After years of economic gloom Europe finds a lot to smile about
A more cheerful economic mood has started to filter through Europe. The greater optimism contrasts sharply with the deep gloom that burdened the Continent a year ago. Then Newsweek headlined a major story: ``The Decline of Europe. Economic stagnation and political malaise darken the future of a once proud and powerful continent.''
Many observers referred to ``Euro-pessimism.''
Now Michel Develle, chief economist at Banque Paribas here, speaks of ``Euro-dynamism.'' J. Paul Horne, economist for Smith Barney, Harris Upham & Co., here says, ``Europe's not so bad off.''
The change in mood is not just the result of a pickup in economic activity -- though that is a factor.
``The European economies came out of recession one year later than the United States,'' noted Ulrich Ramm, an economist with Com-merzbank in Frankfurt. (The US recovery started at the end of 1982.) ``Growth in the European countries is a little more rapid now. We can be more optimistic.''
There is also a growing feeling on this side of the Atlantic that Europe has been gradually tackling its more basic economic problems, and that some good results are starting to surface.
``Things are going on,'' says Mr. Develle. ``But it is like water running under the snow in spring.''
Much of the fashionable economic thinking of the 1970s has been reversed. Then many of Europe's leaders were advocating or enacting the indexation of wages against inflation. They were promoting a mass consumption society, enlarging the welfare state, stimulating economic growth even if that meant more inflation, and installing more business and social regulation.
Now these factors are regarded as elements of European weakness. France and Italy, for example, have limited indexation. There are some moves toward more labor and wage flexibility in most European nations. Politicians, even in Socialist France, will openly say that business needs more profits -- a bigger share of the economic pie -- in order that it can invest in job-creating ventures. Nearly all European governments have moved to restrain inflation -- with major success -- at the price of high unemplo yment.
Further, most European governments have taken steps to either shrink their own size or at least halt the growth in the portion of total national output of goods and services absorbed by the state. Britain has privatized several state-owned companies. West Germany and some other European nations talk about similar moves.
Stock market investors, notes brokerage house economist Paul Horne, have already recognized the change for the better in Europe -- a more than $3 trillion market. Stock prices have soared to record highs in recent weeks in Paris, Frankfurt, and Zurich. They were close to the record in Amsterdam last week. Shares in London are well above their level of a year ago.
Corporations are recording handsome increases in earnings. They are spending some of that money on modern equipment and, to some lesser degree, on expansion of capacity.
Mr. Horne does not claim that Western Europe is about to overtake the United States and Japan in terms of competitiveness, research, or dynamism of capital and labor markets. ``Rather, we would contend that numerous European governments are making progress in dealing with problems long considered virtually hopeless and which seemed to condemn Europe to a dismal failure,'' he states.
Mr. Develle speaks of the progressive change in European mental attitudes, the growing recognition of the need to limit government and welfare spending and encourage productivity and job flexibility.
As evidence of ``European revival,'' he notes the upward thrust of capital spending and the relatively modest increase in labor costs in the European Community (EC).
``Restructuring of the EC's old industries is not complete, but substantial progress has been made over the past 10 years,'' he says. The European steel industry has shrunk dramatically both in capacity and in the size of its work force. Some steel companies even had profits last year. Capacity also has been sharply trimmed in textiles, shipbuilding, and oil refining.
Employment in more competitive industries has started to grow, adds Horne, pointing to a surge in the formation of new companies in Britain, West Germany, the Netherlands, and Denmark.
However, as these economists admit, job creation has been far slower in Europe than in the US. Europe's job count today is no higher than in 1970. The US economy has added 30 million jobs.
Central banks in Europe have moved, almost as a unit, to curtail the growth of money and thus inflation. By one broad measure of money, known as M2, money growth has slowed in Western Europe from 12.5 percent in 1982 to 9.5 percent at the end of last year and it will probably be 7 to 8 percent this year. Inflation, running at a 10.6 percent annual rate in Europe during the decade 1971 to 1981, was climbing at a 4.2 percent rate in the last six months.
Even in Socialist-governed France money has been tight. ``Since June 1982 there has been a very restrictive monetary policy,'' noted Didier Bruneel, director of monetary studies and statistics at the Bank of France.
The governments of West Germany, France, the United Kingdom, Belgium, Denmark, Finland, the Netherlands, Spain, and Sweden have moved toward greater fiscal restraint. The average general government deficit in the European Community declined from an average 5.6 percent of gross domestic product (a nation's output of goods and services) in 1982 to 5.4 percent last year and will perhaps fall to 4.8 percent this year.
Such changes reflect to a considerable extent the political shifts in Europe. Margaret Thatcher's Conservative Party took power in 1979. In Belgium, Denmark, and the Netherlands, center-right coalitions took over in the years 1980-82. Chancellor Helmut Kohl's conservative-Liberal coalition accentuated the rightward shift with his election in March 1983. Even the leaders of left-wing governments in France, Greece, Spain, and Italy have moved to conservative economic policies.
Mr. Develle maintains: ``The weakening of the dollar, when capital recrosses the Atlantic, will be the unmistakable signal for Europe's return to economic health, for there's life in the old dog yet.'' In recent days, the dollar has dropped in value.
Concludes Mr. Horne, a free market enthusiast: ``There are changes for the better in Europe. Although the millenium is not here yet and many structural rigidities remain to impede free markets, efforts are being made. The political will for positive change by most European governments is strong and their policies are pointing in the right direction.''