American Humble Pie

Is it just that I’m a touchy American, or do I detect a hint of schadenfreude in the voices of my European friends these days? First that New Economy icon Enron, then swashbuckling empire builder WorldCom and now even sad old, out-of-step Xerox — each new revelation of creative accounting and vastly overstated earnings is another blow to the credibility of corporate America. The prospects for a robust recovery in both the stock market and the economy are looking dimmer. Americans are not only poorer than we were — or thought we were — just a couple of years ago, we are also painfully disillusioned and more than a little frightened. But I don’t expect any of this is likely to elicit much sympathy from Europeans. What they may be thinking instead is: It couldn’t have happened to a nicer bunch of fools.

Which would be perfectly fair. All through the late, great 1990s bull market, Europeans had to put up with a lot of patronizing guff from America’s go-go capitalists. In my years as an investment-fund analyst and financial journalist in the States, I spent much of my time interviewing American money managers who ran European equity portfolios. This was not usually considered a job for Wall Street’s best and brightest — I know one asset management firm that chose its Europe fund manager because he vacationed in France — and in truth European mutual funds were a tough sell to U.S. investors when the S&P 500 was notching double-digit returns every year. These managers’ favorite pitch was that Europe was just like America, only five years behind. Investors would make a fortune once Europe learned to embrace deregulation, private pensions, flexible labor markets (read: hassle-free layoffs), looser merger-and-acquisitions rules, stock options, and greater transparency in their financial reports. (Yes, you read that last one right.)

In fact, Europe has come a long way toward the American model of capitalism. Much of this has clearly been to the good: liberalization has gone hand-in-hand with the development of a single European market and currency, creating a 300-million-consumers-strong economic rival to the U.S. In Britain, unemployment has reached once-unimaginable lows, while in France privatization has transformed ailing industrial giants into competitive global players. But the costs of this transformation are real. Whenever an Italian finds herself worrying about the security of the job she’s held for 15 years, or a Frenchman passes by yet another McDonald’s where a pâtisserie used to be, or a Londoner stands on a crowded rail platform waiting for a privately owned train that isn’t coming, they may naturally wonder if the old European economy was all that bad. That something in the vaunted U.S. version of capitalism seriously stinks just underlines the point. Maybe Europe can do it better, after all.

Yes, but … While it’s become obvious that the American economic miracle was partly based on smoke and mirrors, this isn’t enough to open the door to a new era of European economic dominance. I remember a lot of clever people (most of them Germans) telling me in 2001 that as America reeled from the dotcom implosion, the slow and sensible European economy would emerge as the new driver of global growth. Instead, many of Europe’s key economies (particularly, um, Germany’s) have stalled without strong U.S. growth. It’s true that investors have been shifting assets out the U.S. and into Europe, pushing up the euro, but much of that dosh is simply going into money-market instruments — that is, cash. Investors haven’t lost faith in U.S. stocks. They have lost faith in stocks, full stop. Vivendi, France Telecom and Deutsche Telekom haven’t broken the rules, but that doesn’t make them safe havens.

American managers aren’t genetically more dishonest than Europeans — remember Robert Maxwell? And though Americans may be able to learn something from European accounting rules, higher standards mean little to those who set out to deceive. The real reason Enron and WorldCom happened in America and not in Europe is that the incentives for fudging were simply that much greater in a country where half of all households are investors. America’s army of small shareholders stood ready to bid up companies’ shares, and lavish their CEOs with silly money, as long as they could produce 15%-plus earnings growth. Europe is still in the early stage of developing such a shareholder culture, and maybe now it doesn’t really want one. Yet while we may see liberalization slow, I doubt Europe is ready to reverse course. We’ve finally learned the U.S. doesn’t have all the answers, but we’re still waiting for better ideas.