Germany and Europe Join the Global Effort to Prevent Recession

Europe in distress appears to be swinging back to left-wing politics. Yet the real news is not political, but economic. European countries are uniting with the world’s leading economies to stimulate growth and avoid recession.

A shift in thinking is occurring that will boost economies immediately and bring Europe’s companies to greater prominence in the long run.

Germany is in the news because its new government, led by the Social Democratic Party and its finance minister Oskar Lafontaine, last week introduced an economic program to raise taxes on corporations while cutting taxes and increasing allowances for families. The aim is to put money in consumers’ pockets in order to boost demand. That German sentiment is shared by the broader European Union, whose governing commission has just lowered its forecast of economic growth for its 15 members.

Fear of recession is in the air. So the EU is talking of loosening its strict policy that a country cannot adopt the new euro currency next January if its government budget deficit is more than 3% of the country’s annual output of goods and services--its gross domestic product.

The policy, instituted in 1997 at German insistence, was intended to prevent inflation by restraining government spending. But now Germany, France, Italy and other European countries want to amend the stricture to allow extra government “investment” to stimulate their economies.

Questioning the Markets

Government spending to boost economies is called Keynesianism, after the British economist who recommended it in the 1930s Depression. But the practice has been discredited for more than a decade as the world has put its faith in markets to allocate resources.

Yet now, with bank losses rising in Europe and the U.S. as well as in Asia, and unemployment remaining stubbornly high in Europe--nearly 11% in Germany, 12% in France and Italy, 18% in Spain--markets are being questioned and government action to guide economies is coming back in fashion.

What will be the consequences of this shift in thinking? In the near term, retail sales and production of consumer goods will increase in Europe. That will help the economies of the U.S. and other countries because the Continent will buy more goods from abroad.

Interest rates will fall. Germany’s central bank, which refused to lower rates last week, will respond to the new government’s wishes, analysts say. In that respect, Europe will follow the example of the U.S. Federal Reserve Board, which has twice lowered interest rates recently and is likely to do so again.

Economist Philip Suttle of J.P. Morgan Co. predicts that U.S. rates for overnight bank borrowings from the Fed--a base rate for other lending--will fall by mid-1999 to 3.5% from 5% at present.

Japan, too, is trying to stimulate its economy--which means that countries responsible for more than 70% of the world’s total output are trying to boost economic activity. That’s bound to help.

But in Germany and much of Europe, economic reforms will still be needed for more lasting stimulus.

One reason for high unemployment in many countries is that taxes are high. The average German wage earner pays more than 60% of income in taxes, including social security contributions (compared with 37% in the U.S.).

Keynesian policies unaccompanied by other reforms are not the answer.

“Boosting demand rather than making adjustments to their economies is not the way for continental Europe to go,” says Bronwyn Curtis, the London-based economist for Nomura Securities.

And increasing taxes on German corporations will only encourage more of them to think about leaving the country.

The auto giant Daimler-Chrysler may well move its headquarters to New York, predicts Stephan-Gotz Richter, head of Transatlantic Futures, a Washington based consulting firm.

But there are larger trends at work in Germany also, among them a growing internationalism that ultimately will make many of its companies more prominent and successful on the world scene.

Deutsche Bank, the country’s leading banking institution, was in the news last week because it is proposing to acquire Bankers Trust of the U.S. Deutsche’s aim would be to gain capabilities and stature in investment banking, the business of raising capital and putting together mergers for companies.

The big German bank, with unmatched prominence in Central and Eastern Europe, could become a formidable international competitor.

Success comes from expanding internationally, says the head of SAP, one of the most technologically advanced German companies. SAP--its name stands for “data processing systems and applications”--provides software to run corporate operations the world over. Almost half its $3.4 billion in annual sales comes from the U.S. market. SAP operates in 50 countries. But Hasso Plattner, SAP’s co-founder and chief executive, says Europe is the best training ground for international companies.

“You can’t be a success in only one country anymore,” Plattner said recently. But Europe is a natural laboratory for international success, he said, “because its many languages, styles and priorities force you to adapt.”

That’s a good point. And if more German and European companies now follow Plattner’s example--as a single currency makes international operations more accessible to all--old Europe will be a place to watch early in the new century.

Whose Problem Is It?

European governments and businesses are open to new ideas these days because they have just had a shock. As the Asian crisis spread to Latin America and the U.S., Europe was in denial. EU economic ministers said openly that the crisis was an American problem.

But at recent International Monetary Fund meetings in Washington, the Europeans discovered that bad loans to Russia and other developing countries were hitting their own European banks hardest, reports economist Donald Straszheim of the Milken Institute think tank.

And now European governments see the outlook growing dimmer for their economies. They have come to the recognition that in the modern world of global lending and borrowing, buying and selling, prosperity can’t be isolated within one country or even one continent.

The beginning of wisdom is humility.

James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.