| BUSINESSWEEK ONLINE : AUGUST 9, 1999 ISSUE | ||||||||
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| INTERNATIONAL BUSINESS
Springtime in Europe at Last? But tough reforms are needed to lock in growth All winter and spring, Europe's business leaders fretted. Germany's economy was in the doldrums. Italy couldn't control its public spending. And the euro was plunging close to parity with the dollar only six months after its debut. Now, suddenly, the clouds seem to be lifting. The euro has been advancing since July 13, rising from $1.01 to $1.07 on July 27, before falling back a bit. And business confidence in both France and Germany jumped. ''We're at a turning point,'' says Jurgen Ratzinger, economist at German electronics giant Siemens. ''The mood is one of an upswing.'' It's about time. The 11-nation euro zone grew a mere 0.2% in both the fourth quarter of 1998 and first quarter of 1999, dragged down by a shrinking German economy. But now the region seems set for growth of 2% for 1999--and a hotter pace in 2000 (table). Rising export orders in Germany and Italy, which represent half of the euro zone economy, mean output will be picking up, especially in auto and machinery plants. That surge in exports will add momentum to an upturn driven by consumer spending in the faster-growing economies. Spaniards and Dutch are buying cars; Finns and Irish are taking out mortgages for new homes. George Magnus, chief economist with Warburg Dillon Read in London, says domestic demand in the euro zone began growing in late 1998 at an annualized rate of 3%. Now, even the Germans are joining the party. Deutsche Bank estimates that German consumer spending will rise 3.5% this year as higher wages combine with nearly nonexistent inflation to raise real disposable income. The brighter economic prospects are reflected in the recent upturn in the euro. European Central Bank President Wim Duisenberg also helped strengthen the currency by declaring that the ECB is now inclined to raise, rather than lower, rates. The hint was enough to convince currency traders that a recovery was real and that it was time to quit dumping euros. Fortunately, European inflation is hovering at 0.6%--well below the ECB policy limit of 2%. As Europewide growth turns the corner, the equity markets may be in for a more exciting ride, too. Many investors have avoided Europe recently because their stock-price gains were offset by currency losses. Now, a stronger euro could lure investors back. A healthier economy should also translate into better stock prices as corporate profits head north. Mark Howdle, equity strategist for Salomon Smith Barney in London, expects 1999 earnings per share to climb 9% in the euro zone. Other analysts think investors may wait on the sidelines until they're convinced the euro's bounceback is real. ''The euro recovery is fairly embryonic,'' says David Bowers, European equity strategist for Merrill Lynch Global Securities in London. ''We're still looking for a trigger to buy Europe rather than the U.S.'' RIGHT NOISES. Meanwhile, politics is providing a boost to business morale as the economy picks up. No recovery can last if governments of the biggest states--Germany, Italy, and France--don't follow through with tough labor, tax, and social welfare reforms. But at least German Chancellor Gerhard Schroder finally seems to be making the right noises. He and new Finance Minister Hans Eichel want to cut $16 billion off Germany's budget deficit next year and balance the budget by 2006. They aim to slash the corporate tax burden, including national and state taxes, to 37% by 2001, from 56%. And in mid-July, Economics Minister Werner Muller called for private pensions, labor flexibility, and the reduction of state spending from 48% to 40% of gross domestic product. All these proposals are winning Schroder new support from the business community. ''He is moving in the right direction,'' says Klaus-Jurgen Schmieder, chief financial officer for drugmaker Hoechst. But it's crucial that Schroder and his counterparts across the euro zone use the good times to take measures for deflating the welfare state. ''They have to follow through with their promises,'' says Siemens' Ratzinger. If not, the European recovery will fade as just another cyclical blip. By Karen Lowry Miller in Frankfurt _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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