TLT exports at present, will make up the difference.

“We’ve already been successful in the Netherlands, in Switzerland, in England,” she said. “If we are in the stores, people will buy.”

Sloendregt agrees. Five years ago, the brash, jovial Dutchman sold his motorcycle to get capital to start his business. He thinks Europe’s economy is on the verge of a renaissance and plans to go whole hog into importing U.S.-made products. His goal is to eventually secure Europe-wide distribution rights for Tender Loving Things.

“The TLT line fits in perfectly with my strategy,” he said over a mug of coffee in his Utrecht store. “We want to have exclusivity for Benelux [Belgium, the Netherlands and Luxembourg], then build up the market.”

Last year, EU purchases of U.S. products jumped by 10%, more than triple the volume to Asia, topping $140 billion. As 11 of the EU countries prepare to begin the switch to a shared currency, the euro, on Jan. 1, views are divided on the fallout for business. But many believe the resulting economies of scale and price transparency will keep Western Europe purring along nicely, and perhaps even rev up the rhythm.

The single currency “will give us at least two to three years of strong economic growth--all countries will collect the fruits,” predicted Lannoo, the historian.

To make sure American businesses get their share of the action, the Commerce Department last month announced more than a dozen seminars across the United States to dispense advice to entrepreneurs and exporters.

“Getting ready for the euro is critical for the American economy, for American jobs and to maintain our lead position as the world’s foremost trading nation,” David L. Aaron, undersecretary of Commerce for international trade, has said.

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Thirty-five miles southwest of Utretch, where Europe-bound shipments from Tender Loving Things arrive by sea, there are signs that U.S.-European trade is expanding even more. Last year, stevedores in the North Sea port of Rotterdam, the world’s busiest and the main ocean gateway to Europe, handled almost 3.5 million freight containers.

Most of the inbound cargo is hitched to trucks or put on river barges and sent inland to an estimated 380 million consumers in Europe’s hinterlands.

This year, Rotterdam’s traffic to and from North America is up about 7%, estimated Minco A. van Heezen, spokesman for the port authority. And as recession-hit Asian countries spend less abroad, he added, the number of containers being sent back to the region empty is growing. Chemicals once sold to customers in the Far East and Southeast Asia now sit in Rotterdam’s tank farms.

“Once Asia has an effect on Europe’s economy, it becomes our problem as well,” van Heezen said.

According to macroeconomists, the U.S. and Europe should experience similar effects from Asia’s crisis. But Japan’s recession should hit the U.S., which is more dependent on exports to Japan, with greater force.

In the first three months of this year, Germany’s economy grew 3.8% over the same period in 1997, the largest spurt of the decade. The French rate was almost as high: 3.4%. Unemployment, meanwhile, dropped slightly: to just under 3 million people in France and 4.2 million in Germany.

“Are we at the beginning of a long growth cycle? It could be we are at the point the United States was two to three years ago,” said Wright of the European Commission.

However, some analysts still aren’t impressed. “What we’re seeing is economies coming out of recession,” said Bruce Ballantine, a Scottish economist and senior advisor to the European Policy Center, a Brussels-based think tank. “The big question is, has anything changed in terms of fundamentals? The jury is still out.”

Some economists believe that to unleash long-term growth, labor markets in France, Germany and some other countries on the Continent must be reformed to allow employers greater liberty to hire and fire. The cost of state health insurance, social security and other employer-funded programs, they assert, is too high and makes companies hesitant to hire.

“The only problem in continental Europe is unemployment,” said Axel Rhine, spokesman for the Cologne Institute of Business Research, a think tank funded by German business. “In our opinion, we have to liberalize our labor market, to reduce our regulations and also open up a low-paid sector . . . .”

Europe has other problems--for instance, a dearth of venture capital markets where start-ups can secure financing and few fast-growing companies in the aggressive mold of Microsoft and Intel. The euro may remedy some of these shortcomings. Ballantine, though, thinks the real restraints on an economic boom lie far deeper--in the European psyche.

“In Europe, we don’t honor success,” said the economist. Recently, Ballantine wanted to buy a Jaguar, but his daughter talked him out of it. Too flashy, she said.

In any event, many ordinary Europeans seem to have decided that what the German media has been prudently calling Aufschwung--”the upswing”--is real and will be around for a while. An opinion poll published last month found 53% of respondents in eight countries--Belgium, Britain, France, Germany, Italy, Netherlands, Portugal and Spain--were optimistic about the economic future. That was the first time in memory that optimists outnumbered pessimists.

Many big European businesses have been chopping costs and consolidating to become more competitive globally, a process made urgent by the coming of the euro.

Unilever, the Anglo-Dutch multinational that owns such brands as Lifebuoy soap, Lipton tea and Popsicle, has closed 59 of its 189 European plants, fired 18,000 workers, or 16% of its local work force, and dumped underperforming units.

The corporation sees the best chance for long-term growth outside Western Europe--in high-potential (and high-risk) markets such as Russia, India and China. Unilever executives are uncertain if Western Europe’s economic upturn will continue past next year. But this region continues to furnish the majority of Unilever profit--51% of the $5.6 billion reported in 1997.

“We expect much higher growth rates elsewhere than in Europe,” said Harry van Egmond, an economic advisor at the company’s Rotterdam office. “But a slow growth rate of a big slice may be just as important as a high rate for a smaller slice.”

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* CALIFORNIA CONNECTION: The state’s exporters increase focus on the vast European market. D4