Why U.S., Europe are divided

VIENNA — 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 U.S. 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, 32, a 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 more bleak, projecting a 2.75 percent slump worldwide.

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

In much of the European Union (EU), there are fears of taking on more public debt and having to rescue neighbors in addition to foundering banks and struggling industries.

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

German Chancellor Angela Merkel said Wednesday that her nation had 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."

At the heart of the rift between the United States 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 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 U.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 said 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 suggested 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.

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.

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

In Vienna, the Austrian capital, there was 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, 34, an energy worker. "No matter where they live."