I'm concerned about Europe. Actually, I'm concerned about the whole world -- there are no safe havens from the global economic storm. But the situation in Europe worries me even more than the situation in America.
Just to be clear, I'm not about to rehash the standard American complaint that Europe's taxes are too high and its benefits too generous. Big welfare states aren't the cause of Europe's current crisis. In fact, as I'll explain shortly, they're actually a mitigating factor.
The clear and present danger to Europe right now comes from a different direction -- the continent's failure to respond effectively to the financial crisis.
Europe has fallen short in terms of both fiscal and monetary policy: It's facing at least as severe a slump as the United States, yet it's doing far less to combat the downturn.
On the fiscal side, the comparison with the United States is striking. Many economists, myself included, have argued that the Obama administration's stimulus plan is too small, given the depth of the crisis. But America's actions dwarf anything the Europeans are doing.
The difference in monetary policy is equally striking. The European Central Bank has been far less proactive than the Federal Reserve; it has been slow to cut interest rates (it actually raised rates last July) and it has shied away from any strong measures to unfreeze credit markets.
The only thing working in Europe's favor is the very thing for which it takes the most criticism -- the size and generosity of its welfare states, which are cushioning the impact of the economic slump.
This is no small matter. Guaranteed health insurance and generous unemployment benefits ensure that, at least so far, there isn't as much sheer human suffering in Europe as there is in America. And these programs will also help sustain spending in the slump.
But such "automatic stabilizers" are no substitute for positive action.
Why is Europe falling short? Poor leadership is part of the story. European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent. And to hear anything in America comparable to the know-nothing diatribes of Germany's finance minister you have to listen to, well, Republicans.
But there's a deeper problem: Europe's economic and monetary integration has run too far ahead of its political institutions. The economies of Europe's many nations are almost as tightly linked as the economies of America's many states -- and most of Europe shares a common currency. But unlike America, Europe doesn't have the kind of continentwide institutions needed to deal with a continentwide crisis.
This is a major reason for the lack of fiscal action: There's no government in a position to take responsibility for the European economy as a whole. What Europe has, instead, are national governments, each of which is reluctant to run up large debts to finance a stimulus that will convey many if not most of its benefits to voters in other countries.
You might expect monetary policy to be more forceful. After all, while there isn't a European government, there is a European Central Bank. But the ECB isn't like the Fed, which can afford to be adventurous because it's backed by a unitary national government -- a government that has already moved to share the risks of the Fed's boldness and will surely cover the Fed's losses if its efforts to unfreeze financial markets go bad. The ECB, which must answer to 16 often-quarreling governments, can't count on the same level of support.
in other words, is turning out to be structurally weak in a time of crisis.
The biggest question is what will happen to those European economies that boomed in the easy-money environment of a few years ago, Spain in particular.
For much of the past decade Spain was Europe's Florida, its economy buoyed by a huge speculative housing boom. As in Florida, boom has turned to bust. Spain needs to find new sources of income and employment to replace the lost jobs in construction.
In the past, Spain would have sought improved competitiveness by devaluing its currency. But now it's on the euro -- and the only way forward seems to be a grinding process of wage cuts. This would have been difficult in the best of times; it will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.
Does all this mean that Europe was wrong to let itself become so tightly integrated? Does it mean, in particular, that the creation of the euro was a mistake? Maybe.
But Europe can still prove the skeptics wrong, if its politicians start showing more leadership. Will they?