Time for Europe to celebrate spending
With consumption stagnant, core Europe could catch the Japanese disease
Friday 19 March 1999
We also build the temples to consumerism, the physical entities designed to encourage people to part with their cash - as the Bluewater complex, the largest shopping centre in Europe - shows. And we have, by European though not by US standards, long shopping hours.
But in Euroland this happy state of affairs does not invariably exist. Some countries are booming. The Netherlands, Denmark and Ireland are all growing fast, helped by solid growth in consumption. But elsewhere, particularly in Germany and Italy, growth is slow. Indeed overall, continental European consumption remains pretty stagnant, giving rise to the worrying thought that core Europe might catch the Japanese disease, where interest rate cuts and fiscal packages fail to stimulate any growth at all.
Both Germany and Italy are quite close to slipping back into recession, with negative growth in the last quarter of the year. Neither can rely on exports to pull the economy up this spring, investment is pretty flat and government spending is constrained by the Maastricht rules. So the only source of demand has to be the consumer.
That is obvious enough. What is less obvious is what is actually happening to consumption, for European consumers are saying that they are confident but they are not buying much more. The divergence between reported consumer confidence and reported business confidence is striking (see graph). Taking the euro-11 as a whole, ordinary people have seldom been more cheerful about their economic prospects. By contrast, the business community is plunging back into gloom. For most of the last two decades the two have moved together, so this divergence is puzzling. What is the explanation? Does it matter? And if so what is to be done?
The explanation comes in several parts. First, the confidence levels of European business have been depressed by lack of confidence in the governments in Germany, France and Italy. The most notorious anti-business minister, "Red Oskar", has been heaved out, which is a start, but immense damage has been done to the German business community's belief in its politicians.
As anyone who has had even a brief conversation with a German business leader in recent months will have found, within about three minutes the fury would begin to erupt. They thought they were the heroes of the German prosperity (which, of course, they were) and accordingly they would be listened to (which they weren't.)
Similar, though more muted concerns inflict some French industrialists, and while it is hard to make any sensible generalisations, it is probably also true that medium-sized businesses in Italy, the ones that matter, retain their traditional scepticism towards the government of the day.
But it is not just politics. European business also knows it faces a new and more competitive world with the transparency of pricing with the euro. The wave of reconstructions, mergers and other deals is a first stage in the response to it. But while it is early enough to feel the fears, it is too early to perceive the benefits. In as far as the introduction of the euro does anything to business confidence, I suspect that, so far at least, it has reduced it.
Finally, euroland business confidence will have been depressed by the fall off in demand from what has until recently been its best export market - the UK. Rapid growth, an open attitude towards imported goods, strong sterling and a high propensity to import has made the UK a very attractive market for continental Europe. Now that growth here is easing, that market has weakened, though this has yet to show up in the import numbers.
If it is easy to explain European commercial gloom it is much harder to explain European consumer cheer, particularly because it does not seem to be translated into spending.
The usual explanation when figures don't add up is that they are wrong, but I can't quite see how they could be wrong in this instance. Euroland has a population of 290 million so any survey of consumer opinion is going to be a very broad-brush effort. But if these people say they are confident I see no reason to try and question that. The puzzle is more that if they are indeed confident, why are they not spending more?
I have two possible explanations to offer. The first - not very good one - is that the consumer spending figures have become unreliable, perhaps that additional spending is now going on in the cash economy rather than in the taxed one.
So people are more confident, but their reaction to the higher taxation needed to meet the Maastricht targets has encouraged them to spend their money in ways which minimises the tax-take.
The second is that the shift to a near-zero inflation world has changed buying patterns, delaying purchases. So consumers feel more confident, but they also see no need to rush out and buy now. Things may be cheaper next year.
What is to be done depends on what is wrong. But we may not be able to risk waiting for explanations if demand continues to remain flat. The range of policy options is really quite limited.
Governments can't ease fiscal policy without busting the Maastricht rules - indeed they used a lot of creative accounting to get within them. Monetary policy is outside their control, and in any case may be much less effective than it used to be. When interest rates are down in the 3 per cent region, you may not achieve much but cutting the odd half percentage point off rates. When they were in double digits then a sharp cut in rates was at least noticed. In any case a cut in short-term rates might have the opposite effect to that intended if long-term rates rose as a result.
No, the only available policy is structural reform. In that sense Euroland is in pretty much the same position as Japan - fiscal and monetary policies are unavailable or ineffective, so you have only one further thing you can do. But structural policies - removing labour market rigidities, easing business regulation, changing planning controls and so on - carry costs too. Consumption in Euroland will not remain flat for ever, but developing a culture which celebrates spending (as America does and Britain seems to be trying to do) takes a long time. The great European consumption boom may not come in time to rescue the world economy when the US economy eventually slackens.
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