ONE BIG STUNTED ECONOMY Pervasive recession reveals structural ills

When western Europeans contemplate their worst post-war recession, two views predominate: bad and worse.

Some believe the recession is merely a cyclical downturn that will pass by year's end. After eight years of strong growth, they say, Europe's economies were due for a slowdown. Once the pressures caused by German unification are worked out, they expect the economies to grow again.


But western Europe's problems appear to be much deeper. The region faces chronic problems, including high labor costs and technological inferiority, that will not go away quickly or painlessly.

"We are going through some of the changes that the U.S. economy went through during its recession," said Joachim Volz, an economic forecaster with the German Institute for Economic Research. "Older industries are hurting, and this time around the service industry isn't there to cushion the losses."


The European slump affects both sides of the Atlantic. It has contributed to political instability and a pervasive malaise in western Europe. And it's slowing the U.S. recovery -- nearly a quarter of the nation's ex-ports go to western Europe, the largest market for U.S. products.

Sparks-based McCormick & Co., for example, relied on Europe for 17 percent of its 1992 sales of $1.4 billion. Robert J. Lawless, McCormick's vice president for Europe, said the company is optimistic about Europe in the long run but saw sales decline last year because of the economic downturn.

"The retailers feel buoyant, but the consumer confidence is not there," he said. "People are worried about their jobs and so are hesitant about spending money."

For the struggling General Motors Corp., the European recession is hurting much-needed international sales and profits, just as the company sees some light in its home market.

During the U.S. recession, GM counted on Europe for hefty profits to partly offset its huge overall losses. In 1992, for example, GM Europe sent home $1.2 billion in profits. This year, that figure could be cut in half, analysts believe.

The European Community estimates that the economies of its 12 member nations will decline by up to 0.5 percent this year and will grow just 1 percent to 2 percent next year. A growth rate of 2.5 percent isneeded to boost employment, so unemployment rates of about 11 percent -- and up to 20 percent in poorer countries, like Ireland and Spain -- are likely to remain through 1994 at least.

The trigger for these economic difficulties: the costs of German unification and the high interest rates in Germany. Those costs, estimated at $70 billion a year for the rest of the decade, forced the German government Thursday to announce an austerity program and to warn its citizens that their standard of living would not rise before 1995.

Likewise, growth is expected to be weakest among countries linked to Germany by the Exchange Rate Mechanism, Europe's attempt to regulate currency exchange rates by pegging them to the German mark.


Countries still in the ERM, such as France and the Netherlands, have been stifled by high interest rates. Those high rates suit Germany, which is trying to control inflation, but they have helped deepen the recession in other countries.

Meanwhile, countries that dropped out of the ERM last year, such as Italy and Britain, are bouncing back from recession because they no longer have to follow Germany's interest-rate policy. They have

devalued their currencies, a move that makes their exports cheaper -- at the expense of countries still toughing it out in the ERM.

For example, Italy, whose weakened lira makes its exports attractive, has seen exports to France increase by 10 percent since leaving ERM last fall. The loser: French businesses.

But short-term problems like interest rates and German unification are less worrisome than are structural weaknesses in the European economy.

One problem is the burdensome labor costs stemming from generous wages and benefits, which give Europeans unparalleled vacation time and health care. In Germany, six weeks of vacation and a 35-hour workweek are becoming the rule in many industries.


Today, nine of the 10 countries with the highest labor costs are in Europe, according to statistics compiled by the Institute for Economic Study in Munich. Germany leads the pack, with average hourly manufacturing labor costs, including benefits, running at $26.30. The United States, ranked 11th, had average hourly industrial labor costs of $15.50.

For years, Europeans compensated for high labor costs by producing high-quality goods -- Jaguar autos, Bosch auto parts and Pierre Cardin suits -- that commanded top prices. But these products are in aging industries that have become increasingly susceptible to low-priced competitors in Asia and even eastern Europe.

The situation is most dramatic in the west European steel industry, in which at least 50,000 workers are likely to lose their jobs over the next two to three years of restructuring. Depending on the quality, east European steel can cost up to 25 percent less than western steel. That price differential has allowed eastern companies to capture 5 percent of the western market.

In other fields, like automaking, European countries also face challenges. German companies, which dominated the luxury-car market in the United States for decades, are finding that Japanese models like Lexus and Infiniti match their quality and are much cheaper.

The United States has met similar challenges by moving to high technologies, but Europe seems to have missed many of these developments. No advanced computer maker is European. And the continent's last big computer company, Germany's Siemens, decided last year that it could make advanced microchips only with the help of U.S. and Japanese companies.

"The more advanced European countries are finding their niche invaded from below by the lower-cost countries in Asia that now nearly match their quality," said Mr. Volz of the German economic institute. "And above them, the way is blocked by the U.S.A. and Japan, which control the advanced technologies."


Even less-developed, low-wage countries like Portugal, Spain and Greece have found their traditional positions threatened by the new world order. Instead of being known as poor cousins that qualified for mountains of aid from Brussels, they are becoming average European countries.

Eastern European countries, especially Poland, the Czech Republic and Hungary, have become more attractive to foreign investors because of cheaper labor. And when these countries join the EC over the coming decade, they will qualify for the lion's share of development aid that now goes to Mediterranean countries like Greece, where EC aid accounts for 6 percent of all goods and services produced.

Despite these structural problems, few are burying European hopes for a recovery. Britain, for example, is thought to be climbing out of recession, and its economy is expected to grow by 1.5 percent to 2 percent this year.

Many European companies, like Germany's BMW and France's Renault, have started bold restructuring programs and have moved more manufacturing abroad. Others are adopting Japanese-style lean production. Privatization, once taboo in many countries, is now the accepted goal of most countries. France, for example, last week announced plans to sell 21 state companies.

Meanwhile, the high costs paid by European companies will continue to bring rewards of social cohesion that benefit business, said Herbert Henzler, a management professor at Munich University. Most European countries have excellent infrastructures and well-trained work forces, with little of the costly crime and social dislocation that characterize some parts of the United States.

"The challenges look daunting, but compared to the problems that Europe has been faced with in its history, they are not insurmountable," Mr. Henzler said.