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Visiting Experts Describe European Scene

Washington watches as Europe struggles with economic trouble, German reunification

THE European economy is powerful. Thus Washington listens with curiosity and concern as a parade of visiting experts from the Continent - now struggling with an economic slowdown and readjustments in Eastern Europe - march through the nation's capital. Economists here know that Europe is a huge provider and consumer of the world's goods and services, and an important source of capital for investments and aid. They are fully aware that a buoyant European market has been an essential stimulant to world trade and key to economic growth. All of Europe, including the 12-nation European Community (EC), will absorb almost half of the world's imports in 1991, and sell over 40 percent of the world's exports.

Germany is Europe's dynamo, surpassing the United States last year as the world's leading exporter. But Europe's pivotal economy is struggling with the costs of reunification, and other aid to the former communist bloc.

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The impact of this adjustment on the Continent's economies is a central concern for economists, politicians, bankers, and others interviewed here recently.

The growth of all Europe's gross national product will fall to 1.9 percent this year, down from 2.9 percent in 1990. That's an estimate of the WEFA Group, Philadelphia-based forecasters. This compares with growth for the world economy of 1.2 percent this year, according to the International Monetary Fund.

Another forecast, by the European Commission, the EC's governing body, says the gross domestic product of the EC alone will be a meager 1.25 percent, a 50 percent drop from 1990. Joblessness will reach 8.75 percent this year and 9.25 percent in 1992, the Commission predicts.

Kurt Lewin, a New York-based international financial consultant, says Europe's major industries are slowing and they have lost market share in key sectors. He points to increasing unemployment in Britain, France, Italy, and the Netherlands, where manufacturing orders are down. "Japan has overtaken Europe in technological development," he says, and has surpassed Germany, France, and Britain in engineering. The EC's trade deficit with Japan has increased steadily during the past six months.

Britain's is the most sluggish EC economy. A recent British Chamber of Commerce survey shows its service sector is following manufacturing in steep decline. The European Commission says British unemployment will rise from 8.5 percent this year to 10.75 percent in 1992.

Germany is under a different kind of strain. Precisely at the time when the EC integration process could use economic and monetary leadership from Germany, the country is consumed with its costly reunification. This year Bonn will invest $58 billion in eastern Germany.

On the positive side, this investment has acted as a stimulus to European production by placing a high demand on European products, says Allen Shiau, a WEFA economist. Both Britain and France would have experienced a more severe slowdown were it not for strong demand in eastern Germany, Mr. Shiau says.

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Germany is also helping to finance Soviet and East European reforms. German Chancellor Helmut Kohl raised these issues during a visit to Washington last week, underscoring reunification's international importance: "As a consequence of German unification, we have seen the German economy emerge ... as a sort of locomotive, as a sort of engine motor of the worldwide economy."

Fearful of economic displacement caused by the overnight closure of old East German communist production, Bonn is offering export credits to Moscow to buy east German production. Klaus Friedrich, director of the European Department at the Institute of International Finance, says that without these measures, Germany's trade deficit (a new phenomenon due to high domestic demand for imports and reduced export levels) would be worse.

A visiting German member of the European Parliament says his country is threatened by the proximity of the East in flux. It has no choice but to aid the struggling reformers, lest turmoil there disrupt Germany and the rest of Western Europe.

Germany's official coffers have been practically ransacked during the past year. Its vast surpluses have been invested in eastern Germany and the ex-Soviet bloc. Bonn has committed $33.7 billion to the Soviet Union and $17 billion to Eastern Europe, or 3 percent of the German GNP. German Finance Minister Theo Waigel says German aid and investment has set the world pace in Eastern Europe, and warns that its effort must be matched by other leading economies, in and out of Europe.

"We are stretched," says another visitor, Hellmut Hartmann, senior vice president of Deutsche Bank, Germany's largest commercial bank. Germany "cannot do this alone," he says, and repeats often-heard German calls for a "global approach" to meet the trillion dollar capital needs of East Europe and the Soviet Union.

Karl Otto Pohl, outgoing president of the Bundesbank (Germany's Central Bank), cautions that with these and other demands, including financing the recent Gulf war, the world faces a shortage of capital, which pushes interest rates higher. Inflation-conscious Germany has refused to cede to international pressure to reduce interest rates.

Deutsche Bank projects that Germany will still register an overall trade surplus for 1991, albeit 60 percent lower than 1990. Germany's current account - the balance of trade minus transfer payments, such as the Gulf war commitments - is in deficit.

Norbert Walter, chief economist for Deutsche Bank, said that Germany's slowdown will stymie European growth, and limit the EC's ability to help Eastern nations reform. Last week Chancellor Kohl pushed for greater Bush administration support, or "burden-sharing" for urgent Soviet and East European needs. The success of Bonn's assistance in transforming eastern Germany's communist system into a more efficient market economy "will be of considerable psychological importance also for the countries in centra l

, eastern, and southeastern Europe," he said.

Edzard Reuter, a senior official of Daimler-Benz, a German industrial conglomerate, says there should be no European monopoly in Eastern Europe and the Soviet Union. US investment in these countries must increase to assure a long-term US and European balance of economic and strategic influence there. Japan is quietly making inroads, while the US is still tentative, he says.

Since Europe is a major export market for the US, a reduction in Europe's capacity to absorb US goods spells further trouble for US producers, the experts say.

Claude Barfield, director of science and technology studies at the American Enterprise Institute, warns that Europe's slowdown could lead to increased protectionism, with government bailout programs for industrial losers. "A number of state-owned firms that lost money and were starved for capital even during the good years of the 1980s are already demanding that their governments step in to prop them up," Mr. Barfield says.

France's new Prime Minister Edith Cresson, for example, advocates a national and European policy of increased government spending in industry.

The European Commission has been trying to curb the practice, which occurs in industries ranging from agribusiness to aerospace. "France and Italy, which have public sectors that account for one-third of GNP, are both pressing for some easing on the Commission's hard-line stance on subsidies," Barfield says.

Europe's economic downturn will reverse next year, says WEFA's Shiau. He projects European growth at 2.6 percent in 1992. "The engine, again, will be Germany."

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