European economy on the skids

[Louis Proyect <lnp3@xxxxxxxxx>]

NY Times, May 16, 2003
3 European Economies Contract, Causing Fears of Global Damage
By MARK LANDLER

FRANKFURT, May 15 — Europe, which has struggled for more than a year to 
regain its economic footing, appears on the brink of tumbling back into 
recession — with Germany, Italy and the Netherlands reporting today that 
their economies unexpectedly contracted in the first three months of the 
year.

The European Union said growth stalled across the 12-nation euro zone in 
the first quarter, prompting fresh demands that the European Central 
Bank lower interest rates.

"The euro zone is stagnating, and Germany, as the sick man of Europe, is 
falling even further behind," said Jörg Krämer, chief economist at 
Invesco Asset Management in Frankfurt.

Germany reported that its economy contracted 0.2 percent in the first 
quarter, after shrinking 0.03 percent the previous quarter. That meets 
the textbook definition of a recession — two consecutive quarters of 
"negative growth." It would be Germany's second since 2001, though 
economists caution that the latest figures are preliminary.

Even in good times, Europe's economic engine tends to run more slowly 
than that of the United States. Now that much of the European economy 
seems to have sputtered to a halt, economists are asking how well the 
rest of the world can run without it.

"We have to take it very seriously," said Stephen S. Roach, the chief 
economist at Morgan Stanley. "The world doesn't have much of a growth 
cushion. So when we have shocks like SARS in Asia, and Europe seemingly 
falling into recession, it could push the global economy into recession."

Though the United States has been a reliable motor for the rest of the 
world, Mr. Roach said that with a growth rate of less than 2 percent, it 
could no longer be counted on to drag along Europe and Asia.

Indeed, the United States is indirectly aggravating Europe's misery, 
through the dollar, which has tumbled 26 percent against the euro in the 
last year. That could hobble growth in Europe by making German cars, 
Italian shoes and French wine more expensive in the American market. The 
euro resumed its rise against the dollar today, settling in New York 
trading at $1.1511, up from $1.1399 late Wednesday.

Yet the surging euro is, in some ways, the least of Europe's problems. 
Germany and France are plagued with chronically high unemployment, and 
with what bankers and industrialists see as calcified labor markets and 
cradle-to-grave social welfare programs that are increasingly 
unaffordable in an era of big budget deficits.

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