Darker Times Ahead for Europe's Economy

It was a cheap myth from the start, but somehow irresistible: the "new economy."

Free from business cycles, powered by the efficiencies of on-line commerce, international trade and deregulated markets, it was beautiful, and there was no end in sight.

Even now that it has faltered, some economists maintain that the new economy will rise again.

During a brief interlude between recessions, especially during the late 1990s, economists – ordinarily hard-headed believers in rational self-interest – allowed themselves this rare romantic flight of fancy.

Not only the United States was growing and prospering, after all. Europe was, too.

The 12 countries now preparing to exchange national currencies for the euro entered a period of growth starting in 1996. Their combined gross domestic product rose gradually to peak at 3.4 percent in 2000. Confidence soared.

Confidence, being the engine of growth in consumer-driven economies, would sustain the growth, most experts said.

But then came 2001

Someone said "bubble," and then it popped.

This year has been a year of economic crisis for the global economy.

The US economy, home base for the "new economy" and most of the technological innovations that spurred its growth, is reportedly in recession. Consumer confidence is injured, though not shattered, by terrorism and war.

The EU, which through the last decade led neighbouring East European economies on the path of economic growth, is now on the verge of being outperformed by its pupils, in terms of economic growth, not in terms of volume.

Confidence in Europe is injured, too. Euro-zone economic growth is projected to slump to 1.75 percent this year, and it could fall below 0.5 percent if US business fails to recover, according to PriceWaterhouse Coopers.

True, the same study does not rule out a "high growth scenario" of 2.5 percent growth, spurred by a US bounce-back, lower taxes and interest rates.

But the old optimism is gone. The government in Germany, the region's biggest economy, expects unemployment to rise this winter to 4 million, and worries of recession are real.

Falling employment figures have a way of dragging consumer confidence down with them.

France and Britain, staving off the disappointment of grim economic news, took some solace in rising consumer trends as the Christmas shopping season began.

But this seasonal "rise" is no rise at all. It is a slower decline, the European Commission admitted in a recent business survey. Putting on a brave face, the Commission said of the November results "this decline was much more restrained than in the previous month."

Signs of hope

Spain, for one, has announced it is fit enough to weather the storm without slumping growth. But its investments in Argentina, which faces a currency crisis, are a cause for special concern.

To know which way the EU's economy will go in 2002, there's no choice but to ask the same experts who said even just 18 months ago that growth could go on indefinitely. Their optimism back then was wrong. What of their pessimism, now?

The Euro, many thought, would be launched in a time of prosperity helping Euro-zone economies stride through the currency's shaky baby steps, just in case it teetered.

Not so. Europe is not in recession, but neither is it booming.

Now, many analysts no longer see the economy as support for the euro, but the euro as support for the economy.

The whole idea of the currency union is that it will power the Euro-zone with new and unprecedented efficiencies, and it will, without question.

But the speed and size of the Euro-dividend remain matters of debate.

The lesson of 2001 is that booms don't last forever. The lesson of 2002 could be that recessions don't either.

There's nothing "new" about that.