How the Crisis Is Hitting Europe

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Europe's woes are a big worry for the rest of the global business community. The European Union is by far America's largest trading partner and a key destination for Asian exports. And the Continent remains a crucial market for General Electric (GE), Procter & Gamble (PG), Toyota Motor (TM), Sony (SNE), and thousands of other multinationals—many of them now facing hard times there. Honda Motor (HMC) has closed its plant in the British city of Swindon for four months; Ford Motor (F) says it will eliminate 850 jobs at factories across Britain by May; and aluminum maker Alcoa is laying off hundreds of European workers and selling operations in Germany, Hungary, and Italy.

WILDCAT STRIKE

That's not the way it was supposed to be. Europe's economy was built for stability more than speed, and policymakers scoffed at the reckless Americans and their greedy bankers. Slower growth was a price Europeans were willing to pay for job protection and a generous safety net. "The German social market economy is a good model" for balancing free markets and social protections, German Chancellor Angela Merkel told the World Economic Forum in Davos, Switzerland, on Jan. 30.

By some measures, she's right. Europe has averted bank failures on the scale of Lehman Brothers. While some British banks are deeply troubled, institutions such as Spain's Banco Santander (STD) and BBVA and Germany's Deutsche Bank (DB) are in better shape and have so far managed to avoid a government bailout. In most countries, unemployment has risen gradually, while consumer spending has proved resilient.

But it's not hard to find evidence of economic trouble. At a Renault plant in Sandouville, in France's Normandy region, about 150 workers staged a wildcat strike to protest plans to close assembly lines for several weeks this winter. Along Barcelona's fashionable Passeig de Gracia, the restaurants may be busy, but a Volkswagen (VLKAY) showroom displaying the sporty new Scirocco is empty—no surprise considering that Spanish auto sales plunged 40% in January from a year earlier. And above street level, windows are festooned with signs advertising offices for rent and apartments for sale.

As a global financial hub, London has been particularly hard hit by the crisis. On Bromley High Street, a popular shopping area 10 miles south of the city center, tony home furnishings retailer Habitat has shut down, Gem's pawn shop sits in space recently occupied by a real estate agency, and Poundland—the British equivalent of a dollar store—has expanded. Area residents are scaling back their expectations, too. Tucked behind Bromley's train station is a red brick office building that's home to the local JobCentre Plus, a government agency for the unemployed. Inside, the job seekers include Bharat Mistry, a 46-year-old IT manager laid off by Morgan Stanley (MS) in London. He says he's interviewing for jobs at half what he was making. "And even for those," Mistry sighs, "there's stiff competition."

Companies with substantial business in the U.S. have seen the crisis coming.