The shadow of ``the crash'' is lengthening. After stocks first plummeted last week, European economists argued that their countries could avoid long-term economic damage. Some still do. But with European markets continuing to plunge, the dollar falling, and predictions proliferating of an imminent American recession, many have lowered their earlier estimates.
``We've drawn up two new scenarios, an optimistic baseline scenario and a total-disaster scenario,'' says Evelyn Brodie, an economist at the London-based investment bank of Morgan Grenfell. ``If the policies go wrong, it could become a real recession.''
``The impact [of the market crash] on the European man on the street may be limited, but the confidence of European businessmen is shaken,'' explains J.Paul Horne, a Paris-based economist with a major investment firm. ``The growth spurt we expected in Europe in 1988 simply won't happen.''
Poor financial signals this week are fueling the new pessimistic outlook. The dollar has dropped against European currencies, prompting further declines on European stock exchanges. On Wednesday, the US currency stood at 1.75 against the mark, a seven-year low, and stock prices dropped sharply. Yesterday, the Paris stock market closed down 9.6 percent for the day, Frankfurt down 5.3 percent, and London down 2.7 percent.
Taken alone, the European stock market problems are not as serious as those in the United States. Analysts point out that markets here are smaller than in the United States; 1 out of 10 Frenchmen owns stock, versus 1 out of 5 Americans. And European stock prices have fallen less than have American prices.
For these reasons, government officials throughout the Continent have refused to lower their optimistic predictions of economic expansion. In West Germany, for example, Finance Ministry officials say no policy change is needed to ensure a moderate annual growth rate of 2.5 percent in coming years.
``The market turbulence does not reflect our true economic situation,'' insisted one official in Bonn. ``As far as we can see ahead, conditions look good.''
But others do not share this optimism. Even if European small investors did not lose as much as their American counterparts, analysts fear the fallout on European businessmen. Mr. Horne of Smith Barney, Harris Upham & Co., predicts a decline in business investment throughout Europe.
Further problems could lie ahead. European exports to the United States are expected to fall if the dollar continues to weaken or the American economy slows. For every percentage fall of American growth, economists say European exports diminish by about 0.6 percent.
``Economists who were predicting 2 percent growth next year now say American growth could fall to minus 1 percent,'' says Gavin Davies of London's Goldman Sachs Investment Bank. ``If that happens, European economies will lose 1 percent of their own growth.''
The effect will not be felt evenly. Stronger European economies, such as those of West Germany and Britain, have scope to increase their own consumption. But nations with more fragile economies, such as France and Italy, with large public debts and delicate trade balances, can do little on their own to make up for the lost exports.
``France and Italy have no room for maneuver,'' notes economist Davies, ``but both German and the UK are in a fairly good position to ride out the problems.''
This situation results in pressure on Germany. French financial officials are pushing the Germans to to ease their tight monetary and fiscal policies. Britain, which lowered its interest rates this week, is also upset.
``What is required in current world circumstances is neither a lurch into protectionism or undue monetary tightening,'' said Nigel Lawson, British chancellor of the Exchequer. ``It would certainly be helpful if the German monetary authorities were to show more obvious awareness of this.''
But West Germany refuses to lower its interest rates. West German officials argue that they already plan a 14 billion-mark tax cut for Jan. 1. Any greater stimulus, German analysts say, risks raising Bonn's budget deficit and its inflation rate.
``I don't see Germany changing its policies. It would be too disruptive to increase tax cuts and lower interest rates,'' says Alfred Regele, an economist at Vienna's Creditanstalt Bank.
What happens next in the US is perhaps even more important than what happens in Europe. Although European analysts welcome President Reagan's newfound willingness to raise revenues to cut the American budget deficit, they remain skeptical about the outcome of his current negotiations with Congress. Even worse, they fear a burst of US protectionism.
``In my baseline case, the US government reduces its budget deficit - let Reagan call them revenue enhancements if he can't use the word tax - and Germany eases its monetary policy,'' says Ms. Brodie, the Morgan Grenfell economist. ``In the disaster scenario, they continue the wrong policies. There's no budget agreement, the Fed [US Federal Reserve] cuts interest rates in response to signs of an American recession, the dollar collapses, the American trade account deteriorates, protectionist pressure grows, and Europe follows by itself falling into recession.''