Spending Cuts Hit Europe's Building Industry

The delayed revamp of a Berlin palace and a wobbly bridge project in Sicily signal that Europe's building industry will bear the brunt of state spending cuts. The Stoxx Europe 600 Construction & Materials Index, whose laggards include Ferrovial of Spain and France's Lafarge, has lost 17.3 percent this year. The wider Stoxx 600 index of European equities is down just 1.7 percent.

The threat of state budget cuts in Europe led cement maker Lafarge on July 30 to cut its best-case scenario for market growth, to 3 percent this year from 5 percent. "We're expecting construction stocks to remain very much under pressure," says Franck Nicolas, head of global asset allocation at Paris-based Natixis Asset Management, which oversees $400 billion of investments.

Italy may delay building a $7.9 billion bridge linking Sicily to the mainland, and Spain on July 22 announced a freeze or delay on almost 200 projects worth more than $1.2 million each. France may reduce or eliminate its tax break on mortgages, which will hit new-housing construction. "We've felt the crisis and thought we had reached the trough, but now we're afraid of austerity," says Jean Rossi, the head of construction at Vinci, a top French engineering group. Britain has announced the biggest public spending cuts since World War II. Rockwool International of Denmark, the world's No. 2 insulation maker, sees Britain's building slump lasting two more years.

For Berliners, budgetary cuts mean a longer wait for work to start on the Stadtschloss palace, once the winter residence of the Hohenzollern kings of Prussia. "The delay—it may be shelved altogether—is really short-sighted," says Peter Traichel, chairman of Berlin's Chamber of Construction. "The schloss would become a Berlin landmark and would cost maybe no more than building 12 kilometers of Autobahn. I know what I'd prefer."

The bottom line: Infrastructure spending, a traditional way to boost economies, is falling under the ax in a suddenly frugal Europe.

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