Europe Is Restricting Its Money And Its Recovery

Signs that recovery is faltering in Britain and recessionary forces strengthening in Germany, France, and Spain do not bode well for Europe's near-term economic outlook. What makes prospects even more dismal is the fact that most European countries are pursuing contractionary macroeconomic policies.

On the monetary side, economist William P. Sterling of Merrill Lynch & Co. points out that real short-term interest rates in many European countries remain relatively high--despite recent rate declines--as recessionary forces have quelled inflation. Current inflation-adjusted short-term rates range from about 3% in Germany and Britain to 5% in France and 6% in Italy and Spain.

Meanwhile, economists at Oxford Forecasting Ltd. estimate that current fiscal tightening could subtract nearly a percentage point from gross domestic product this year in Western Europe as a whole and double that in countries such as Italy and Sweden. If European nations continue to try to meet the fiscal criteria for European monetary union, warns the consulting firm, fiscal policy may stay relatively tight through 1994.