How Europe Survives A Financial Crisis

At the end of the race between the tortoise and the hare, at least as the 17th Century French fabulist Jean de La Fontaine told the tale, the terrapin cries out, "I won! And what would have happened if you'd been carrying your house on your back!"

As the world's economies slog toward the still-not-quite-visible end of the crisis, Europeans are hoping they'll be able to make a similar boast to the Americans. And thus far, going slow and steady, it looks as if they just might win this marathon, or at least set a useful example. Sure, the U.S. economy is known for being faster off the mark, unfettered by the accumulated weight of what some would call the welfare state or, God forbid, "socialism." But it's also been the first to crash. And in hard times, Americans are left looking, sometimes rather desperately, for shelter. In continental Europe, especially as the French and Germans see it, the shell is really the secret of long-term success, offering protection from the ferocious storms in the global economy and allowing society to keep functioning smoothly.

Of course, we should drag out this metaphor only so far, but even the hitherto insouciant jack rabbits of laissez-faire capitalism are starting to look at the continental models more closely. The British, who jettisoned much of their burdensome carapace in the Thatcher years, are so chagrined by their current woes that the free-market bards of The Economist recently wrote a paean to É France! So, too, The Wall Street Journal. Lo and behold, they've discovered that French and German workers, even the unemployed ones, are still able to lead decent lives, free of want, free of fear, and with enough left over to buy lunch and go to the movies.

Yet, to understand how this race is playing out, it's not enough just to describe the pricey protections—the universal health care, the generous unemployment benefits—that are the roof and supports of the European economies. The essential difference with the United States lies in attitudes toward government spending and borrowing, a difference that is especially important today, as trillions have become the new billions. "Americans look at debt more as wasteful expenditure, whereas the Europeans look at debt more as an investment," says Felix Rohatyn, the distinguished banker who helped save New York City from bankruptcy in the 1970s and served as the U.S. ambassador to France in the 1990s. "The Americans by and large look at the government as the enemy."

The result in the United States was apparent even before the current crisis. Across the country, government-funded infrastructure has been crumbling. "The nation is falling apart—literally," Rohatyn writes in his recent book, Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now. The spirit of government enterprise that purchased the Louisiana Territory, built the Erie and Panama canals, brought electricity to rural communities and gave GIs college educations after World War II—all those public endeavors that contributed so much to the success of private enterprise seem to have been forgotten.

President Barack Obama is trying to turn those attitudes, and that situation, around. But you know how it is in Washington and on Wall Street. Words like "socialism" are tossed out as epithets, and it's hard to change gears. For at least 30 years Americans have been taught that Europeans are sentimentalists out of touch with the real world, squandering funds on bleeding-heart solidarité with the indigent—and indolent—while piling taxes on the business people who just want to make an honest buck, or euro, as the case may be.

Like all caricatures, there's some truth in that picture. But basically it misses the point. And that, to return to Rohatyn's word, is "investment." As Europeans tend to see things, governments spend money to acquire assets, both tangible and intangible. This isn't socialism, it's more like Accounting 101 or a corporate report: a reasonable balance sheet. At the national level, the assets might include highways and bridges, air-force bases and nuclear reactors. Add to that the government shares in massive corporations like Électricité de France that actually can be sold, in part or in whole. Harder to price but just as important are intangible assets like a well-educated population, police and courts that have the trust of the public and assure orderly life and commerce; and, yes, health care, and, yes, generous (by American standards) unemployment insurance and welfare payments. These are not measurable on stock-market tickers or at auction, but they are real. You might write them up as good will.

At a time of economic crisis, all these elements work together—or they should—and, for the most part in modern Western Europe, they have. So, to use an oft-cited example, people being laid off in Europe do not need to be terrified of getting sick. The social order does not break down. Schools remain open. Commerce continues. There are protests, to be sure, but they pale by comparison with past revolutions in a continent that has deep memories of apocalyptic upheaval. Even the recent spate of Òboss-nappingsÓ in France, where workers took over corporate offices and held executives more or less captive, were essentially about getting better payouts from foreign-owned factories they knew would close anyway. In short, they were about exploiting the system, not exploding it.

French President Nicolas Sarkozy, whose relentless energy has been compared to the drum-beating bunny in battery advertisements, came to office in 2007 preaching the Anglo-Saxon-style gospel of less government and lower taxes. But the experience and responsibility of office have led him to appreciate the wisdom of the old European tortoise. Not only does he talk about looking at national debt compared with national assets, he's even started to re-think that core indicator of prosperity, the growth of gross domestic product.

In 2008, Sarkozy called on American Nobel laureate Joseph E. Stiglitz to head a commission looking at what might be called the real wealth of nations. "Sarkozy felt there was a tension between what citizens were asking him to do about the environment, noise pollution and all these other quality-of-life issues, but also the pressure around maximizing GDP," says Stiglitz. "They seemed to be inconsistent with one another, but he felt they shouldn't be. So, we thought we'd try to get a better way of measuring growth, one that would take into account all these factors."

Measuring the intangible assets for what amounts to a revolutionary accounting project is "extremely difficult," Stiglitz says, "but it's conceptually correct. We don't yet have a new kind of metric that can replace GDP, but what we want to do is start a conversation around this issue. Governments have a misguided way of accounting that looks only at debts, rather than also incorporating assets."

None of this is to suggest that it's better to borrow than not, or that all government investments are made wisely. Many developing countries have shown what happens when massive borrowing is squandered on ill-conceived projects. The burden of servicing the debt starts to impinge, and in some cases overwhelm, every effort to deliver the services and security—the intangible assets—that governments are supposed to provide.

Before the crisis, when French state debts were topping 66 percent of GDP and the United States was in the same range, leaders including Sarkozy were concerned that the burden would weigh on France's ability to compete. But several French economists, among them Anton Brender in books like France Confronted With Globalization, argued that the perspective changed radically if you compared debts to assets. As late as 2007, France's government debts were billions of euros less than its tangible assets alone.

As one French economist put it, speaking privately, even in Europe many commentators talk about the amount of debt each child is going to be born with. But they rarely talk about the amount of assets he or she inherits as part of a modern Western society. Europeans sometimes forget just how well off they are: "The income of a jobless French person," Brender wrote," is very much higher than most of the workers in the world!"

Which brings us to the critical question of consumption. Such is the relatively relaxed public mood in Europe that there are sometimes stunning displays of nonchalance. As the global economy looked like it was in total free fall a couple of months ago, Le Parisien, a popular daily paper with a mainly working-class readership, ran this headline across its front page: it's time to think about summer vacation. But Americans, looking at such examples, tend to miss the most important economic point. In European systems where you can still be a consumer even when you lose your job, the economy keeps cranking, cushioning the fall for everyone.

With U.S. unemployment at 8.9 percent, which exceeds France with 8.3, many Americans feel their backs are to the wall. Unemployment insurance varies from state to state, but generally kicks in later and terminates sooner than in Europe. A study at the University of Connecticut tried to calculate a "generosity index" comparing the U.S. with other industrialized countries. The Americans are way down the list, not only in terms of the unemployment compensation they earn, but, most strikingly, the potentially catastrophic impact of medical expenses. Add to that the problem of pensions that are tied to equity and bond markets: when the markets are tanking, the unemployed in the United States see their long-term as well as short-term future in jeopardy. The effect is to make Americans want to save in a crisis, not spend. And so the crisis risks getting worse.

One of the ironies of the current situation is that the Americans, who have been critical of the Europeans as spendthrifts for years, now knock them for not spending enough. Because the Europeans already have a protective system in place, extensive bank regulation and much less dependency on easy credit to keep consumers spending, they have had less interest than the Americans, and less need, to pour massive amounts of money into the financial system. And one place where the Europeans do not spend nearly so much money is on their militaries. The United States spends more on defense than all other nations in the world combined: more than half a trillion dollars a year. And that doesn't include the roughly $2.5 billion a week spent on the wars in Iraq and Afghanistan. While all that may prime the pump in some states and at some companies, it hardly has the same impact as healthy consumers who can keep spend-ing even when they lose their jobs.

So, what's the moral of the tale? In the real world it shouldn't be about winners and losers, in fact. It should be about the hare who learned a thing or two from the tortoise, then kept on going strong.