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Europe's Economy Gaining Speed as It Shifts Gears

June 11, 2000|JAMES FLANIGAN

The New Germany Fund, which holds stocks of small and fast-moving companies on Germany's version of the Nasdaq, has risen 37% in the last year in trading on the New York Stock Exchange.

The Central European Equity Fund, which holds shares of Polish, Czech and Hungarian telecommunications companies, among others, also trades in New York and is up 17.6% in the last year.

These funds, managed by Deutsche Bank, are just two of many run by various investment houses that are devoted to investment in Europe, including "emerging Europe," a term embracing countries ranging from Poland to Turkey.

European companies, too, are reaching out to U.S. investors. BASF, a large German chemical company, listed its shares on the New York Stock Exchange last week. Siemens, the Munich-based giant of European electronics and telecommunications, will list next year.

The higher visibility of European companies and institutions on the front lines of global investment reflect profound economic and social changes going on in the old continent.

And those changes have particular meaning for American and foreign investors and businesspeople, especially as the U.S. economy slows its growth in the next year or two.

"Europe is at the beginning of a long cycle of strong growth after a disastrous performance for most of the '90s," says Eric Chaney, a Paris-based economic analyst at Morgan Stanley.

Economic growth is speeding up to 3% and more a year in France, Germany and most other European countries, which are revving their economies in order to unite under one currency, the euro. That may not look fast compared with the recent U.S. pace, but it's a whirlwind compared with Europe's stagnation of the last decade.

The euro had a rocky first year or so, falling in value against the U.S. dollar. But it has made a comeback in the last two weeks on perceptions that trends are turning positive.

A look at trends and companies reveals a new continental economy in its formative stage.

Taxes are still high. Direct and indirect taxes can take as much as 60% of the average European worker's pay. "But there are serious moves to bring down personal taxes to encourage consumers," reports economist Edward Yardeni of Deutsche Banc Alex. Brown, a U.S. investment arm of the German bank. Capital gains taxes are already coming down to encourage mergers and restructuring among companies and banks.

Unemployment remains high, above 9% for France, Germany, Italy and Spain. But today's unemployment reflects job changing more than economic stagnation. Contract and temporary employment are growing in Europe as it adopts U.S.-style flexible work arrangements. "European companies are reforming the old social compact, which promised cradle to grave security," says economist William Rhodes of Williams Capital Group, a New York investment firm.

Europe's exports are rising, particularly to the countries of emerging Europe, the catch-all phrase that refers to Poland, the Czech Republic, Hungary, Romania, Bulgaria, Greece, Turkey and the war-torn lands of the former Yugoslavia. More European Union exports now go to those countries than to the United States.

Such a range of countries can present a confusing picture. So investment companies look for opportunity by focusing on telecommunications, which is a growth business in every society.

Major holdings of mutual funds run by Merrill Lynch and other investment firms include Magyar Tavkozlesi, or Matav, the Hungarian telecommunications company, Cesky Telecom, of the Czech Republic, and Telekomunikace Polska, of Poland.

Those East European countries have educated, skilled workers in abundance, a great advantage for modern industry. That's why Siemens, Volkswagen and many other German companies have set up modern factories there.

European high-technology companies are listing shares on international markets. Fresenius Medical Care of Germany, for example, is the world's largest maker of kidney dialysis machines for home and institutional use. Its shares trade on Frankfurt's Nasdaq-like Neuer Markt.

STMicroelectronics, a French semiconductor giant, supplies the world's telecommunications and automotive industries, yet is not well-known to Americans. The company was formed from the merger of Saint-Gobain and Thomson Electronics, which bought RCA Television operations in the 1980s.

Europe's ambitious insurance companies, Allianz of Germany which bought Pimco of Newport Beach last year, and Axa of France, are growing to be global powerhouses.

Serious economic needs and historic ambitions underlie Europe's efforts to change. First, the countries of the European Union need economic growth to pay for retirees in their aging societies.

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