Costly Oil, Weak Euro Deal a Double Blow to Europe Economy: Analysts say the intertwined problems could take a major toll on the Continent's growth.

By CAROL J. WILLIAMS, Times Staff Write

BERLIN--As international concern grows over the collapsing euro and soaring price of crude oil, the two events together threaten damage to Europe's economic health that could far outlast the effects of the recent blockades by angry truckers and farmers. The 11 European Union countries using the euro common currency are already reeling from a domineering dollar and rosy U.S. economic growth forecasts that are luring investors to the other side of the Atlantic. And with oil prices edging toward a stratospheric $40 a barrel, the euro zone faces further erosion of its growth expectations vis-a-vis the Americans, whose more technologically sophisticated industries are better prepared to weather the oil-price shocks. Because the U.S. economy has benefited from considerably higher investment in computers and conservation, its output is less dependent on oil than most European producers. And because oil is universally traded in dollars, the weak euro buys less oil than ever before, creating extra inflationary pressure. That makes the euro nations "a bit more vulnerable" to the ravages of the oil crisis, said Germany's deputy finance minister, Caio Koch-Weser. On Wednesday, an unexpected drop in German business confidence and weaker-than-forecast economic figures for Italy helped send the euro to an all-time low against the dollar for the eighth day out of 11. It dropped to 84.44 U.S. cents, from 85.2 Tuesday, before recovering slightly on talk the European Central Bank might have bought euros to prop it up. It closed at 84.6 cents in New York. The euro fetched $1.17 when it was introduced in January 1999. An economically weaker Europe will buy fewer goods from the United States and other nations, spreading its woes beyond the Continent and raising the stakes for the accelerating global energy turmoil. Some analysts expect continued downward pressure, especially if Denmark's voters reject euro membership in a Sept. 28 referendum--a prospect increasingly imaginable in the current crisis of confidence over the euro. Though the euro's poor showing against the dollar lifts the spirits of anti-euro forces, especially in Britain, economists on the Continent say the currency is being undervalued and its contributions to fostering competitiveness and efficiency among its users are being ignored. "The hard part is behind us already," said Wolfram Schrettl, chief of international economics at the German Institute for Economic Research here, dismissing the euro crisis as one more shaped by perception and emotion than performance and fact. Meanwhile, such blows to the euro zone's economic outlook may prove especially painful for the center-left governments in power, as conservative opponents can cast the leaders as insensitive to the suffering of the common consumer--the rank-and-file constituency that Labor and Social Democratic governments purport to represent. "All these center-left governments are already weak and they are going to feel enormous pressure from their populations, especially as we head into winter and heating oil prices also go up," said Catherine McArdle Kelleher, director of the Aspen Institute think tank here. Dusseldorf-based Westdeutsche Landesbank issued a revised national economic forecast last week estimating that the higher-than-budgeted oil prices will mean $11 billion more out of German consumers' pockets this year and $16 billion more than planned in 2001. The bank said that would mean 0.75% lower growth and would more than wipe out the $13 billion in tax relief due German wage earners next year--the first in which the benefits of this year's tax reform were to be felt. The attention-grabbing blockades in France, Britain, Spain, Belgium, Ireland, the Netherlands and to a lesser extent Germany uniformly demanded government action to lower gasoline prices that, largely because of high taxes, average more than $4 a gallon. This week, turmoil spread to Sweden and Norway. Despite concessions by France, Italy, Holland and Hungary, other governments are holding the line. Germany's so-called eco-tax on gasoline, which adds about 20 cents on the gallon, has political support because it is used to defray employers' social security contributions, thus creating jobs that have helped scale back unemployment from 12% two years ago to 9.5% at present. But analysts say the pressure on the euro from rising oil costs may chip away at euro-zone growth forecasts if prices remain at present levels, because EU government budgets were calculated with expectations of oil costing $26 per barrel. Euro-zone economic expansion had been predicted at a robust 3.4% next year, but if oil prices stay above $35 a barrel, at least half a percentage point may be shaved off that International Monetary Fund forecast, said Koch-Weser. But some economists say Europe is not as badly exposed to the oil crisis as competitors in the United States are wont to suggest. "If you compare the United States and Europe, I would say the country that wastes more resources is the one more vulnerable to the oil price rises," Schrettl said. "Europe may only be more vulnerable because the euro is not so well trusted yet as the dollar." Although sentiment has overwhelmed stability in other euro countries, German reactions to the fuel costs and their burden on certain industries have been relatively muted. Even trade union officials have joined the chorus of expert advisors urging no concession on the gas tax that subsidizes employment costs. And despite the recent surge, today's prices still look good compared with those of other products. "The emotionally heated fight over gas prices tends to obscure the facts," the Berlin daily Tageszeitung noted in a front-page story last week. It compared the rises in gasoline, bread and public transportation costs over the last 40 years, showing that the 230% increase for fuel measures up favorably against 500% more for bread and 1,000% higher bus and subway fares. Truckers, taxi drivers and farmers are the most adversely affected because they use so much fuel, but also because profit margins in those spheres are extremely tight, as is competition among the mostly small and medium-sized firms. The euro zone is also more sensitive to fuel cost increases because more of its goods are delivered by truck than in the United States. The Eurostat statistical agency reports 73% of freight travels by truck on the Continent, compared with 30% in the United States. Tax on gasoline consumed by the average 40-ton truck traveling 85,000 miles a year in Europe already costs its owner more than $18,000. Even with no change in the underlying price of gas, that will rise to nearly $20,000 in January, when the next phase of the eco-tax kicks in, the Federal Assn. of Truckers and Transport reported from Bonn. That extra cost will inevitably show up in the prices of products the truckers deliver, sending inflationary pressures through the economy. In arguing for tax relief, the industry association noted the French government's decision to appease strikers has put French truckers at a competitive advantage, lowering annual gas-tax costs from their current $17,200 to $13,700. On Wednesday, France called for a meeting of the EU, the U.S. and the Organization of Petroleum Exporting Countries to urge a boost in oil production to bring prices down.

http://www.latimes.com/news/front/20000921/t000089281.html

-- Martin Thompson (mthom1927@aol.com), September 22, 2000

Answers

ANkle bone connected to the knee bone. Knee bone connected to the hip bone. Hip bone connected to the neck bone.

-- Buck (bigbuck@trailways.net), September 22, 2000.