The Continent Breaks Into A Run

Growth is picking up, but can it match America's streak?

Heinz Greiffenberger can hardly believe it's true. Sales at his north Bavaria machine and gear company, about $100 million a year, had been seesawing as Europe struggled to break out of the recession that hit in 1990. But he forecasts that after falling 7% in 1996, sales will soar this year by up to 15%. "There's a new, more optimistic attitude," says Greiffenberger.

Indeed, Continental Europe's recovery finally seems to be kicking into higher gear. Across Europe, economists are revising anemic growth projections upward. Average growth in the European Union, which barely reached 1.6% last year, could hit 2.8% next year, figures BMW economist Oliver la Bonte. For the first time since the late 1980s, European growth should surpass that of the U.S. "I see a trend where Europe is going to be more and more competitive," says Richard M. Donnelly, president of General Motors Europe.

But the tough question is how long that trend can endure. What has been so admirable about America's six-year expansion is not so much its vigor as its staying power. Europe has yet to prove it can match the new U.S. formula of steady growth, low inflation, low unemployment, and booming capital markets. And while 1997 and 1998 look promising, Europe's recovery still lacks several building blocks that have been crucial to America's long growth spurt (table).

For one thing, Europe has just begun a streamlining process that took Corporate America 10 brutal years to carry out. And downsizing is only the start. Without structural change, from deregulation to tax laws to work rules, higher growth rates may not be enough to cure European joblessness and set the stage for a long-running expansion.

In the U.S., for instance, high tech accounts for nearly a third of gross domestic product, powering growth and creating well-paid jobs to replace those lost in manufacturing. In Europe, high tech's share of output is less than 10%. Even lower-paid service jobs are few and far between. In Germany and France, manufacturing accounts for 30% of employment, vs. 15% in the U.S. Without deregulation and incentives to create a healthy service sector, Europe's core economies are unlikely to duplicate the U.S. miracle.

Strong, steady productivity growth is another element still largely missing in Europe. U.S. nonfinancial output per hour is rising an estimated 2.4% this year, up from near zero in 1995. In Europe, by contrast, governments are still struggling to unload unproductive assets in state-owned companies. And France, for example, is using job-sharing and shorter workweeks to deal with unemployment--tactics that add little to economic dynamism.

SIGNS OF REFORM. Still, Europe's economies face their best chance in years to show some real verve. A stronger dollar and the lowest interest rates in three decades are boosting exports and, in turn, capital investment. And after a spell of fiscal restraint that will squeeze 1% of GDP out of the EU economies this year, Europe next year may be able to ease off a bit, even as it prepares for monetary union in 1999.

Most important, there are signs that basic economic reform has become part of the landscape. In Spain, home of Europe's most arcane labor regulations, the government recently adopted a business-labor pact to slice compensation packages for laid-off workers and also made it easier for employers to shed excess labor. The reforms are expected to create 200,000 permanent jobs.

After the ups and downs the Continent has struggled with for five years, the brighter growth picture is a relief. Now, the real test will be whether the key economies, France and Germany, use the opportunity to push ahead with reforms that will begin to cut unemployment--and move Europe down the road to U.S.-style economic dynamism.

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