Soaring Growth, Spiraling Inflation

FIRST-TIME visitors to Europe are usually impressed by something that its citizens now take for granted--the pervasive signs of economic growth and prosperity. London, Paris, Milan and Frankfurt are cacophonous with construction and clogged with cars. An international network of autostradas, Autobahnen and autoroutes links the Continent's major (and even minor) cities. In winter, such fashionable ski resorts as Gstaad, Chamonix and St. Moritz are booked solid; in summer, there is a mass migration from Europe's colder climes to such resorts as the Costa Brava and the Costa del Sol, as well as to (almost) unspoiled beaches on Sardinia and Yugoslavia's Adriatic coast.

Europe, in short, looks prosperous and to a large extent is prosperous. And it is no longer only the privileged who share the wealth. A decade ago, a skilled worker in France, Germany, Italy or Belgium was likely to have ridden a bicycle or motorbike to work. Today he owns--or is saving to buy--a Volkswagen, Fiat or Citroen. He is almost certain to have a TV set (black-and-white, not color). He almost certainly has a savings account; and if he is lucky, he lives with his family in new, subsidized housing--architecturally undistinguished, but more comfortable than picturesque squalor.

Europe, of course, is not yet paradise. The Continent still lags well behind the U.S. by the standard measures of wellbeing, but is catching up (see charts). Income is still distributed inequitably, with many poor people within the richer member countries of the Common Market and widespread chronic poverty in the poorer nations of Italy, Britain and Ireland. All too many homes in the slums of Glasgow lack baths and hot water, and in France thousands of working-class families can afford meat only once or twice a week. Throughout the Common Market, however, social benefits help to compensate for low incomes. Medical services are free, or virtually free; family allowances ($65 a month for three children in Belgium, for example) help to feed and clothe the children of the poor; in most cities and suburbs mass transit is efficient, cheap and lavishly subsidized by U.S. standards. To be sure, none of those and other benefits are really free, since they are paid for by a complex of income and indirect taxes.

The extent to which the average European's economic dreams remain unrealized was quite apparent last week. In Italy, 10 million workers walked away from their jobs for periods ranging from 15 minutes to 24 hours. In France, a strike by air traffic controllers went into its second week, grounding virtually all civil aviation. Britain was crippled by strikes and slowdowns that halted trains, cut gas supplies to some homes and factories and closed schools in London.

The issue that brought out the strikers, from Milan to Manchester: living costs that are rising faster than wages. Consumer prices in the Common Market as a whole rose some 8% last year, compared with 3.3% in the U.S. The Paris-based Organization for Economic Cooperation and Development (OECD) warns that this year prices could rise by as much as 9%.

Basically, the problem is that Europe's factories are working at near capacity in an effort to meet the demand for their products, which enables labor unions to ask for--and get--sizable wage increases. In West Germany, for example, plants worked at 93% of capacity in 1970. Not so long ago, many governments would have reduced demand by such traditional deflationary methods as curbing their own spending, raising the cost of credit and restricting its growth. Today they are fearful of using those weapons vigorously, lest they create unemployment. Says Raymond Barre, a former vice president of the Common Market Commission: "Most people have decided they prefer inflation to joblessness."

In the Common Market as a whole, unemployment averages 2% to 3%. It is, naturally, far higher in such depressed regions as southern Italy and southwestern France, as well as among certain sections of the population --teen-agers, women, elderly people.

Strength. When workers are fired, they are rewarded with generous severance pay: a month's pay for each year worked is common. Thanks to the strength of the trade unions, it is becoming even harder to lay off unwanted workers. In West Germany, for example, the Bavarian metalworkers union has just negotiated what may be the ultimate in job security--and a model for other unions. A worker who is either 55 years old and has been with the same company for 20 years, or is 50 and has been with it for 25 years, cannot be fired at all. Says a German industrialist: "With or without socialists in power, we have socialism in Europe."

One way to combat inflation is, of course, to raise the productivity of both labor and capital. However, the structure of European industry and the difficulty of shedding unwanted labor hamper this policy in many countries. France, for example, still has a host of small, undercapitalized companies. Out of 908,000 firms only 37 employ more than 5,000 people, and only 140 more than 2,000. The figures suggest that the country has a long way to go before it realizes optimum economies of scale.

Spiraling prices could make European exports uncompetitive in world markets. The consequent reduction in demand would then lead to the unemployment that workers fear. But rising prices do not yet threaten the EEC's export performance. In part, that is because about half of its members' trade is within the Community, where inflation runs at roughly the same rate from country to country. Moreover, proximity of markets provides a cost barrier against imports from faraway countries like the U.S. and Japan.

A large part of the Common Market's economic growth is provided by U.S. multinational companies, which continue to invest in the European Economic Community. At market value, that investment now totals an estimated $80 billion. Even that impressive figure does not reflect the degree of their dominance. U.S. companies tend to concentrate in such growth industries as telecommunications, chemicals, energy, cars, trucks, food processing and distribution, and pharmaceuticals.

Like their locally owned rivals, the American multinationals must observe local laws and mores. But unlike smaller companies, they have the freedom to move production to the plants where it will be most profitable; and labor unions accuse some multinationals of using that freedom as a weapon in bargaining over contracts. Increasingly, the multinationals are under surveillance by the EEC.

Ironically, while they are becoming less popular in Western Europe, the U.S. multinationals are being courted by Eastern European nations who want new technology and capital. The Eastern Europeans, however, are careful to maintain barriers against foreign, capitalist dominance. Most favor partnerships that give the Eastern country access to modern technology and to investment, while the Western partner gains a supply of plentiful cheap labor.

Since President Nixon's detente with the Soviet Union, many American companies have moved to increase their trade in the Eastern tier. They have found themselves competing with Western European firms already well entrenched there. The Eastern European countries are perennially short of convertible currencies and therefore are highly price conscious. This is one field for U.S. exports that may benefit substantially from devaluation of the dollar, provided U.S. companies supply the Eastern market direct, rather than through their European subsidiaries.

With industrial economies that increasingly resemble each other, the Eastern and Western European nations are bound to have closer trade relations in the coming decade. In the capitals of Western Europe and at Common Market headquarters in Brussels, there is far less talk about the political challenge from the East than there is about American intentions. A suspicion lingers that the U.S. is trying to use its relative economic power--waning but still strong--to force the rest of the world into currency realignments and trade concessions that will enable it to invest overseas on a grand scale.

That investment has brought some benefits to the rest of the world. The U.S. has exported new technology and management methods and, above all, has shown national rivals that it is possible--and highly profitable--to market on a continental scale. But benefits always involve costs. America's continuing export of capital is a major factor in the chronic turbulence of the international monetary system. Last week, a mere fortnight after the second devaluation of the dollar in 14 months, Europe's major foreign exchange markets closed to prevent further massive speculation (see page 91).

The U.S., which exports only about 6% of its G.N.P., can ride out the storm with relatively little inconvenience. But European nations, which export up to 50% of their G.N.P.s, are highly vulnerable to an international currency crisis. Many Europeans argue that the U.S. is selfishly asking other nations to solve problems that are of its own making. If resentment of the U.S. becomes enshrined in Europe's monetary and trade policies, the dollar might fall even lower. For Europe and the U.S., that would signal the start of an economic war in which neither side could expect more than a Pyrrhic victory.

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