Dancers at Vienna's traditional Opera Ball in February 2010. The economic crisis is barely visible in the capital, despite a major banking crisis. (Photo by Herwig Prammer/Reuters.)

VIENNA, Austria – It should have been Austria’s winter of discontent. Its super-sized banking sector is in crisis, economic growth remains stagnant, its former Communist trading partners are struggling, and the European Union has been battered by the Great Recession.

But you wouldn’t know it walking the streets of the capital, where fur is still in, empty storefronts and homeless people are rare, and the metro trains run on time and with a frequency astounding to Americans.

“Politicians and analysts and economists like myself are certainly aware of the situation the Austrian banks are facing, but the ordinary people in the streets do not seem very concerned about this,” says Franz Hahn of the Austrian Institute for Economic Research. “We have trust in the capability of the Austrian government to resolve any problem that might occur in this area. Maybe it sounds irrational, but that’s the case.”

That faith in government is perhaps the signature difference between the European and American socio-economic models, both of which have been put through vigorous stress tests by the global economic downturn. While the Viennese put their trust in public institutions in times of crisis, many Americans rally against government interventions in health care or financial sectors, and regard the words “Socialist” and “Socialism” as pejoratives. 

But how have Europe’s social democracies weathered the global economic crisis? Has it shaken their citizens’ faith in the European Way?

The European system, with its generous social welfare protections, universal health care, and inflexible labor market, gives government a much stronger role in regulating the economy and protecting citizens when things go wrong. Its myriad critics argue that these social protections interfere with the genius of the free market, reducing incentives for hard work and drowning the entrepreneur in a mire of taxes and regulation, yielding a moribund society with high unemployment and a citizenry frustrated in their pursuit of happiness.

A year and a half after the collapse of Lehman Brothers brought the world to the edge of financial oblivion, experts give Europe’s social welfare model mixed reviews. It performed relatively well in the short-term, sparing citizens much of the pain and stress that Americans experienced, but the verdict is still out on its overall response to the crisis.

“It’s almost certainly the case that the job loss in nearly all European countries has been much lower than one would have expected given the depth of the recession,” says Iain Begg of the London School of Economics’ European Institute. “The social protection system acts as an automatic economic stimulus, alleviating the symptoms of a major shock without having to be pushed through a Congress or parliamentary body.”

“The sting in the tail is what happens when an upturn really gets going,” he cautions. “In fairness to the American model, it could turn around and create jobs at a comparatively fantastic rate.”

U.S. seasonally adjusted unemployment has more than doubled over the past year, jumping from 4.8 percent to 9.7 percent, according to the Bureau of Labor Statistics. The comparable rate for Germany, Europe’s largest economy, has stayed nearly flat at 7.8 percent, while France’s jobless rate has crept from 7.3 percent to 9.8 percent. Such comparisons appear to confirm the conventional wisdom that Europe has less booming booms and less busted busts.

But the situation is a bit more complicated, according to Daniel Gros, director of the Centre for European Policy Studies in Brussels. Unemployment, he argues, is a crude indicator of economic happiness, a quality better measured by adding statistics of consumption. The resulting “happiness index” gives a different result: an almost identical performance among the U.S., the 16 Eurozone economies, and the 27-member European Union as a whole. All have slumped badly to reach the same point on the index.

“If you look at the European average, it doesn’t look too different from the U.S. average,” notes Gros. But there’s a catch: “You find hardly any country in Europe that’s ‘average.’ ” Countries like Germany, Sweden, and Denmark that avoided a real estate bubble experienced little change in their happiness index during the Great Recession, while those that did (Spain, Greece, and Ireland, for instance) got hit very badly.

“It doesn’t really matter if you are a socialist state or a free market economy, it really depends if you had a real estate boom,” he adds. “In a normal business cycle, things in Europe might look more smooth than in the U.S, but in this crisis [social, labor, and regulatory policies] make less of a difference.”

Nonetheless, the crisis has shown that the European approach is by no means inferior to the American one, says Andrew Watt, senior researcher at the Brussels-based European Trade Union Institute. The Great Recession, he points out, wasn’t caused by rigid labor markets, powerful trade unions, or over-generous welfare states, but rather by deregulation of the financial sector, macroeconomic policy failures, and a “naïve reliance on market forces.”

Once the crisis burst, Europe’s social protections have kept the peace, and labor market protections have allowed the industrial base “to weather the storm,” he argues. “Generally speaking, given the worst recession since the 1930s, it’s amazing how calm things are in most of Europe,” says Watt. “Here you don’t lose your health insurance when you lose your job; your kids still go to college; and if you become ill you don’t wipe out your savings. The level of security is one of the fundamental differences from the U.S., and in a crisis it really comes to the fore.”

After years of being lectured about the shortcomings of their system, many Europeans initially enjoyed America’s comeuppance when its deregulated financial system nearly destroyed itself, recalls Czech economist Tomas Sedlacek, who served as an economic advisor to former President Vaclav Havel. “That stopped short once the crisis hit Europe in exactly the same manner,” he notes.

If anything, the crisis has brought the continents closer together, as both sides realize they share a financial system so interconnected that firms can be destroyed by the failure of one of their competitors.

“They’re like the elf and the dwarf who became friends because they had to face a shared crisis in Mordor,” Sedlacek says. “They became friends even though they hated each other in the beginning.”

http://www.globalpost.com/passport/foreign-desk/100407/did-old-europe-win-the-great-recession