U.S. Nudges Europe Into Prosperity
Saturday, 9 October 1999
M I L A N , I T A L Y (AP)
THE ARTISANS at Messulam SpA use skills honed by ancient
Etruscans to hammer silver plate into gleaming bowls and
samovars.
To help sell the tableware, the family-owned firm relies on a more
recent innovation: direct marketing via the Internet.
By coupling a new technology with 2,500 years of craftsmanship,
managing director Roberto Beretta hopes Milan-based Messulam
can offset Italy's rigid labor laws, which are among the company's
toughest constraints.
When the loss of a major supplier last year compelled him to lay
off a dozen workers, it took Beretta six months and the
arbitration of a judge to do what an American boss could have
achieved in minutes. There was no alternative. "Otherwise, we
would have had to shut down," he says.
Companies across Europe have struggled against similar obstacles
in the 1990s. Inflexible rules about the hiring and firing of
workers, politicians reluctant to let foreigners compete with
state-owned companies, high interest rates that choked off
consumer demand - all have sapped the region of its economic
potential.
Europe's uneven, tepid growth contrasts sharply with the vigor of
the U.S. economy during the same period. Americans have
enjoyed prosperity for more than eight years, the longest
peacetime expansion in their history, while Europe and much of
the industrialized world have had to make do with crumbs.
In Italy, economic output during the 24 months ending in March
increased by a quarterly average of just 0.4 percent, the most
anemic growth rate in Western Europe. Some of Italy's neighbors
fared little better.
Germany languished due to the high costs of unification and a
global downturn in demand for its exports. France is saddled
with a stubbornly high unemployment rate of 11.2 percent.
Now, at last, the flames of a broad recovery are starting to flicker.
"There's sort of a stereotype of a sclerotic Europe that is not
borne out by the facts," says Bill Callaghan, chief economist for
the Trades Union Congress, Britain's largest labor group.
Among recent positive signs:
-France's gross domestic product increased by a healthy 0.6
percent during the year's second quarter. The finance ministry
has predicted the economy will grow by as much as 2.5 percent
this year and 3 percent in 2000.
-In Germany, which makes more than 25 percent of Europe's
manufactured goods, orders jumped by 1.3 percent from June to
July, three times more than most analysts had predicted.
-A galloping demand for houses has pushed British property
prices skyward, and the Bank of England raised a key lending
rate in September for fear that the economy might overheat.
-Ireland, long a laggard, now boasts Europe's fastest-growing
economy, and Irish emigres are coming home to join the boom in
construction and services.
"I think the fundamentals are pretty favorable for Europe," says
Paul Mortimer-Lee, a London-based economist with the French
bank Paribas. "I think we're going to see quite a bit stronger
growth in 2000 than we have seen this year."
The turnaround extends also to industrialized countries outside
Europe. Japan's economy finally started to grow again this year
after shrinking for 15 consecutive months. South Korea, Thailand
and other formerly high-flying tigers of Asia are clawing their way
back from financial crisis.
Although growth rates vary widely within Europe, the overall
improvement in the region has coincided with the introduction in
January of a single regional currency, the euro, and its
subsequent slide to near-parity with the U.S. dollar.
The euro is still primarily a bookkeeping entry for businesses and
governments in the 11 countries of "Euroland." Euro coins and
notes won't enter circulation until Jan. 1, 2002. But the
currency's low value relative to the dollar has given a competitive
edge to products already priced in euros.
"The weakness of the euro since the start of the year is one of the
reasons the European economy is now picking up, because that
has given a boost to export orders," says Jose Luis Alzola, an
economist at the London office of Salomon Smith Barney
Citibank.
The European Central Bank, headquartered in Frankfurt,
Germany, is doing its part by charging commercial banks a low 2.5
percent for short-term loans. Cheaper loans usually mean
increased investment and consumer spending.
Italy needs a lot more of both. Under the 1992 Maastricht Treaty
that set financial rules for joining the euro, Italy had to slash
government spending more than most countries in order to qualify
for the new currency. Recession soon set in.
At the Salvatore Ferragamo store on Milan's chic shopping street,
Via Monte Napoleone, sales of shoes and handbags have been flat
for the past three years. "Before, the price wasn't important, but
now people care how they spend," store manager Marina Brasca
says.
Indeed, European consumers eager for better prices and wider
selections have created an opening for aggressive U.S. companies.
Wal-Mart Stores Inc. is among the growing number of American
businesses investing in Europe. Wal-Mart alarmed supermarkets
in Britain, where the country's biggest supermarkets are under
investigation for possible price-fixing, when it bought the grocery
chain Asda Group PLC in June.
Other U.S. firms hope to profit from a wave of mergers and
acquisitions sweeping the region. This consolidation trend is one
aspect of the economic restructuring now underway in Europe,
several years after a similar upheaval in the United States.
Europe's largest cities and high-tech centers have generally
profited from these changes, which have favored services at the
expense of heavy manufacturing.
But the region's industrial core is going the way of Pittsburgh and
Detroit. Economic growth has declined sharply in manufacturing
centers such as Germany's Ruhr River valley, parts of southern
Belgium, and large sections of northern Spain, France and
England.
One result is a chronically high jobless rate. Unemployment in
Euroland stands at 10.2 percent, compared with 4.2 percent in
the United States.
Many economists and business executives blame Europe's labor
laws, saying they have impeded growth by restraining businesses
from quickly adjusting their workforce in response to market
conditions.
At InnoConcepts N.V. near Rotterdam, which helps inventors
turn ideas into marketable products, general manager Oscar
Middendorp makes the point.
"In Holland," he says, "we are more cautious before hiring
someone - in terms of references, questions we ask, qualifications
- because we know it will cost us a certain amount of time if we
decide we do need to fire them."
Sweden cut its unemployment rate to 6.8 percent in July from
8.5 percent a year ago, while clocking some of the fastest growth
in Europe. Even so, Lena Munther has little to show for the four
years she and a friend have run an organic cafe and food store in
Stockholm.
"We hardly have any financial leeway at all. We clear just enough
to pay our bills," Munther says.
Elsewhere in Europe, external forces have contributed to much of
the torpor. Major exporters like Germany and Italy suffered from
the global financial crisis that erupted in East Asia in July 1997.
The crisis read to Russia and Latin America, depressing orders for
German and Italian exports and causing both economies to shrink
in early 1998.
But analysts suggest that Europe has inflicted much of its own
economic pain.
When German unification brought a torrent of investment into
former East Germany, the German government hiked interest
rates to keep down inflation. Germany's neighbors raised their
rates to keep their currencies stable against the soaring mark.
They avoided inflation, but only at the cost of stifling demand and
growth.
The United States, by contrast, has followed a more expansionist
monetary policy in the 1990s. U.S. companies also are blessed
with an enormous domestic market and a pool of workers who
think little of uprooting themselves to seek jobs in far-flung
corners of the country.
"In Euroland, you don't have anything like the internal migration
that you have in the United States, and there are much more
serious barriers of language and culture," says William Kennedy,
an economic historian at the London School of Economics.
These barriers, while largely psychological, belie the notion of the
unified and efficient market symbolized by the euro.
Among the biggest hurdles within Europe are nationalistic
policies discouraging cross-border competition.
When Telecom Italia sought to dodge a hostile takeover bid by
Italian competitor Olivetti this summer, it tried to forge a friendly
merger with Germany's telecommunications powerhouse,
Deutsche Telekom. The Italian government, however, made no
secret of its opposition to the transalpine combination. The effort
collapsed, and Olivetti prevailed.
Economic nationalism also has deep roots in France. Banque
Nationale de Paris, the country's largest bank, launched a hostile
takeover bid in March for French rivals Societe Generale and
Paribas. But BNP ended up with only Paribas, a blow for senior
French politicians who had hoped for the creation of a Gallic
megabank that would fend off foreign investors.
"I don't think there will be opportunities for us in France, due to
the resistance of the French government and French companies,"
says Roberto Fanori, a spokesman for Snamprogetti, the
Milan-based engineering arm of Italy's ENI energy group.
State ownership of leading firms also has hindered growth in
Europe.
Although the British government sold off large stakes in the steel,
car and aerospace industries, many governments in continental
Europe have been slower to privatize their holdings. Most of the
region's former state-run monopolies are only now starting to face
up to competitive realities.
ENEL, the state-controlled Italian electric utility, lost its 37-year
monopoly on power sales under a law passed in February. It plans
to issue its first shares to the public.
As a preparatory step, ENEL has trimmed its payroll from
107,000 workers to 80,000, through retirements and attrition.
Yet the shrinkage did no harm to service, says economist Carlo
Scarpa of the Milan-based Mattei Foundation, a research center
funded by the ENI group.
As it learns to trust market forces, the Italian government is
shedding an economic role that dates back a half-century.
"In Europe, there was a lot of state intervention but no vision,"
Scarpa says. "No one was willing to say, 'OK, we accept greater
unemployment today if it means greater growth tomorrow."' |
