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Europe Worries About a 1970s-Style Oil Shock

Europe Worries About a 1970s-Style Oil Shock

Juan Medina/Reuters

Truck drivers blocked a highway in Madrid this week in a protest against rising fuel costs.

Published: June 14, 2008

FRANKFURT — In Europe, where the tight credit market has caused less havoc than in the United States, fears are focusing on another economic bogeyman: a 1970s-style oil shock.

Gordon Brown, the prime minister of Britain, and Jean-Claude Trichet, the president of the European Central Bank, have both warned about the dangers of a new oil shock to Europe.

Soaring fuel costs have incited strikes by fishermen and truck drivers from Spain to Scotland. Blockades have paralyzed highways outside Madrid and Barcelona. And with deliveries of auto parts disrupted across the Continent, Volkswagenshut down a car plant in Portugal on Friday.

Fears that the spike in oil prices might start an inflationary spiral were reinforced on Friday when the European Union released figures showing that hourly labor costs jumped sharply in the first quarter, and are growing at their fastest pace since early 2003.

A similar ripple effect occurred after the first oil shock in 1973, and it left Europe with a legacy of inflation and stagnation that took a decade, and a painful recession in the early-1980s, to banish.

“The historical memory of the first oil shock is much stronger for Europeans than for Americans,” Daniel Yergin, the chairman of Cambridge Energy Research Associates, said. “For Americans, the memory is of gas lines. For Europeans, it was the end of their postwar economic miracle.”

He and other experts caution against overstating the comparison between 2008 and 1973. Europe, they say, is better equipped to absorb these kinds of shocks than it was 35 years ago — with a sturdy, shared currency, an independent central bank, and more flexible, open economies.

Still, with growth slowing at the same time that wages and prices rise, there are unsettling similarities.

“There is unrest among workers, who today, as in the 1970s, feel they have been shortchanged,” said Holger Schmieding, chief European economist at Bank of America in London. “They have to spend more money on fuel, so they have less to spend on other things, and they want to be compensated.”

The sharp rise in labor costs, economists said, all but guarantees that the European Central Bank will lift interest rates next month, as it signaled it might last week. A rate increase, they said, would be a stern warning to unions not to use inflation to extract hefty raises from employers.

During a news conference in Frankfurt, Mr. Trichet offered a brief history lesson to underscore that the bank would not repeat the mistakes of its forebears by reacting too slowly to inflation.

“In Europe,” he said, “you can date from the first oil shock the start of much lower growth and mass unemployment. A large number of economists are also saying that, and I trust that governments that have the memory of these shocks are very lucid as regards the dangers.”

Prime Minister Brown has called for a coordinated global response to rising oil prices, and wants it to be a “top priority” at a meeting of leaders of the Group of 8 industrial nations in Japan next month. The French president, Nicolas Sarkozy, proposed cutting taxes on gasoline.

But political leaders have relatively few options to curb the price of oil, which is why most of the focus in Europe has been on the central banks — and in particular on the European Central Bank.

After surprising markets last week by signaling that it might raise rates in July, the bank spent this week reassuring investors — through comments by Mr. Trichet and other members of its governing council — that it did not plan to embark on a new round of rate increases.

“They rocked the boat at a very fragile moment,” said Thomas Mayer, the chief European economist at Deutsche Bank. “It was like you were in the kitchen with the gas cap leaking, and somebody lit a match.”

Beyond the issue of how the bank communicates, Mr. Mayer said he worried that raising rates would aggravate the slowdown in Europe. He said he also doubted that monetary policy could dampen wage increases, particularly in countries like Spain, that index wages to inflation.

Mr. Mayer is among those skeptical of analogies to the first oil shock. Deutsche Bank drew up a list of factors that were present in Europe in the 1970s — lax fiscal policies, powerful unions, politically weak central banks, protectionist trade policies and so on — and found that in almost every area, Europe is more open and flexible today than in the 1970s.

That makes stagflation — the combination of inflation and stagnation that gripped Europe after the first shock — less likely this time, here or in other advanced economies, Mr. Mayer said.

With less muscular unions, wage inflation is not yet a problem across Europe. While labor costs in Spain rose 5.7 percent in the first quarter of 2008, they slowed in France and Germany. Recent wage agreements for public-sector workers in Germany may yet drive up its numbers.

The European Central Bank’s response to oil prices, Mr. Mayer said, reminded him less of the 1970s than of the German hyperinflation of the 1920s, which helped create the inflation-fighting Bundesbank, the German central bank that heavily influenced the European bank.

“The E.C.B. has had a very Bundesbank-like reaction,” he said, adding that in the 1970s, the Bundesbank “got it right.” and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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