Europe shrugs off US slowdown

As Americans get ready for a bumpy landing after years of record economic growth, European businesses and shoppers are as confident as they have ever been about the future.

And that confidence, bankers and economic analysts say, will play a large part in cushioning Europe against the effects of economic slowdown in the United States. For the days when it was true that "if America sneezes, Europe catches a cold" are long gone.

"Europe is now a large, closed economy" that depends on trade with America for less than 3 percent of its gross domestic product, says Vincent Koen, head of the European desk at the Paris-based Organization for Economic Cooperation and Development (OECD). "There has been a sea change compared with 10 years ago."

And while no country anywhere is completely immune to events in the world's largest economy, Europe seems well positioned to ride out the storm, analysts say. "Key factors responsible for the US moderation [in growth] are likely to have a much smaller impact on the euro area," says a recent report from investment bank Salomon Smith Barney.

Revised expectations

Analysts are revising their US growth forecasts down to below 2 percent in 2001, after several years at or above 5 percent a year. European growth is now expected to be around 2.5 percent, marking the first time in a decade that Europe outstrips America.

This is partly because the two economies are at different stages in their business cycles. The United States is at the tail end of a record-breaking upswing, while Europe appears to be in the middle of a more normal climb.

And it is clear that the effects of the US downturn will be felt to some extent on this side of the Atlantic: Analysts have already knocked 0.5 percent off their earlier predictions for European growth this year.

"When a dentist in Houston does not expect so many patients and decides not to buy the Porsche he had wanted, then German exports suffer," points out Norbert Walter, chief economist at Deutsche Bank in Frankfurt. "But it is not a dramatic thing if your growth rate falls by half a percentage point."

Other parts of the world, such as Asia, are expected to suffer far worse. Europe's relative immunity, say bankers and analysts, is in large part a reward for policies its governments have pursued in recent years. The development of a single market and a single currency in the European Union, for example, means that the 12 countries that use the euro do 80 percent of their trade with each other. That provides a comfortable cushion, however badly exports to the United States might fall.

Economic growth is also likely to be sustained by the impact of wide-ranging tax cuts that the German, Italian, and French governments decreed last year, and whose effects will be felt in the coming months.

"The mother of all tax-cut years," as the OECD's Mr. Koen puts it, "will stimulate demand and help offset negative external factors."

"The consumer will be a decisive prop for the European economy this year," adds Julian Callow, chief European economist at investment bankers Credit Suisse First Boston, in London.

And there will be more consumers, as European governments continue to create more paying jobs. Continent-wide, the unemployment rate is down to 9 percent, from 12 percent three years ago. That is still more than double the US rate, but France, for example, created 500,000 jobs last year, and French and German firms have "continued to hire at a solid pace" in recent months, "in contrast to the marked slowdown in the United States," found the Salomon Smith Barney report.

At the same time, the recent sudden drop in volatile oil prices - to less than $27 a barrel for Europe's benchmark Brent crude on Friday from above $35 a barrel in October - has provided a welcome boost to the European economy, again helping to balance out the bad news from America.

Differing debt and stocks

Two other key differences between Americans and Europeans are also likely to play an important role in keeping Europe's economy afloat on a surge of consumer confidence, while American shoppers watch their pennies.

For one thing, European households, like European corporations, are less heavily in debt than their American counterparts. Credit to euro-area households represented only 45 percent of GDP in the third quarter of last year, compared to 70 percent in the United States.

Second, Europeans own far fewer stocks than do Americans, which means they have suffered less from the slump in share prices over recent months.

All these signs are reflected in the rise in value of the euro, which only a few months ago looked to many observers like a lost cause, propped up only by central-bank interventions. The euro was trading Friday at just below 94 US cents, up from its November low of 84 cents, and currency traders expect parity with the dollar by midyear.

(c) Copyright 2001. The Christian Science Publishing Society