Less than robust recovery indicated in Europe

  • Business
  • Tuesday, 11 Jan 2005

BERLIN (AP) - Signs of shaky economies in France and Germany have sharpened worries about Europe's less-than-robust recovery - and underscored the struggle to shake up regulation-clogged economies in countries that use the euro. 

The European Central Bank is expected to leave interest rates alone when it meets later this week at its Frankfurt headquarters, even as warning flags go up about flat growth in France in the last three months of 2004 and rising unemployment in Germany. 

Those two countries make up half the euro-zone economy, and the news of their wobble at the start of what is supposed to be a year of recovery has underscored Europe's growth problem. 

Europe is struggling to free itself from rigid labor market rules and boost domestic economies instead of relying on exports to support growth. 

But it has watched in recent years as the United States, an ally but also a competitor to united Europe, has far outpaced it economically. 

That is attributed to factors ranging from excessive bureaucracy and welfare-state policies in western Europe - where jobs are increasingly departing for cheaper labor markets to the east - to a more work-focused culture and more business-oriented universities across the Atlantic. 

This week, labor unions in France are considering a protest march to protect their 35-hour workweek _ a holdover from a Socialist government and opposed by business leaders who say the law makes their labor costs too high. 

But efforts to change Europe's economic culture are just getting started. 

The ECB has stuck to an optimistic view that world economic growth will continue to pull the euro countries with it.  

The bank has kept its key refinancing rate at 2 percent since June 2003, and some economists don't expect the bank to touch interest rates at all this year. 

ECB President Jean-Claude Trichet appeared to maintain the upbeat outlook Monday, saying at a bankers' meeting in Basel, Switzerland, that the worst effects of high oil prices - which can dampen growth - "have already been absorbed.'' 

Private economists, however, point to shadows cast by Germany's rise in unemployment in December to 10.8 percent, and French government statistics showing zero economic growth in the third quarter. 

Unemployment there remains at 9.9 percent.And there's no quick fix available. 

Big budget deficits mean governments can't spend to stimulate the economy; interest rates are already low and aren't likely to be cut; and little can be done about a strong euro that weighs on exports by making them more expensive compared to foreign competition. 

"The recovery is far from being secured, and there are a lot of risks around in the system,'' said Thomas Hueck, head of macro and financial research at HVB Group in Munich.  

"Rising unemployment points to subdued consumer activity, and as we all know that is a key to a sustained recovery.'' 

If consumers won't spend, "sooner or later an economy faces the risk of stagnating or even declining activity,'' Hueck said, predicting that the dip in German and French data likely represents only a temporary soft patch. 

He foresees only 1.5 percent growth for the euro zone this year, with the pace picking up to 2 percent in 2006. 

"I'm not quite sure if you can call that a real recovery,'' said Hueck. "It's not a very impressive figure.'' 

Europe's growth has lagged that of the United States, Japan and China, with many economists and political figures pointing to Europe's greater tendency to regulate and tax businesses and to legislate generous worker benefits and job protections. 

Economists expect fourth-quarter growth of 3.5 percent to over 4 percent in the United States, where unemployment is at only 5.4 percent in December and per-person gross domestic product of around euro34,100 remains ahead of euro23,500 for people in the 12 countries using the euro. 

The euro-zone economy grew 1.8 percent year-on-year in the third quarter, following mediocre performances of 0.5 percent in 2003 and 0.9 percent in 2002. 

U.S. population growth has also helped keep output ahead of Europe, where aging populations and increasing social security burdens are a big concern. 

Germany took an important step toward shaking up its system as of Jan. 1, when jobless benefits for long-term unemployed dropped from 50-60 percent of pay to 15-20 percent, the same level as welfare recipients. 

That provides a powerful incentive to get off the dole - but there's no guarantee there will be employment there for newly motivated job seekers. 

In fact, it may temporarily hurt growth by dampening spending by consumers unsettled by welfare state cutbacks, said Lorenzo Codogno, co-head of European economics at Bank of America in London. 

The beneficial effects won't be seen for months or years, he said. "We need more substantial reforms in terms of labor markets and pensions.'' - AP 

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