Global risks may abort Europe's fragile recovery

THERE IS a danger that Europe will not see any economic recovery this year, according to a new report from four European research institutes.

Weak global economic conditions and the risk of a world-wide collapse in share prices could cut short the recovery in growth just getting under way thanks to lower interest rates and the weak euro.

There is little scope for governments to help by raising spending or cutting taxes to keep their budget deficits below the 3 per cent of GDP ceiling, the report says.

The researchers strongly criticise both European politicians, for their failure to introduce labour market reforms that would help create jobs, and the European Central Bank (ECB), for the confusion caused in the financial markets by its unnecessary secrecy.

Growth is forecast to be just 2 per cent this year, edging up to 2.5 per cent in 2000. Easier monetary policy, reflected in lower interest rates and the weak euro exchange rate, is boosting growth, but the subdued outlook reflects a feeble world economy.

The dimmest outlook faces Germany and Italy, both expected to see growth below 1.5 per cent. Both have been hard-hit by the downturn in world trade, and Italy is likely to be the euroland economy most affected by the Kosovo crisis.

As if this were not dismal enough to start with, today's report from the four institutes notes there is an increasing risk of a Wall Street crash. It estimates that a resulting 20 per fall in global equity markets would reduce European GDP by 0.75 per cent after two years, even if the ECB reacted by cutting interest rates again. The impact in Europe would be almost as big as the likely 1 per cent reduction in US GDP.

The experts from the four institutes, including Britain's National Institute for Economic and Social Research, attack the European Central Bank for sowing confusion about its policies.

The report notes that the money supply is growing faster than the ECB's target and inflation is rising, yet it insisted its surprise half-point cut in interest rates last month was not a response to depressed growth.

"If the ECB is to retain its credibility and improve the transparency of its decisions, changes are needed in its operating procedures," the report says. It recommends that the ECB should, like the Bank of England, publish an inflation target.

Euroland governments do not escape criticism, however, as the pace of expansion is unlikely to create jobs.

The report says: "Faster progress on structural labour market reforms is necessary if Europe is not to have a jobless recovery."

This echoes the views of many economists. John Llewellyn, chief economist at Lehman Brothers, warns that jobs market reforms under way in France and Germany are proceeding much too slowly. He said: "Governments are failing. Their efforts are petering out, and this matters for the long- run sustainability of the recovery."

The Euroland corporate sector is restructuring rapidly, he argued, in order to improve returns to shareholders.

"But European governments are not fulfilling their half of reforming the modern economic partnership."