- The Washington Times - Wednesday, April 1, 2009

VIENNA (AP) - Europeans and Americans don’t always see eye to eye _ and how to solve the global financial crisis is no exception.

Across a continent long accustomed to big government and high taxes, many Europeans are counting on generous welfare benefits to shield them from the worst of the meltdown. Others worry that loosening interest rates would lead to devastating inflation.

In the American view, the economic house is on fire, and only quick and decisive action will put out the flames. Europe is not quite as ready to pull the alarm.

“The social security system is definitely better in Europe than in the States,” Florian Schnabl, a 32-year-old financial consultant in Vienna, said Wednesday. But he was hedging his bets: “Who knows if countries here will react as well as the U.S. to the crisis.”

For all their talk of coming together at this week’s summit of the G-20 economic powers in London, European leaders have been openly skeptical of corporate bailouts and massive U.S.-style stimulus spending.

As the G-20 leaders gathered, two new projections forecast more economic turmoil worldwide. The World Bank predicted the global economy will contract by 1.7 percent this year. A separate outlook by the Organization for Economic Cooperation and Development was even more bleak, projecting a 2.75 percent slump worldwide.

And economists warn this is probably just the beginning. Some analysts, such as former International Monetary Fund chief economist Simon Johnson, worry that if Europe keeps dragging its feet it could risk a rerun of the Great Depression or worse.

Still, in much of the European Union, there are fears of taking on yet more public debt _ and having to rescue neighbors in addition to foundering banks and struggling industries.

Germany in particular is still bailing out what was once an entire country: the former communist East, which is reeling from high unemployment despite billions spent in the two decades since the Cold War ended.

And German Chancellor Angela Merkel pointed out Wednesday her nation had already approved programs worth $106 billion to get the economy moving. “We have made a gigantic contribution,” she said.

France and Germany are leading a European drive to tighten the regulation of financial markets in an effort to prevent the kinds of excesses that pushed banks worldwide into insolvency.

Looming at the London summit, French Foreign Minister Bernard Kouchner warned, was a confrontation between “two worlds: one that wants more regulation, and the other that wants less.”

Yet at the heart of the rift between the U.S. and Europe over how best to dig out of the crisis is a long-standing clash of economic philosophies.

Europeans historically have enjoyed comprehensive social safety nets that offer jobless workers years of unemployment benefits and uninterrupted health insurance.

Those welfare programs are expensive _ in Austria, individual income tax runs as high as 50 percent _ but they already do much of what the Obama administration is proposing to achieve through fiscal stimulus.

And Europeans differ from Americans in other key ways: They save far more cash, and generally don’t max out on their credit cards.

That helps explain why Czech Prime Minister Mirek Topolanek, whose country holds the rotating presidency of the 27-nation EU, last week denounced Washington’s deficit spending as “the road to hell.”

“The Europeans think there’s a danger of overdoing it,” said Johnson, the former IMF chief economist, now a professor at the Massachusetts Institute of Technology’s Sloan School of Management.

“Their feeling is, `We’ll get through this,’” he told The Associated Press in a telephone interview. “Germans, for instance, are just not that worried about unemployment. They think their fiscal system can take care of it.”

Poorer countries such as Greece, Portugal and Spain are much more vulnerable, Johnson added.

Johnson and other experts suggest Europeans are too preoccupied with the long view when the global economy needs urgent action, specifically lower interest rates to stimulate growth.

“What’s amazing to me is that the real key to this crisis is monetary policy _ and it’s not even being discussed” at the summit, Johnson said.

French President Nicolas Sarkozy has been more receptive to the idea of deeper public spending _ in part because more than 1 million workers have taken to the streets in recent weeks to demand it.

But Germans are wary of spending money they don’t have, said Stefan Schneider, an analyst at Deutsche Bank AG.

Merkel’s “grand coalition” of conservatives and center-left Social Democrats has long made a top priority of balancing Germany’s budget and reining in the budget deficit.

Germany, Europe’s biggest economy, is leery of losing control of its national deficit, feeding its hesitancy to expand stimulus spending, Schneider said.

“You have to tackle the question of whether it’s enough. You have to look at how the future economic trends pan out,” he said.

And even though inflation is at an all-time low in Europe, many Germans fear a return of the kind of hyperinflation that took hold after World War I, which people were forced to use barrels of cash to buy basic necessities.

In the back of many Germans’ minds, Johnson said, “almost every year is 1923.”

“The Germans are very afraid of inflation,” Roman Fuertig, 34, a government worker, said Wednesday while walking through a Berlin park. “It already happened here. It’s clear when we are very indebted the only option is inflation.”

“We’re not as hard-hit at the moment as the U.S. or England or many other countries. But we’ll be hit harder later on indirectly because we’re an export nation,” he added. “Raising taxes or shrinking social benefits would be hard.”

On the streets of the Austrian capital, there was an air of uncertainty despite a generous welfare system that kicks in when things go wrong.

“I think everyone is scared of the crisis and job losses,” said August Baldassari, a 34-year-old energy worker. “No matter where they live.”

___

Associated Press Writers Veronika Oleksyn in Vienna and Matt Moore, Geir Moulson and Rachel Nolan in Berlin contributed to this report.

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