Throughout its remarkable postwar prosperity, Western Europe has reacted fast to fight inflation. Lately, it may have overreacted: with country after country splashing cold water on overheated economies, icicles have started forming. After clipping along at a 5.6% pace in 1964, the Continent's overall economic growth rate dropped to 4% in each of the past two years, is likely to slow down in 1967 to 3.5%—the smallest increase in more than 15 years. And in many countries, incipient recession is a worse threat than inflation.
Basic to the situation is the fact that Western Europe's two biggest economic powers, West Germany and Great Britain, find themselves in slumps at the same time. Hoping to combat inflationary pressures and reverse nagging balance-of-payments deficits, Bonn and London deliberately moved last year to brake domestic demand, in Germany's case mainly by tightening credit, in Britain's by means of last July's sweeping price-wage freeze.
The measures have had the desired cooling effect—and then some. In West Germany, industrial production rose by only 1.7% in all of 1966, and not at all in the last three months of the year. With business investment declining sharply, German unemployment jumped to 673,000 (or 3.1%) this month v. 269,000 a year ago. In Great Britain, moreover, the government's austerity program did not prevent the cost of living from soaring to an alltime high in mid-January. The British and German slowdowns have complicated the efforts of other European countries to steer their troubled economies on a course between inflation and recession.
Examples:
∙BELGIUM. With its obsolescent coal industry ailing and unemployment on the rise, Belgium expects to see its growth rate dip as low as 2% this year, v. 3.5% in 1966. At the same time, the country continues to be plagued by inflation and hefty government expenditures.
∙DENMARK. Demand for Danish goods abroad has fallen, with agricultural exports especially hard hit by the country's continued exclusion from the Common Market. But consumption at home remains high. To curb inflationary spending and level out incomes, Prime Minister Jens Otto Krag's socialist government has proposed higher taxes.
∙FINLAND. Helsinki's movie houses are doing big business, the reason being that Finns forsake more costly entertainment for the cinema when times get tough. Chief woes: tight money and the crimp in European markets for Finland's wood products, which account for 70% of all exports.
∙FRANCE. The gross national product grew by a robust 5.5% last year, and is expected to do as well in 1967. But a few clouds are gathering. Though exports rose fast (10%) last year, imports increased even faster (15%). And with markets weakened in other European countries, France stands to see its balance-of-payments surplus turn into a deficit before 1967 is out. Continued prosperity depends on France's ability to hold the line on prices.