Businessweek Archives

The Economy: Growing Like Gangbusters


International Business: Europe

The Economy: Growing Like Gangbusters

So far, the euro's slide hasn't slowed down Europe's consumers or triggered inflation

The euro may be plumbing new depths, but German Finance Minister Hans Eichel is in an upbeat mood. "We need to keep calm about the exchange rate," he said after the currency plunged to a then-record low of 88.38 cents on Aug. 31. "The main thing is that the economy is performing well."

That kind of cheeriness is welcome in Europe, long accustomed to gloomy economic news. But the euro's yearlong slide is still giving skeptics plenty to worry about: The currency dipped even after the European Central Bank's recent move to hike rates. On Sept. 6, it dropped below 88 cents for the first time. If the euro is weak, something has got to be wrong--right?

Well, not quite. Europe's economy is growing, and the signs for expansion are still strong. Gross domestic product in the euro zone will grow by more than 3.6% this year. Unemployment has tumbled to 9%, its lowest level since the early 1990s. Despite rocketing oil prices, core inflation is well below 2%. What's more, domestic demand is becoming the main driver of economic growth, overtaking the Continent's recent record-breaking export performance. That shift means the economy is becoming more resilient by the day. "Things haven't looked this good for a decade," says Carlo Monticelli, co-head of European economics at Deutsche Bank.

But here's the rub: The U.S. is still growing faster and attracting European capital looking for the best return. More than $3 billion of portfolio money a week is heading across the Atlantic, calculate analysts at French bank BNP-Paribas. And the most ambitious European companies still prefer to make acquisitions in the U.S. rather than invest at home. "The U.S. is such a large and vibrant market that you have to be strong there if you're going to be a serious global player," says Niall FitzGerald, chairman and chief executive of Unilever PLC, the Anglo-Dutch food and detergent conglomerate.BIG-TICKET ITEMS. So far this year, euro-zone companies have shelled out almost $200 billion making acquisitions stateside--despite an increasingly unfavorable exchange rate. Among them are Unilever, which forked out $20 billion for BestFoods; Germany's Deutsche Telekom, which paid $45 billion for Voicestream; and France's Vivendi, which paid $31 billion for Canada's Seagram Co., which had significant U.S. assets. "These companies need a presence in the vast U.S. market," says Stephen Barrett, vice-chairman of KPMG's corporate-finance practice. "But they are also under immense pressure to boost shareholder value, and the U.S. is the place they can best do that, even if the dollar is so incredibly strong." Companies get a better return on investment in the U.S., even at the current exchange rate.

All that money pouring into the U.S. explains why the euro has lost a quarter of its value since its launch at the beginning of 1999. And it suggests that the beleaguered currency isn't going to revive any time soon. "European politicians and central bankers are probably wrong when they say the euro is undervalued," says Robin Marshall, director of European research at Chase Manhattan Bank in London. "You can actually make a better case that the exchange rate is just about right."COMING UP ROSES. But that's only part of the story. Recent structural reforms in several euro-zone countries give cause for hope. Iona Hamilton, an economic adviser for Brussels-based UNICE, the European Employer's Assn., notes that Germany has already moved to reduce taxes and that other countries, such as France, are following suit. Government budgets in most countries will be in surplus this year, buoyed by stronger-than-expected tax receipts and the revenues from mobile-phone-license auctions. Deregulation is fostering greater competition and helping prevent stratospheric oil prices from igniting an inflationary spiral. Meanwhile, this year's wage settlements have been below market expectations.

Even long-skeptical businessfolk are turning optimistic. "I'm bullish," says John A. McMaster, the American CEO and president of KPNQwest, a telecom joint venture between Qwest of the U.S. and the Netherlands' KPN. "Europe is beginning to look more like the U.S., copying its natural advantages of a common currency, deep capital markets, and reasonable taxation."

What's needed is a New Economy effect. Schroder Salomon Smith Barney analyst Carmen Nuzzo points out that European companies are stepping up spending on information technology. Production of high-tech machinery and computers in the euro zone is also soaring--at an annual pace of around 26% in the first quarter of this year, on top of a hefty gain of 15% in 1999. As yet there is no evidence of productivity picking up as a result. But the tech spending has to come first. Europe is off to a good start. It has only one choice. The key is to stay in the race.By David Fairlamb in Frankfurt, with William Echikson in BrusselsReturn to top


Burger King's Young Buns
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus