Once-Lagging Europe Shows Renewed Vigor

The Old World’s economy, hovering near recession only months ago, is on the move again. Industries are producing, consumers are buying and the outlook is brightening as the new century nears.

After stalling earlier this year, economic growth in the European Union countries is accelerating so fast that it has surprised many analysts. Some believe the area’s economy, the largest of any trading bloc in the world, will expand by more than 2% this year and 3.5% in 2000.

Pronouncing their confidence that the euro boomlet has legs, the central bankers who make policy for the 11-nation European Union raised interest rates Thursday--a bid to head off any increase in the minuscule rate of inflation.

It’s a recovery that is also good news for the United States, whose consumers until now have been single-handedly propping up the global economy and whose major companies rely heavily on Europe for profits.

Signs of Europe’s resurgence can be found everywhere. Consider what might be called the Tabbouleh Index.

At Bonduelle, Europe’s leading manufacturer of canned, frozen and otherwise processed vegetables, executives look at surging demand for the Lebanese-style salad and see proof of the upswing in Europe’s economy.

Over the last two years, sales of the entree--a mix of bulgur wheat, scallions, tomatoes, mint and parsley--along with other Bonduelle perishables like grated carrots in vinaigrette have increased by 25% annually.

No wonder Bonduelle, which did raised90% of its $867 million in sales in the 15 European Union countries last year, is serene about both the current state of Europe’s economy and its own future.

“We have a lot of confidence and optimism in Europe,” said Daniel Bracquart, president, at Bonduelle company headquarters outside this northern French city.

The improving economic climate, according to Bracquart, means that European consumers are more willing to spend more for the ready-mixed dishes he sells in plastic containers. More women work and don’t have the time or inclination to make salads from scratch for their families. Admittedly, there are noneconomic factors: People these days want to eat more healthfully.

But the signs of better times go far beyond vegetable sales. Industrial output, which slowed late last year in the 11 European countries that use the continent’s new common currency, the euro, stabilized and has begun increasing--by 1% in the third quarter of this year.

So many Europeans are taking sea cruises that more ships have to be built--12% more in France’s shipyards this year than in 1998, according to one Paris bank’s estimate.

For the first time since the recession of 1993, households in many regions of Europe seem confident and flush enough to engage in major discretionary purchases. In Spain, interest rates for people seeking to buy a Madrid apartment are the lowest in history, around 5% to 6%. In France, auto makers are heading for near-record sales of 2.1 million vehicles this year.

“Most of the available information . . . supports a picture of ongoing cyclical improvement,” Wim Duisenberg, president of the European Central Bank, said in a recent speech. “Against this background, most forecasts point to a strengthening of economic activity in the remaining part of this year and in the course of next year.”

Some see it lasting for a while.

“This trend can stay with us for several years,” Jose Alzola, European economist in the London office of investment bank Salomon Smith Barney predicted in an interview. “There is room to grow above [the historical] trend for a while.”

Stronger Europe a Boon for U.S.

Economists say Europe’s stir from the doldrums is also great news for the United States because it no longer will have to carry the weight of the global economy and serve as sole dumping ground for cut-rate exports from Thailand, Indonesia or other emerging markets.

A stronger Europe should also be a fillip for many U.S. companies. Paine Webber, the New York-based stock brokerage, estimates 20% to 25% of profits for the corporations that make up the Standard & Poor’s 500 index comes from Europe. A more prosperous Europe should generate a better bottom line for U.S. companies with branches or subsidiaries here, as well as increased trans-Atlantic trade.

“For the first time in 15 years, America, Asia and Europe are growing together, which should lead to interesting market developments,” said Goeran Lindahl, chief executive of ABB Ltd., the Swedish-Swiss engineering giant.

Europe’s new growth phase has been particularly juiced by reviving demand in Asia, where economies are healthier than at any time since the 1997 crisis. Europe’s own low interest rates have also meant that money to finance consumer purchases or business expansion is cheaper.

The euro, the new currency adopted last January by 11 countries of the European Union, was weak on world currency markets for much of 1999, making European exports more competitive and giving another invigorating jolt to member states’ economies. The euro dipped as low as $1.01 last July 8, but has revived to $1.05 as of Thursday, compared with $1.17 when it was introduced at the start of 1999.

Surveys also show that after a dip at the beginning of 1999, the confidence of European consumers, and hence their willingness to spend more of what they earn, is very strong, encouraging businesses to produce. The prospect of greater sales, and therefore of greater profits, has sent a tremor of excitement through the continent’s stock markets; last week the Dow Jones Europe Stoxx Index climbed 4.4% for the second-biggest weekly gain in nine months.

“Inflation is relatively subdued, there’s high growth coming through and we’re seeing profit upgrades,” Prash Arora, who helps manage around $6 billion at Old Mutual Asset Managers, told Bloomberg News. “I see this continuing for the rest of the year.”

Economic Prospects Vary by Country

The picture, however, is not uniformly rosy, and some analysts note that Europe still has to solve long-standing economic problems, including highly regulated and inflexible labor markets and a relative dearth of venture capital.

Among the larger EU member countries, Spain has been the region’s star performer, in part because the government this year cut income taxes, leaving Spaniards with more to spend. Growth there in 2000 could reach 4%. The Portuguese and Irish economies also are among the leaders.

In France, where exports set an all-time record in July, corporate leaders and industrialists believe the outlook for doing business is the sunniest in a quarter-century. In a report last month, the International Monetary Fund lauded France for a “remarkable economic performance” and predicted 2.5% growth this year and 3% in 2000.

But Germany, Europe’s single largest economy, and Italy have been among the laggards.

Both were hit especially hard by the crisis in Asia and downturns in other developing markets such as Latin America and Eastern Europe, which sapped demand for German industrial machinery and Italian luxury goods. In Italy, even the drop in interest rates has been a mixed blessing, since many families count on government bonds for a large share of their income.

Germany of late has been showing signs of revival, but some analysts say it is due primarily to a revival in foreign demand. A number of leading institutes have predicted the economy will expand by 1.4% this year and 2.7% the next, but many captains of industry and business remain wary.

Another reason for their caution is the uncertainty surrounding the year-old coalition government of Chancellor Gerhard Schroeder, which has lost a string of recent regional elections.

Unemployment Still a Problem

Moreover, better economic times will be truly genuine for millions of Western Europeans only when unemployment, a decades-old curse, is cut dramatically. In this area, too, 1999 has brought improvement, though much remains to be done.

The good news, according to the European Union, is that in the first seven months of this year, 500,000 people were added to the employment rolls, knocking half a percentage point off the unemployment rate. The bad is that 15.8 million Europeans, or an average of 9.3% of the adult working population in the EU member states, still are without jobs. That is more than double the U.S. jobless rate.

Only six months ago, when there were still fears of a Europe-wide recession, the Frankfurt-based ECB cut its key refinancing rate half a point to 2.5% in a bid to encourage easy money and get the economy moving. Thursday’s action--which was echoed by the Bank of England--restores the European rate to 3%.

With inflation running at only 1.2% in the euro zone, there was disagreement on whether an interest rate increase was needed or wise. But Eckhard Schulte, senior economist at the Industrial Bank of Japan’s Frankfurt office, said Thursday’s increase shows that Europe’s central bankers are convinced the continent’s recovery is a durable one. “Now the economy is set for a rebound, even if cyclical,” Schulte said.