Sub-prime not seen halting Europe's economy

By Brian Love - Analysis

PARIS (Reuters) - Even if the credit boom ends and financial markets can no longer count on a cheap, plentiful supply of funding, Europe's economy looks set to continue performing strongly.

The view of most economists is that consumption, investment and production should not suffer unduly if a renewed sense of fear in markets pushes credit costs upwards.

Despite renewed trader fears of contagion from the crisis at the high-risk end of the U.S. home loans market, these economists do not predict a genuine credit crunch and are keeping disaster scenarios in their bottom drawer.

Instead, they largely agree with European Central Bank chief Jean-Claude Trichet's argument that an upward re-pricing of risk was expected and even desirable after years of perhaps overly carefree financial market investments.

"We share the ECB's implied upbeat view of fundamentals for the next year or so, and we do not believe that credit markets hold the power to derail this otherwise orderly slowdown," U.S. investment bank Goldman Sachs said on Friday.

There was news this week of Europe's first notable casualty from exposure to the U.S. sub-prime lending market. German banks had to pool 3.5 billion euros in rescue money to cover potential losses at one of their peers, IKB.

The message from officials such as Trichet and from the IMF is one of reassurance. Trichet has flagged another interest rate rise in the euro zone for September and the IMF had just raised its European and global growth forecasts.

The International Monetary Fund now expects global GDP to rise 5.2 percent this year and next. It raised its forecast for this year from 4.9 percent only a week ago, just when market jitters over U.S. sub-prime troubles were reaching fever pitch.

The latest Reuters quarterly poll conducted between July 9 and 16 found economists predicting growth in the 13-nation euro zone in 2007 would match the six-year high of 2.7 percent achieved seen last year.

GLASS HALF-FULL

Jacques Cailloux, chief Europe economist at RBS bank, says business confidence, rather than consumer confidence, is where Europe would be vulnerable if the situation deteriorated badly.

The euro zone's economy, he argues, chiefly owes its rebound of last year and continued strong performance this year to private sector business investment, although such investment is only a quarter of the volume of consumer spending.

Cailloux estimates it would take a 10 percent drop in share prices before companies, cash-rich from years of rising profit, would might start postponing investment plans or hiring.

"Consumer confidence is even less responsive," he added.

How economists rate the risk of economic damage in Europe also depends on whether they believe Europe will catch a cold if the United States sneezes. Goldman Sachs says the rise of Asia and return of Europe has taken much of the meaning out of that old adage.