European commentators have revealed a certain degree of smugness in the last few months. Yes, the United States will have a recession, they say (they are, unsurprisingly, more willing to admit this than U.S. commentators) but it won’t affect us here in Europe.

Instead, Europe will have a higher growth rate than the U.S. in 2001, and this will prove that the European model works.

Sorry, guys, but this recession’s for you too. But it will arrive about six to nine months later.

For a start, those Europeans who scoff at NASDAQ’s 60 percent decline and mutter about American investors’ incurable taste for speculation should take a look at Frankfurt’s Neuer Markt, the German stock exchange for the new and the high tech. Since its peak in March 2000, the NEMAX 50 index of Neuer Markt stocks is down not 60 percent, but 84 percent. As that doesn’t sound much worse, let’s put it the other way up: To get back to its peak, NASDAQ would from Friday night’s close (the bottom so far) have to rise by 167 percent. The Neuer Markt, to get back to its March 2000 peak from Monday night, would have to rise by 512 percent.

The French Nouvel Marche, similarly, closed Monday down 75 percent from its March 2000 high, in other words, it would have to rise around 300 percent to regain the levels of a year ago.

Thus the Internet bubble, supposedly a U.S. phenomenon, was even more inflated in France and Germany. As in the United States, the New Economy in France and Germany was grossly overvalued a year ago.

We demonstrated last week that the Old Economy, in the form of the Dow Jones Index, was still overvalued by close to 100 percent; is this also the case in Europe?

Look, therefore, at the major European stock markets. The Morgan Stanley Capital International Indexes for each country are uniformly based to Dec. 31, 1991, a point just more than nine years ago when both Europe and the United States, and their stock markets, were close to the bottom of a modest but significant recession. From that point, in national currency, the German market was up Friday by 165.7 percent, the French market by 199.3 percent, the Spanish market by 258.2 percent, and the Italian market by 178.7 percent, all of them greater rises than the United States’ 165.2 percent from that date. The Swedish market, up 326.8 percent, the Dutch market up 309.0 percent and the Finnish market, up an astounding 1369.8 percent, have all performed much better than the U.S. Market. Only in the United Kingdom, up 126.0 percent, of the major European stock markets has significantly under-performed the U.S.

Yet European economic growth has been lower than in the United States. Nominal Gross Domestic Product (the appropriate indicator, when looking at nominal stock prices) in the United States grew by 67 percent from 1991 to 2000.

Germany’s nominal GDP over the same period grew by 25 percent, France’s by 42 percent, Italy’s by 50 percent, and Britain’s by 59 percent.

If the stock markets have gone up more than in the United States, and economic growth has been lower, then, as they all started at a roughly comparable base, it must follow that the stock markets in Europe are currently even more overvalued than in the United States.

Hence Europe is likely to suffer a negative wealth effect similar to that rippling through the United States as I write.

Since Europe starts from a similar basis of asset overvaluation as the United States now and Japan in 1990 (even greater overvaluation than the U.S. in the case of premium real estate, as I discussed a few weeks ago), it is thus likely that Europe will suffer a similar fate to Japan in the 1990’s and the United States in the 2000’s (whatever the latter fate will be).

In terms of the differences in trade balance, budget balance and savings between Japan and the United States, Europe generally has a less favorable budget balance than the U.S. or 1990 Japan, it has a savings rate somewhere between the two extremes, and it has a balance of payments position roughly in balance, as compared to the U.S.’s structural deficit and Japan’s structural surplus.

There are of course a number of special factors in Europe’s case relating to the European Union. On the positive side, the Single European Market, still far from completion in many areas, has the potential to increase the efficiency of resource allocation and thereby produce growth.

EU enlargement, on the positive side, will produce substantial new markets for EU goods, as well as pools of cheap but highly skilled labor that can be used to generate new industry.

On the negative side, EU regulation, almost always imposed in addition to rather than instead of national regulation, is a huge drag on economic growth which will become worse in a recession, when regulators can regulate and tax faster than cash-strapped businesses can escape.

Even EU enlargement is not wholly positive. That ’giant sucking sound’ which Ross Perot heard when NAFTA was signed could really appear in the less efficient bits of Western Europe as jobs migrate to the equally skilled, but lower wage and often better regulated East.

But there can be no question that in a big recession the tendency in Europe towards Keynesian stimulation through government spending will be irresistible. Europe already has a far larger government sector than the United States, or than Japan even now, and it has leftist governments in all its major countries except Spain. Hence a Europe which sank into recession would indulge its governments in an orgy of pump-priming, both at the national level and, no doubt, at the EU level.

The destination for such a Europe is clear: Sweden.

We’re not talking about the successful mixed economy Sweden of 1936-76, where heavy social programs were funded by the entrepreneurial genius of Marcus Wallenberg, whose fortune was left untouched by a concordat with long-term Socialist prime minister Tage Erlander, whereby Erlander could oppress the middle classes while Wallenberg ran the economy and enjoyed a life of luxury funded by his family foundations. No, Europe’s destiny is the Sweden of 1990, (Wallenberg died in 1982) with government spending a staggering 72 percent of GDP, a heavily negative growth rate, and a bankrupt banking system.

In the short term, of course, the Eurocrats are right. The Euro has been weak, so European economies are relatively strong, especially those long standing lands of layabouts Ireland and Greece, both propped up by EU subsidy.

Even for 2001 as a whole, it is possible that European GDP will exceed that in the United States, though a feckless Greenspan and a cautious Duisenberg may disrupt this prediction. Nevertheless, as the U.S. stock markets decline, so will those in Europe, and toward the end of the year these negative wealth effects will start to show, probably in rising unemployment, as is normal in the Euro-sclerotic EU. At that point, the social spending machines will crank into action, public sector finances will be thrown overboard, and the European Commission and those European governments that are still socialist will begin an increasingly desperate effort to make water run uphill.

In Europe, even more than in the United States, the solution to the 2000’s recession will be to cut taxes, cut especially the size of the public sector in relation to the economy as a whole, adopt a rigorous cost benefit analysis for both EU and national regulation, and strictly enforce the principle of subsidiarity whereby the EU is prevented from regulating matters best left to individual countries.

If this is done, then the benefits of Europe’s huge single market, to be enlarged by entries from central Europe over the next several years, would allow economic growth to resume and Europe to emerge, maybe more quickly than Japan has or the United States will. However, one cannot put a high probability on such a solution being adopted.

The 2000’s, in short, are likely to be as unpleasant for Europeans as for Americans. Only countries which can simultaneously elect anti-statist governments and reject the dead hand of ever-increasing EU taxation and regulation are likely to escape. Italy, under Silvio Berlusconi, would have a chance to be one such country. Britain, under a re-elected Tony Blair, probably won’t be.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.