EUROPE: Stagflation or Recession?

A dark vision haunts Western Europe these days—the specter of economic decline. Even before the Arabs unleashed their oil weapon, the anti-inflationary measures of European governments, widespread uncertainty about the future and political and labor unrest were combining to slow the rate of growth. What can Europe expect in 1974, which will be a year of rising energy costs and possibly of continuing scarcities?

Last week TIME brought together in Brussels a group of ten economists, bankers and businessmen to survey the prospects. They spoke as individuals, rather than as official representatives of their institutions. After a weekend of discussion, the group was in broad agreement that:

> The best that Europe can hope for in 1974 is "stagflation"—an uncomfortable mixture of stagnating output ac companied by continued inflation. Living costs are likely to rise by 10% or more in many countries. Recession —that is, an actual decline in output — is a possibility, though far from a certainty.

>Even without a recession, unemployment will rise in most countries be cause slow or zero growth will fail to provide enough new jobs for youths leaving school and other people entering the labor force.

>Real personal income will stagnate as unemployment rises, the cost of living increases, and overtime work be comes rarer. The decline in income will cut painfully deep in regions heavily dependent on industries hit hard by the oil weapon, such as autos, steel and rubber.

>Hard times will almost certainly sharpen social and class conflicts. A recession could stampede many people into seeking solutions on the extreme right or left.

Most members of the economists' group concluded that there was cause to be deeply concerned—but not to be unalterably pessimistic. Recession can be avoided if the Arabs loosen the oil spigot and Europeans recover their confidence. Professor Rolf Krengel of West Berlin's Institute for Economic Research emphasizes: "The psychology is extremely important. If people believe there will be a recession and start cutting their expenditures so as to increase their savings, they will help to bring about the very thing they fear." A fear voiced by some American economists that a prolonged Arab oil squeeze would really devastate the European economy found little echo in the group. Most members assumed, rightly or wrongly, that the Arabs simply will not force Europe to its economic knees.

The key to forecasting the future for Europe as a whole is the performance of the three biggest economies—those of West Germany, France and Britain. Smaller nations are so heavily dependent on them that they cannot hope to immunize themselves from the Big Three's economic ailments. Professor Jan Pen of the University of Groningen says: "To forecast employment and output in The Netherlands, we must first ask how our chief trading partners will fare." Reports from the key economies: