American cousins think financial engineering is economic salvation. They don't seem to mind that if manufacturing keeps moving offshore -- devestating

How Europe Avoided Our Mess | Robert Kuttner | May 5, 2008

The credit crisis, which is sapping America's economic strength, was the result of an almost religious belief in deregulation. It is instructive to consider the economic situation in nations that resisted deregulation.
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None of this had to happen. The credit crisis, which is sapping America's economic strength, was the result of an almost religious belief in deregulation whose excesses are now coming home to roost.

It is instructive to compare the American financial mess with the economic situation in nations that resisted deregulation. Old Europe tends to get a scornful press in the U.S. But Europe is not suffering a financial meltdown today -- mainly because Europeans (with the exception of Britain and Switzerland) took only a few sips of the financial Kool-Aid so heavily promoted by U.S. banks.

A few European banks did get into trouble last summer, because they had been persuaded to buy toxic sub-prime securities made in America. Germany's powerhouse Deutsche Bank continues to suffer some big losses. But the European Central Bank, in its first real test since the Euro made its public debut in 2002, has performed well and the crisis has largely passed. On our side of the ocean, the Fed keeps lurching from bailout to bailout.
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Europe also has high domestic savings rates and balanced trade accounts with the rest of the world. Europe, unlike the U.S., is not increasingly in hock to China. The high Euro, the flipside of the cheap dollar, protects the European economy from inflation. And despite using an expensive Euro that has appreciated 60 percent against the dollar in six years, Germany is running record trade surpluses.

How can that be? As German Chancellor Angela Merkel once twitted Britain's then Prime Minister Tony Blair, "Mr. Blair, we still make things." By contrast, the Brits and their American cousins think financial engineering is economic salvation. They don't seem to mind that if manufacturing keeps moving offshore, which is devastating for the trade balance.

In a recent interview, Germany's Gunter Verheugen, the vice-president of the EU, told me, "We need a strong and competitive industrial base in order to have a strong service economy. Don't try to be cheaper. Try to be better. Don't try to compete on low social standards."

So as the U.S keeps trying to contain a needless crisis caused by an extreme faith in financial engineering, the Europeans have kept their heads and a more balanced form of capitalism. While Europe has its own debate about the right balance between market innovations and social protections, there is little enthusiasm for taking more lessons from market-besotted Americans who have managed to sink what was once the world's strongest economy. The main worry is how much contagion from America will spill over onto Europe.