The Best Is Yet to Come.(Global Investor)

Byline: Holger Schmieding; Schmieding is head of European economics at the Bank of America.

The Anglo-Saxon habit of borrowing against the house to buy a second car is all but unknown in much of Continental Europe.

Be careful what you wish for. since 1999, central bankers in Continental Europe had pushed for a strong euro. In the past few years, they also urged more attention to market risks. Both wishes have now been granted. The euro is trading at a record high to the U.S. dollar. And markets are now so fixated on risks that banks are becoming more reluctant to lend. Add exploding oil prices to the mix and it is easy to see doom and gloom ahead for the European economy. But that would be premature. Financial turbulence could be a prelude to a European recession if policymakers mishandle the situation badly or if the turmoil reveals a major underlying problem. This was the case in 2001, when we learned that much of the dotcom boom was based on dreams rather than realistic revenue projections. Other periods of turbulence, such as the mini-crash of 1987 triggered by U.S. and German interest rate hikes and the gyrations of 1998 after the collapse of a major U.S. hedge fund, caused no more than a temporary dip in European growth.

So far, euro policymakers have reacted well to the recent upheaval. The European Central Bank has postponed a rate hike and injected generous amounts of liquidity into the markets instead. More important, Europe does not have a major underlying problem. The risk that the eurozone could be heading for a U.S.-style housing crisis looks remote.

Also, eurozone consumers did not go on a U.S.- or U.K.-style borrowing binge. Debt levels have risen, in some countries substantially. But unlike Britons and Americans, Continental Europeans stuck more to the traditional sort of debt. The Anglo-Saxon habit of making mortgage-equity withdrawals -- taking out a second or third extra mortgage on the rising value of a house to buy a second car and another fancy dress -- is virtually unknown in much of Continental Europe.

This is not to say that the next year will be smooth sailing. The money-market disruptions could still force European banks to tighten their lending standards significantly until mid-2008. After years of sluggish growth in domestic demand in their European home base, some banks may have comparatively vulnerable balance sheets. The European Central Bank's latest survey of bank lending foretells tighter credit conditions to come. In July, only 7 percent of eurozone banks wanted to impose tougher conditions on credits to corporates in the next ...