Western Europe: Signs of Slowdown

Western Europe’s postwar economic wonder—its decisive leap from bombed-out plants to sold-out production—is still pretty wonderful, but not quite as much so. Italians speak with pride of the “Italian Miracle,” which has made them much more prosperous than in days of Caesar or Il Duce. French workers, who once scrimped to buy their good meals and wine, now drive their families to the seashore for August holidays. English tradesmen have long since scrapped their vintage cars that were held together with baling wire and loving care; London now looks the most prosperous city in Europe. West German businessmen, a less apologetic lot abroad than their politicians, have become Wagnerian troubadours of free enterprise doing successful battle in foreign markets.

Looking on in envy, many U.S. businessmen have come to believe that the Europeans have found the fountain of eternal prosperity. Not quite so: the fountain still flows, but less exuberantly: While industrial production in the six-nation Common Market is running 6% ahead of last year’s fast pace, the rate of gain is lower than in previous years. Steel output is down 2.4% from 1961. Italy is experiencing declines in home-building and cement production. British shipbuilding is at its lowest ebb since World War II. West Germany’s gross national product, which showed a real gain of 5.8% last year, will increase by only 3.5% this year (v. an increase of 7% in the U.S.). The Common Market’s high authority notes “a leveling off in the growth of investment,” and the French government complains of a “slowing rhythm in the progression of demand.” The mood in every European nation is one of hesitancy.

Help Wanted. One difficulty is an acute labor shortage, in part the result of the manpower lost in World War II. Industry has had to hire all but the squarest pegs and complains of poor productivity and increased absenteeism. West Germany has imported 700,000 workers from abroad, still has 600,000 jobs unfilled because, as the managers say, “there are not enough Italians to go around.” The Netherlands is recruiting workers in Greece, Portugal and Ireland, and so many Spaniards are working up north that the wages they send home have become an important $100 million asset, in balancing Spain’s international payments.

In the tight labor market, Europe’s long-docile trade unions are beginning to noisily claim their due. Costs of production are. rising just when worldwide competition has sharpened. Employers, having to meet wage increases out of lower profit margins, have slowed their rate of capital investment.

The Inflationary Swamp. After many years of remarkable self-restraint, West German unions have picked up the chant of Construction Workers Chief Georg Leber: “Get all you can.” The Germans have a lot of getting to do: family income averages only $181.30 a month and at the rate pay has been going up in recent years, German wages will not catch up with U.S. wages for 20 years—if even then. But wages in the past twelve months have soared 14%, wiping out.a productivity gain of 7%. Businessmen have covered part of the increase by raising prices (Germany’s export prices have increased 4.2% over the past year). Gone are the plump times when German firms could simultaneously finance all investment from profits, add lavishly to reserves and pay handsome dividends. Wrote the business-oriented daily Frankfurter Allgemeine: “We have long since ceased being a model, and instead are increasingly coming to be a horrible example. We are running wildly into the inflationary swamp.

Have we suddenly lost our minds?”

Low-Level Productivity. Bundesbank President Karl Blessing says West Germany is catching “the English disease,” by which he means allowing wages to outrun productivity, thus pricing goods out of foreign competition. But the unpopular “wage pause” ordered by the Macmillan government a year ago has helped Britain to hold wage increases to 4.6% and to spur British exports to the Common Market countries, where wages are increasing much faster. Britain’s increase in productivity, however, is a poor 2^%, and companies with excess capacity find little incentive to expand. Managers are also delaying decisions to spend until they learn whether Britain will get into the Common Market. (If Britain does not, her businessmen will probably decide to build plants on the Continent.) France is just beginning to feel the slowdown. Industrial production has risen 7-5% in the past year, led by the auto industry’s 16% jump. But new orders have dropped. Partly because of a profits pinch resulting from a 20% jump in wages over the past two years, French private industry is delaying new investment in plant and machines.

High-Level Stagnation. The labor shortage is less severe in Italy because of the reservoir of unemployed in the poverty-ridden south, but skills are scarce. In the past nine months, Italian labor has managed to pressure wages up 11.2%—and the cost of living has climbed 5.4%.

How much this has affected profits is hard to tell because Italian industrialists are experts at that old European game of “cooking the books”—keeping three sets of accounts, one for the tax collector, one for the stockholders, one for the company itself. But businessmen are concerned by the increasing leftism of Premier Fanfani and the nationalization of the electric power industry. Italy’s industrial output is a remarkable 12% higher than a year ago, but manufacturers’ new orders are slumping. Top Italian Economist Livio Magnani talks like a New Frontiersman: “We are going through a period of stagnation on high economic and industrial levels.”

Among the Benelux nations. The Netherlands has a severe labor shortage, and Luxembourg’s large steel industry lags behind last year’s pace. (Even so, Luxembourg has only 43 unemployed. ) Belgium is a booming exception; in first-half 1962, exports were up 13%, profits 10%.

Wide Open Markets. It is only natural that Europe’s postwar economy, now 17 years old should grow at a slower rate than when it was less mature. On the bright side is the fact that consumer demand for hard goods is still unrelenting. There is only one auto for every twelve Europeans (v. one for every three Americans), only one TV set for every three German families. In France housing construction is rising by 2% a year, but economists contend that the increase should be ten to 20 times greater to fill the nation’s needs.

The more progressive European businessmen believe that they have much to learn from U.S. methods of production, distribution and automation. Supermarkets are catching on. So is the automated factory, such as the Saint-Gobain glassworks at Chantereine, France, where a few button-pressing workers turn out a continuous “river of glass.” And for all its labor shortage, Europe still abounds in make-work jobs protected by tradition, and sometimes by law.

“e;The main source of additional profits must be sought in greater efficiency,” says Paul Chambers, chairman of Europe’s biggest chemical producer, Imperial Chemical Industries. Fortnight ago Britain’s Chambers set an example for his fellow Europeans by calling in a U.S. consulting firm to examine every operation in the company in the hope of cutting costs. Says Chambers, poking at some cozy European traditions: “It must be the company’s aim to secure reasonable profits with growing volume of business at lower prices rather than rely on smaller volume of business at higher prices.”