11:44 AM Apr 15, 1996

UNITED NATIONS: BLEAK OUTLOOK FOR WESTERN EUROPE

Geneva 15 Apr (Chakravarthi Raghavan) -- West Europe, where unemployment is "the major economic and social problem" will be unable to bring about a significant reduction of unemployment, without policies to ensure a "considerably higher rate of economic growth than is currently in prospect," the United Nations regional body has warned.

While projecting this bleak outlook for west Europe, the UN Economic Commission for Europe (ECE) projects a somewhat more optimistic picture for east Europe, with some prospect of recovery and growth, though with some uncertainty because of growing dependence on trade with west Europe.

In its report, 'Economic Survey 1996-1996', the UN's Economic Commission for Europe (ECE) says that economic growth in west Europe appears to be slowing down in every economy and at best European GDP could rise by 1.5% in 1996, compared to a GDP growth of 2.7% in 1995.

Even this 1.5 percent would be possible only if activity picks up before mid-year, the ECE adds. But if GDP remains unchanged in the first half, an annual rate of over four percent would be needed in the second half to achieve the 1.5% for the year -- and such an acceleration of activity is not very likely.

At a news briefing, ECE Executive Director, Mr. Yves Berthelot said that the current European monetary and fiscal policy approaches were not correct and would aggravate unemployment. The inflationary risks were not that high and there was need for measures to stimulate the economy, he said.

The ECE which, since 1990 (collapse of the Berlin wall), has been consistently calling the shots in the projections and policy errors in Europe, from a reading of its latest report appears to be less forthright and more cautious in its analysis than the views that its economists privately voice.

Last December, the ECE had cautioned that the attempts to achieve the convergency targets of the Maastricht treaty for the monetary union was responsible for the recovery being stymied and slowed down, and suggested that the target dates for the EMU be extended, pending recovery.

The EU Commission came down with a ton of bricks on the ECE, with the EU's officials and a commissioner using very disparaging words, while the EU Commission President, Jacques Santer, privately asking his officials about non-cooperation in future with the ECE.

But within a few days many others in the EU were voicing similar sentiments. Even the current efforts at Turin intergovernmental conference and the weekend Verona meeting on the EMU and the relationships between those in the EMU and those outside is not removing the uncertainty.

Elsewhere in the OECD area, the ECE Survey expects a 2% real GDP growth in North America and the long-awaited Japanese recovery forecast to increase GDP by two percent.

But the subdued outlook for growth in western Europe implies that on present policies a renewed rise in unemployment in 1996 is unavoidable. The only like change in policies could be a further and perhaps faster fall in interest rates.

European fiscal policy, the ECE notes, is however constrained by determined efforts of governments to meet the convergence criteria of the Maastricht treaty.

The ECE sees little room for manoeuvre here, though further efforts might be made to shift the composition of government expenditure in favour of private consumption and fixed investment and more active labour market policies.

"But a significant reduction of unemployment, the major economic and social problem now facing western Europe, will not occur without a considerably higher rate of economic growth than currently in prospect," the Survey says.

Labour market policies do have an important role in reducing costs of employment to enterprises for hiring new staff and increasing employability of young and long-term unemployed with better education and training.

"But these efforts will have little effect if the demand for labour is constrained by weak growth prospects," the ECE stresses.

Fears that lowering unemployment will increase inflation are "exaggerated" and the risks of inflation have to be balanced against risks to social and political stability of increasing number of disenchanted and marginalized people excluded from social integration, the ECE points out.

While unforeseen events could upset any forecast, and stronger growth in rest of the world could boost west European exports, "many of the risks are still on the downside," the ECE says.

Tighter monetary policy in the United States, the Survey adds, could check fall in European interest rates, as could increasing uncertainty about EU integration. It hopes that the EU's Intergovernmental Conference, which has opened in Turin, could have a major impact on expectational environment in western Europe.

Among the downside risks, the ECE says a renewed exchange rate turbulence cannot also be excluded. And consumers may be even more cautious in spending behaviour than assumed. And need for tightening of monetary policy in the US could restrain scope for monetary relaxation in Germany. And the increasing uncertainty about starting date and modalities of the European Monetary Unit (EMU) could be reflected in higher premia on bond yields in Germany visavis dollar bonds.

Among the positive 'surprises', the ECE lists the response of European economies to tight fiscal policy and whether automatic stabilizers can have full effect; a stronger than expected recovery in the US and Japan, as well as developing countries, providing a stronger boost to west European exports.

The loss of momentum and faltering growth in west Europe, ECE says, has been due to a number of factors:

* consumer confidence has remained fairly weak since recovery began in mid-1993 - reflecting the bleak prospects in labour markets and uncertainty over future incomes.

High unemployment levels and fear of unemployment have engendered economic insecurity among a much larger proportion of labour force than in the past. Sectors and higher income groups, particularly in the services (including government), hitherto more or less immune from periodic bouts of unemployment, are now threatened with job losses as a result of technical change and weak demand -- in more fashionable language 'downsizing'.

* private consumption has been weighed down by higher taxes and social security changes as well as reduction in government transfers which have reduced disposable incomes. Private consumption grew on average only by 2% in 1995, compared to a over three percent annual average between 1986-1990.

* while there has been a recovery of investment, as expected, in general this is focused not on expansion of productive capacity which would improve medium-term prospects for employment growth, but on cost reduction and modernization of capital stock.

This last is partly a response to intense competition on world markets, but also to increase profits in the face of weak and uncertain prospects for demand growth.

However, domestic activity in western Europe continued to be supported by export growth, though its net effect was smaller than inn 1994 because of slow-down in intra-west European trade. But the region has benefited from the strong global demand for investment goods and rapid growth of imports into the transition economies.

There was a small increase, 0.6%, in west European employment in 1995, compared to a 3.5 percent fall between 1991-1994, while in Northern America, there was expansion in job creation -- 3% in 1994 and 2% in 1995.

Though much stress has been given to labour market flexibility in the US for this job creation, "the major factor seems more likely to be the considerable difference in rates of economic growth."

However, eastern Europe stands out as "an area of rapid growth", though there is considerable variation within the region - ranging from a fall in Croatia, FYR of Macedonia, a 13% rise in Albania.

In the Baltic States, a somewhat hesitant recovery is more firmly established in Estonia and Lithuania, but with a further setback in Latvia where output is falling again.

And, while the deep depression of output in Russia and other CIS countries continued last year, the output fall has slowed considerably in a number of them, with output increasing in Armenia and Georgia and expectation of upturn in others.

But would depend on what happens in Russia, where GDP fell by four percent in 1995, but still less than expected. If progress made on economic stabilization last year can be maintained, Russian output might stabilize and begin to grow. But the outlook for Russia and other CIS states is still very uncertain.

And most forecasts for transition economies, including that in the ECE Survey, are at best informed judgements, based in some cases on little more working or hopeful assumptions, ECE adds.

However, the ECE warns, uncertainties are still considerable.

Apart from uncertainties of the reform process, an important element of risk in 1996 arises from eastern Europe's very high dependence on western Europe as an export market, with nearly two-thirds of exports going to developed market economies.

But the ECE appears to have refrained from commenting on the EU's integration and association plans for east Europe, and its effects on an export-led recovery in eastern Europe.

This is an issue where the EU members are sharply divided, with France opposed (because of the threat of competition in agriculture), the UK favouring it in hope it would bloc faster EU integration, and Germany favouring for security reasons.