The Next to Fall? Europe.(European economic conditions)(Brief Article)

In the late 1990s, no European moneyman could meet with U.S. Treasury Secretary Larry Summers, among others, without enduring a lecture on the virtues of American capitalism as compared with their own pathetic markets. And their only defense, in the face of Nasdaq, was to mutter darkly, "Wait till the bubble bursts, then we'll see..."

Fast forward to 2002. Europe's dream of revenge has become its nightmare. The U.S. bubble has indeed burst. Stock markets are down half or more. CEOs are led away in handcuffs. Voters doubt the virtues of unbridled capitalism. Everything a schadenfreude-loving European could want has happened.

Except, Gott-in-Himmel, that European markets are getting trashed even more soundly than American markets. Worse, it's not just equities. European companies face a massive credit crunch, bringing lending to a screeching halt, throwing banks and insurance companies into crisis and, ultimately, saddling Europe with the prospect of a Japanese-style deflation.

What a spectacle! Just weeks ago the European Central Bank was talking about a rate hike. Suddenly, a cut's more likely. The rebounding euro now looks set to reverse. And from big insurance companies, which had been lending like crazy, come weak assurances that, never fear, they'll survive. Probably, anyway. Could it be that after funding the long- running U.S. bubble by sending trillions across the Atlantic, and after patiently waiting for the overly aggressive Americans to run themselves on the rocks, the Europeans will be the ultimate losers in the Meltdown of '02?

The answer is yes. And that's because markets are not punishing risk and restructuring and flexibility. They are punishing the sins they punished in the Asian financial crisis of 1997 and in the long-running Japanese economic disaster--too much debt, opacity and crony capitalism.

Start with debt. When the bear market started 18 months ago, European smugsters said the United States was in deeper trouble because of the extensive "equity culture" in America compared with the "debt culture" in Europe. And it's true, so far as it goes. Because more Americans own shares than do Europeans, they've been harder hit. But there's an ugly flip side to this euro. Thanks to that same "equity culture," coupled with America's love affair with venture capital during the '90s, U.S. corporations are saddled with a lot less debt than European companies. So while the market's fall has cut their valuations, they're not struggling to repay massive loans in their efforts to stay alive. Unlike Europe.

The damage is compounded by the fact that what few equities did get issued in ...