Europe Worries About a 1970s-Style Oil Shock

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.

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.

New York Times