With the euro on the rise against the US dollar, the European Union is worried that its exports may become too expensive to stay competitive. The only hope for the struggling region to rebound is continued growth abroad, mainly in America and Asia, writes Farah NayeriEurope is banking on the United States and Asia for economic growth, leaving the region vulnerable to a decline in exports that might kill its recovery.

　　"Europe is a follower rather than a leader at the moment," said Matthew Cobon, head of currency fund management at Deutsche Asset Management in London, whose 87 billion euros (US.2 billion) in assets make it the United Kingdom's second-biggest institutional investor. "Growth is reliant on external factors: It could roll over if the US and Asia roll over."

　　Third-quarter exports helped end a contraction in the 12 countries using the euro, spurring expansion of 0.4 percent, the fastest in five quarters. Sales to the United States, China and India should boost growth in 2004 at Siemens AG, Germany's largest electronics company, Chief Executive Heinrich von Pierer said last week.

　　Exports generate about a fifth of the US trillion economy of the euro region. The US buys about a fifth of those. A slowdown in US consumer spending once tax cuts run their course may curb corporate investment and demand for European products.

　　The risk is that the euro, which has risen 17 percent against the dollar in the past year, may make European exporters' goods much more expensive for dollar customers. In addition, US consumers, who account for 70 percent of the economy, may scale back spending, as might the Chinese.

　　"American consumers are shopped out: They've been visiting the mall day in and day out for the last five years, and there's a limit to how much they can do," said Paul Donovan, a global economist at UBS in London.

　　For now, America and Asia are giving the European economy a boost. A US.7 trillion package of tax cuts helped propel US third-quarter growth to a 19-year high of 7.2 percent, leading consumers and companies to spend. US imports of cars, parts and engines, chips and computer equipment, and consumer and electronic goods rose in September to US.4 billion.

　　China's economy, meanwhile, grew 9.1 percent in the third quarter from a year before. September imports from Europe alone totaled a record US.9 billion, almost twice what they were three years ago. The dozen euro nations produce 13.1 percent of China's imports, according to France's second-biggest asset manager CDC-Ixis. That's good news to many European executives.

　　"We expect the US economy will develop positively in the run-up to the American elections: We could reach nice growth there," said Siemens's von Pierer, adding that the company has US billion in sales and 70,000 employees in the United States. "We won't only grow in the US, but also in China - we're strongly focused on China - and India."

　　Earnings at some of Europe's biggest companies reflect the export revival. Deutsche Telekom AG last week raised its full-year profit forecast, saying the company's counting on its US wireless unit for growth. LVMH Moet Hennessy Louis Vuitton SA said third-quarter sales at its Louis Vuitton luggage unit rose more than 20 percent in America and Japan, fueling optimism about the fourth quarter.

　　Smaller companies are noticing profits, too. "We've seen demand pick up in the third quarter, particularly in the US, which is always the growth engine in our industry," said Mario Carraro, chairman of Carraro SpA, an Italian exporter of parts for farming and construction machinery, whose clients include Caterpillar Inc, the world's largest maker of construction equipment. "That's put a smile on our face for 2004."

　　Exports are also powering national growth rates. The German economy expanded 0.2 percent in the last quarter, helped by a record September trade surplus. France's economy grew 0.4 percent, the fastest rate in five quarters.

　　Italy, Europe's fourth-largest economy, grew 0.5 percent in the third quarter, putting recession behind it. Exports were the reason.

　　Autogrill SpA, the world's largest manager of airport and highway restaurants, said US sales helped push third-quarter pretax profit up 47 percent.

　　Exports aside, Europe's big economies show scant evidence of internal growth. "We will see a rather slow-moving recovery," European Central Bank council member Matti Vanhala said. "From investment and consumers, there really have been no major positive surprises."

　　In Germany, the region's largest economy, where unemployment increased to a 4 1/2-year high earlier this year, retail sales haven't risen since June. "We still don't see the recovery we keep reading about in newspapers," said Wolfgang Reitzle, chief executive of Linde AG, Europe's largest maker of forklifts, referring to Germany.

　　France will barely grow this year, with the European Commission projecting 0.1 percent expansion. Consumer spending, which generates half of gross domestic product, the value of all goods and services, stalled in the second quarter. Unemployment rose to a 3 1/2 year high of 9.7 percent in September.

　　"Europe is still very difficult, especially France and Germany," Johann Rupert, executive chairman of Cie Financiere Richemont AG, the world's No 2 luxury-goods maker, said.

　　In the past decade, the economies in the dozen nations that share the euro have never achieved above-trend growth without outside help, according to Patrick Artus, chief economist at CDC- Ixis, France's second-biggest asset manager.

　　It was the euro's 20 percent drop in its first two years that led the region to post decade-high growth in 2000. It was the drop in interest rates to historic lows that sparked a building boom and expansion in southern Europe.

　　However, the rest of the world may not always be able to provide the economic impetus. The US trade deficit reached a record US billion in March and was not far from that level - at US.3 billion - in September. The broader current-account gap held at a record in the second quarter, making the United States hungry for foreign capital to fund the shortfall.

　　While the US currency's drop is helping to narrow that gap, "there comes a point when decline after decline in the dollar ceases to be just a nice, neat mechanism," said UBS's Donovan. "The US is doing well, but not well enough: If you want to be borrowing that much money, you need to have a phenomenal performance."

　　Some executives say they're concerned. "I hope the United States' rebound can last long enough to give Asia and other parts of the world enough momentum for things to sort themselves out," said Richemont's Rupert. "The United States cannot continue to run a trade deficit in excess of 5 percent: It isn't sustainable."

　　Growth in the other engine of global expansion, China, will probably slow from an estimated 11.5 percent this year to 7.4 percent in two years' time, according to UBS. That means less cash to spend on other people's exports.

　　Admittedly, interest rates in the euro nations are at a postwar low of 2 percent. Stock markets, mirroring the United States, are up across the board: Germany's benchmark Dax Index is up 30 percent this year.

　　Still, Europe may stall again - unless it generates growth itself by loosening labor markets and cutting back on pension and welfare spending, said strategists including Andrew Hornig of F&C Management Ltd in London.

　　Germany is cutting state retirement benefits and raising the average retirement age to 63 from 60 by 2008 to alleviate the budget deficit and pension spending. France is inducing workers to retire later and pay into their pension plans longer. The government is also cutting jobless benefits and bringing forward US billion in tax cuts.

　　"The outlook for the coming months will be dependent on whether we will be able to correctly implement urgently needed reforms in both tax and labor policies," said Werner Wenning, chief executive of Bayer AG, Germany's No 2 drugmaker, in a telephone interview. "I am actually optimistic and expect additional growth stimuli for our German and European operations."

　　By 2005, the effects of those welfare overhauls should start to trickle down into European growth rates, economists say. Until then, the hope is that growth in America and Asia will keep driving economic expansion in Europe.