Western European economies, in the analogy of one Paris-based international economist, are like a plane on a runway waiting to be airborne. For several years the plane was stalled by the impact of the huge increases in world oil prices that occurred in 1974 and 1978-79. But with the gradual recovery of the last few years, the plane is racing down the runway.
”It hasn`t yet reached takeoff speed,” the economist said. ”But the push that it is getting from the current fall in oil prices may be enough to get it into the air.”
Western Europe, which has lagged behind the resurgent United States and Japan in economic growth and still has high levels of unemployment, is expected to be one of the principal beneficiaries of the trend that has so far brought a slide of about 30 percent in world oil prices, according to economists, bankers and stockbrokers surveyed in London, Paris and Frankfurt. The Europeans, they said, can look forward to more money in their pockets through further easing of inflation, lower interest rates, higher growth and slightly lower unemployment. But these blessings will not be available to all. Britain and Norway, both oil producers, will experience losses and gains; in Norway`s case, the losses may outweigh the gains.
Elsewhere in Europe, the Soviet Union–which derives a significant share of its dollar earnings from oil sales in the West–also will see its revenues squeezed by the fall in prices.
But the mood in much of Europe has changed markedly in recent weeks. A Paris-based economist said he noticed that ”people have stopped talking of Europessimism,” the name given to the melancholy that has gripped Europe in recent years as it has been unable to keep up with high-technology-paced growth in the U.S. and Japan.
”There is a change in the climate,” he said. ”Investment is picking up.”
But most economists say any suggestions that Europe is heading into an economic boom, the mirror image of the recession into which it plunged after the 1974 oil shock, would be wrong.
”What is happening now reinforces underlying trends, but it is not significant enough to start new trends emerging,” said David Osman, an economist with the London stockbrokers James Capel & Co.
Oil, he noted, is just one component in energy costs and it no longer has the importance it did in 1974, thanks to conservation and energy substitution measures that have occurred since then. He also pointed out that, while prices rose 15-fold as a result of the earlier oil shocks, the reduction so far has not been nearly so dramatic–only about one-third.
Finally, as he and other economists observed, the economic benefits to Western Europe will be cushioned somewhat by a decline in business they do with oil-producing nations because of enforced belt-tightening among the producers. But 65 percent of all Europe`s trade takes place within Europe, and that trade should be stimulated by lower oil prices.
J. Paul Horne, European economist for the U.S. brokerage firm Smith Barney, Harris Upham in Paris, agreed that benefits to Europe from low oil prices would not be dramatic. ”It would be out of order to refer to a boom,” he said. ”The lower oil price will help accelerate the moderate growth rate now underway and push it from a projected 2.5 percent this year toward 3 percent.
”But it will keep the current investment boom going in West Germany, the Netherlands, Belgium, Denmark and France. It is pretty good news for Europe.” The good news could be of particular political significance in France and the Netherlands, which will have national elections this spring. In both countries, the governing parties are experiencing political difficulty. But if benefits are not felt soon enough to influence voters` decisions, then they could be enjoyed by successor governments.
Trying to work out precisely what the fall in prices will mean for Europe is tricky because no one knows where the price of oil eventually will stabilize or what will happen to monetary policies. But, on the assumption of a $20-a-barrel price and unchanged policies, most economists believe European economies on average will get an extra 0.5 percent spurt to their growth rates.
All agree that West Germany, with the most robust economy in Europe, will be among the leading beneficiaries. Sources at the Dresdner Bank in Frankfurt said West Germany should save nearly $3.5 billion this year on its oil-import bill and economic growth, instead of a forecast 3 to 3.5 percent, should rise 3.5 to 4 percent.
These sources said the impact will vary for different sectors of the German economy. Construction, which is heavily dependent on contracts in the Middle East, already is in a slump as Arab oil producers cut back on building projects and this slump is likely to be accelerated, they said. German machinery exports to the Middle East also will be hurt, they said, but such sectors as petrochemicals and transportation will benefit from lower oil prices.
French Prime Minister Laurent Fabius has projected a more hopeful outlook for his country`s economy from the oil price fall than most independent economists foresee. Fabius said France will get an additional 1 percent economic growth this year, to 2.5 or 3 percent. He said the trade account will save between $5.5 billion and $8.3 billion, mainly because of the reduction in the oil bill.
The French inflation rate, he said, could be down to 2 percent by the end of 1986, compared with a targeted 2.5 percent.
At the other end of the scale, the most significant impact of falling oil prices for Britons is that they will not get a $4.97 billion tax cut promised for this spring. The Financial Times estimates the government will have less than $1.4 billion available for tax cuts. But Keith Skeoch, chief economist for James Capel & Co., said the oil-price fall has ”effectively obliterated” hopes for a tax cut this year. Every $1 decline in oil prices, he said, costs the treasury $500 million in oil taxes, and right now revenues are expected to be down by $4.2 billion.
The Royal Bank of Scotland has made a similar forecast and has suggested Britain might soon find cooperation with the Organization of Petroleum Exporting Countries, aimed at cutting production and shoring up prices, an
”increasingly attractive option.” Bank economist Alex Salmond said:
”Those who keep their heads when all around are losing theirs often don`t realize how serious the problems are.”
Skeoch said the government could be forced to hike interest rates to stop the sterling exchange rate from falling and this would have a negative impact on growth. He said growth this year could be 0.1 percent below previous expectations but may rise next year by 0.1 or 0.2 percent above what it would normally be.
Last October, Chancellor of the Exchequer Nigel Lawson was emphasizing that benefits to Britain from North Sea oil would last into the next century. But professor Alan Budd of the London Business School suggested this time frame has been shortened by the oil price fall. In terms of revenues, the economy is now where it might have been five or six years from now when oil supplies start to dwindle, he said.
The British Treasury has tried to dismiss the threat to its planned tax cuts by saying lower oil prices will achieve the same effect. It says the effect of lower prices for the North Sea oil Britain produces will be broadly neutral and possibly slightly beneficial.
But oil accounts for only 6 percent of Britain`s gross domestic product and 8 percent of its exports. In Norway, oil represents 20 percent of national income, 11 percent of government revenues and 36 percent of exports. Experts say tax revenue from oil could be halved to $3.03 billion this year and investment in new oil fields could be threatened.
The Soviet Union, which derived nearly 60 percent of its export earnings from oil in 1983, also stands to suffer. Western experts said the Soviets could lose more than $3 billion in hard currency earnings from the price decline.
Soviet oil production has been declining in the past two years but still accounts for 63 percent of its trade with the West. Western Europe in particular bought 84 percent of Soviet oil sold for hard currency in 1984. The earnings are used to buy equipment, technology and food from the West.
James Capel & Co. has studied the likely consequences of lower oil prices for four European countries over the next three years and has come up with the following picture:
— West Germany: Growth this year will be 0.9 percent higher than expected, and in 1987 and 1988 it will be up by 1.4 percent. The exchange rate of the Deutschemark will appreciate by 1.2 percent this year and 1.7 percent subsequently, making West Germany more attractive for investors. Unemployment, now at 9.2 percent of the work force, will go down by a tenth and consumer prices will fall 2.3 percent.
— France: The impact on growth will not be as great as elsewhere because France, with a large network of nuclear power plants, is less dependent on imported oil than most countries. No spurt to growth is expected this year and by the third year it will only be 0.5 percent. Similarly, there will be only a small decline of about 15,000 in the ranks of France`s 2-million-plus unemployed. Consumer prices will fall 3.3 percent in 1986 below earlier expectations and 4.9 percent in 1988.
— Italy: Growth will not be affected in 1986 but will get a boost of 0.5 percent in 1988. Inflation, currently running at 8 to 9 percent and well above the rate for most of Europe, will be shaved by 1.9 percent this year and 6.8 percent by 1988. Unemployment, now at 10.3 percent, will fall only by about 17,000 by 1988.
— The Netherlands: A boost to growth of 0.5 percent will occur this year, rising to 0.7 percent in 1988. Inflation will be down 1.6 percent in 1986 and 3.7 percent in 1988. The unemployment rate of 15.5 percent, one of Europe`s highest, will be only marginally reduced over three years.
Smith Barney, Harris Upham projects a rise in domestic demand in Western countries of between 0.6 and 0.8 percent this year and another 0.5 percent next year. It estimates inflation will fall by one percentage point in each of these years and interest rates could decline significantly.
The London stockbrokers Phillips & Drew believe France`s 1986 inflation rate, estimated at 3.75 percent by the Organization of Economic Cooperation and Development, could be cut by 2.8 percent if oil goes down to $18 a barrel. At $21 a barrel, the decline would be 1.7 percent, the company said.
Colin Robinson, professor of economics at the University of Surrey in England, suggests the current fall in oil prices actually will lead to higher prices later. He said consumption will rise and investments in all forms of energy will be depressed, giving rise to expectations of scarcity in the future. So producers will hold their oil underground for sale at higher prices later and, as supplies contract, prices will go up.
