3 European Economies Contract, Causing Fears of Global Damage
By MARK LANDLER The New York Times
FRANKFURT, May 15 Europe, which has struggled for more than a year to regain its economic footing, appears on the brink of tumbling back into recession with Germany, Italy and the Netherlands reporting today that their economies unexpectedly contracted in the first three months of the year.
The European Union (news - web sites) said growth stalled across the 12-nation euro zone in the first quarter, prompting fresh demands that the European Central Bank lower interest rates.
"The euro zone is stagnating, and Germany, as the sick man of Europe, is falling even further behind," said Jörg Krämer, chief economist at Invesco Asset Management in Frankfurt.
Germany reported that its economy contracted 0.2 percent in the first quarter, after shrinking 0.03 percent the previous quarter. That meets the textbook definition of a recession two consecutive quarters of "negative growth." It would be Germany's second since 2001, though economists caution that the latest figures are preliminary.
Even in good times, Europe's economic engine tends to run more slowly than that of the United States. Now that much of the European economy seems to have sputtered to a halt, economists are asking how well the rest of the world can run without it.
"We have to take it very seriously," said Stephen S. Roach, the chief economist at Morgan Stanley. "The world doesn't have much of a growth cushion. So when we have shocks like SARS (news - web sites) in Asia, and Europe seemingly falling into recession, it could push the global economy into recession."
Though the United States has been a reliable motor for the rest of the world, Mr. Roach said that with a growth rate of less than 2 percent, it could no longer be counted on to drag along Europe and Asia.
Indeed, the United States is indirectly aggravating Europe's misery, through the dollar, which has tumbled 26 percent against the euro in the last year. That could hobble growth in Europe by making German cars, Italian shoes and French wine more expensive in the American market. The euro resumed its rise against the dollar today, settling in New York trading at $1.1511, up from $1.1399 late Wednesday.
Yet the surging euro is, in some ways, the least of Europe's problems. Germany and France are plagued with chronically high unemployment, and with what bankers and industrialists see as calcified labor markets and cradle-to-grave social welfare programs that are increasingly unaffordable in an era of big budget deficits.
Already, France and Germany have breached European Union rules that limit the size of budget deficits at 3 percent of the gross domestic product.
Many economists say that to lift these economies out of their sluggishness, Europe's major countries need to undertake an array of changes that will shake up their labor markets and reduce the role of the state in the economy.
Recent strikes in France, political feuds in Germany and even protests in Austria demonstrate how hard it will be for European governments to undertake even the most basic of such changes.
"They're marching in France, they're distraught in Germany," Mr. Roach said. "Cutting interest rates is a short-term fix, but the intractability of their political systems is their biggest problem."
Many Europeans would agree with that conclusion. In France, Prime Minister Jean-Pierre Raffarin's plan to overhaul the state pension system drew tens of thousands of protesters to the streets on Tuesday in a paralyzing one-day strike.
In Germany, Chancellor Gerhard Schröder's proposals to make it easier for businesses to hire and fire workers have ignited a dispute with labor unions and members of his own Social Democratic Party. With a razor-thin majority in Parliament and plummeting poll ratings, Mr. Schröder's grip on power is viewed as tenuous by political analysts here.
"Schröder is having huge problems even pushing through timid reforms," Mr. Krämer of Invesco said. "They're going to be watered down, and they're already not sufficient to kick-start the economy."
Since few Europeans expect economic recovery to come through political change, they increasingly look to the European Central Bank as the remedy for their ills. Pleas for the bank to lower its benchmark interest rate of 2.5 percent resounded across the Continent today.
Germany's finance minister, Hans Eichel, said in an interview on Bloomberg's German television channel that the weak economic statistics would give the central bank another reason to lower rates.
"I'm certain the E.C.B. will look very closely at today's data," Mr. Eichel said. "It certainly has room to stimulate growth."
The bank resisted those calls at its last monthly meeting, arguing, in the words of its president, Wim Duisenberg, that "there's not yet anything excessive" in the rise of the euro. Most economists expect it to act in June, however, perhaps with a decisive cut of half a percentage point.
The bank's hard line has exposed a fracture between Europe's large and small countries, which have divergent growth rates and hence require different monetary policies. Disagreements over such issues could disrupt efforts to knit Europe's economies more closely together.
Among big companies, Volkswagen, Altana and other German and French companies have blamed the soaring euro for denting their earnings. Others, like BMW and Deutsche Telekom, make less of the currency's impact.
Deutsche Telekom, the debt-burdened German phone company, reported its first profit in two years today. The company, which operates a vast cellular network in the United States, said it earned nearly $1 billion in net income, after a stringent program of asset sales and cost-cutting.
BMW said it expected to match 2002's record profits this year. The chairman, Helmut Panke, said the company had entirely hedged its risk from currency fluctuations in 2003, and the bulk of the risk for 2004.
"The dollar can be as weak as it wants and the euro can be as strong as it wants," Mr. Panke declared today at BMW's annual meeting in Munich. "It won't make any difference to us in 2003."
Some economists argue that the effects of the euro on economic growth have been overblown.
David Walton, chief European economist at Goldman, Sachs, noted that the bulk of exports of European countries tend to go to other European countries, not to the United States. "For Germany, it's far more important what's happening in France or Italy than what's happening in the U.S.," he said.
That may be cold comfort. Italy reported that its economy contracted 0.1 percent in the first quarter, surprising analysts who had expected growth of 0.1 percent. The Netherlands was an even bigger surprise, shrinking 0.3 percent, when analysts had expected an 0.1 percent contraction.
In both countries, business investment dropped sharply while domestic demand remained slack. The Netherlands also meets the strict definition of a recession, with two consecutive quarters of declining output.
Germany's stumble was surprising because it contradicted other recent reports, including industrial production data and surveys of business sentiment that indicated modest improvement. Because it was a preliminary estimate, the government offered no details.
"It came not only as a surprise, but as a shock," said Jürgen Pfister, the chief economist at Commerzbank.
Mr. Pfister stopped short of declaring Germany in recession, saying he needed another quarter to verify the trend. But the line between recession and recovery has become so fine that today's data confirms a more basic reality: Germany, Europe's largest economy, is dead in the water.
Commerzbank and its rivals were scrambling to lower their forecasts for the rest of the year. Absent an upward revision, most now think that the German economy will not grow at all in 2003. That would be the fourth consecutive year of little or no growth.
While some analysts likened Germany to Japan, others said that Germans simply needed to lower their expectations.
"Do we need to have more growth?" asked Martin W. Hüfner, chief economist at HypoVereinsbank in Munich. "We already have our refrigerators, we already have our cellular phones, we already have our second cars. We'll be content if we adapt our expectations to the new reality."
story.news.yahoo.com |
