You Thought '93 Was Rotten For Europe? Just Wait

It's no secret around Europe that economic growth is the essential fuel of European unity. After suffering two years of political calamity and the worst economic downturn in 40 years, Europe's best and brightest are now daring to dream again. With a U.S. recovery solidly under way and a global trade accord in the bag, Europe's politicians look to 1994 as the year to resume the march toward superpower status.

But don't bet on it. Just as Europe's unity agenda has slipped further and further into the future, so the Continent's long-awaited recovery is likely to disappoint those banking on it to shore up the forces of eroding union. And try as it may, Europe can't seem to get a step ahead of the external political and economic forces that are whittling away at its cohesion.

While it's true that Europe will emerge from recession next year, most Europeans may be hard-pressed to notice the difference. EC growth is likely to come in lower than 1%, less than half what politicians are expecting. And Germany, Europe's biggest economy, is riding the edge of an unprecedented second consecutive year of declining output. More important, European unemployment, officially 11%, will rise to Eastern European levels of 16% next year once make-work and training programs are stripped out.

OUT OF CONTROL. With that as a backdrop, and elections likely in 9 of the 12 European Community member countries over the next two years, you have a surefire formula for jitters. Right-wing politicians are on the rise, workers are hitting the streets, and skinheads are attacking foreigners, so politicians such as German Chancellor Helmut Kohl and Spanish Prime Minister Felipe Gonz lez will be tempted to let budget deficits go out of control. "There's going to be enormous pressure on governments to abandon the fiscal restraint" necessary to get European inflation rates and budget deficits in order and attract new investment, says Kim Schoenholtz, Salomon Brothers Inc.'s chief Europe-watcher.

For Europeans, the General Agreement on Tariffs & Trade is a two-edged sword. While the trade accord will produce winners in such industries as pharmaceuticals and software, new losers will emerge in manufacturing and agriculture. It is only now beginning to dawn on European leaders that the years of focusing on the single market had a hidden downside: the isolation of Europe from the low-wage competitors it now faces. Stiffer competition may rob the Continent of hoped-for gains from falling interest rates.

Europe is also feeling insecure about the world outside its borders. The emergence of ultranationalist politics in Russia's Dec. 12 elections raised the specter of renewed turmoil on Europe's eastern flank and quickly quashed the good cheer lingering from Boris Yeltsin's visit to Brussels just days earlier to agree on expanded Russian trade. NATO's unwillingness to embrace Eastern Europe for fear of irritating the Russians threatens to push countries such as Poland and Hungary to form their own security blocs.

Ironically, Europeans may find their best hope for restoring momentum not at home but in Washington. Prospects next year could well depend on the Clinton Administration's willingness to reverse its policy of depressing the dollar. A shift that boosts the greenback "would do more than the rest of Europe put together could do to stimulate job creation," says Michael Hughes, European strategist at British broker Barclays de Zoete Wedd Ltd. Such dependence is a far cry from the superpower status that European Commission President Jacques Delors once envisioned. But as a year of living dangerously looms, a U.S. savior may make all the difference.

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