Play It Another Way, Sam

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TIME's European economists see growth ahead but worry about U.S. policy

It can hardly be called a boom, but Western Europe's recovery, still somewhat tentative only six months ago, is now taking root and slowly spreading. Healthy profits in many industries are turning out to be the best possible antidote to the fashionable Europessimism that only a few months ago considered the Continent to be in an irreversible economic decline. With the upswing has come a return of business confidence, at least for the next 18 months. Beyond that period, though, the outlook is clouded by the unpredictable course of the surging U.S. economy, because high interest rates plus towering budget and trade deficits make the American expansion appear unsustainable. So instead of relaxing and enjoying the pickup, Europeans are now fearful about a new U.S. downturn and its impact on both themselves and the Third World debtor nations, whose inability or unwillingness to repay loans could bring on an international financial crisis.

That was the assessment of TIME's European Board of Economists, which held its twice-yearly meeting last week in the Italian resort town of Cernobbio, outside Milan. Said Hans Mast, a University of Zurich lecturer and Executive Vice President of Credit Suisse: "Europe's substantial pickup seems to believe recent theories about the inevitable stagnation of the old Continent in contrast with the youthful vigor of the U.S. and Japan. We still seem to possess talents for aggressiveness and innovation in world markets."

Mast predicted an average growth of 3% for Western Europe both this year and next. Said he: "When the expansion in the U.S. economy slows down in the foreseeable future, Europe and Japan are likely to take on more importance as the sustaining force in the world economy." Moreover, European growth is taking place at the same time that the average inflation rate has fallen from 7.1% in 1983 to 5.5% this year. While the recovery was at first pushed forward by private consumption and housing starts, it is currently being driven by exports and private investment.

In just the past six months, Western Europe's foreign trade has expanded by more than 10%, led chiefly by exports to the U.S. Rising profits have helped spur outlays for new plant and equipment, which are expected to grow by 4.4% this year and 5.7% in 1985, according to European Community calculations. Six months ago, Britain led the recovery, followed by West Germany. But now other countries are joining the trend—The Netherlands, Sweden and Switzerland. Even France and Italy, which stayed in recession longest, are showing symptoms of growth.

Despite the spreading upswing, however, Western Europe continues to suffer from high unemployment. The jobless rate is expected to remain at 10% in 1984 and decline next year by a mere half a percentage point. Michael Emerson, Chief Forecaster for the Commission of the European Communities and a guest at last week's meeting, noted that Europe's "non-performance" in creating new jobs was becoming dramatic. Emerson said that the rigidity of the European labor market, where unions are strong enough to make layoffs extremely difficult, have raised real wage costs over the past ten years.