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The fallout of America’s sub-prime mortgage crisis goes beyond the economic realm. More than even its military failures in Iraq, the decline in America’s economic fortunes has damaged its global standing, as well as the attractiveness of its political and economic model in the eyes of many Europeans.

Even for sympathetic observers, the events that led up to the sub-prime crisis are hard to believe. Just a few years after the New Economy bubble burst, the Federal Reserve created another bubble by keeping interest rates artificially low. As housing prices soared, thousands of low-income families were lured into buying their homes with loan offers that looked highly attractive — but only at first sight. Banks took on credit risks that every reasonable loan officer would reject, because they knew they could unload the foul loans on investors dazzled by the mystique of new securities that nobody really understood. Rating agencies, supposedly the guardians of financial solidity, gave their blessing to turn junk into gold, and money managers all over the world jumped in, believing the fairy tale of high returns at low risks.

When interest rates started to rise last year, housing prices tumbled, loan holders defaulted and the whole house of cards had to collapse. The virus of sub-prime loans infected Wall Street, as well as European banks, and now is threatening to throw the global economy into a recession.

The narrative of the current financial and economic crisis is by now well known and even quite well understood even outside financial circles — another tale of greed and recklessness gone awry. Most Americans accept it as an aberration, a sad but probably unavoidable aspect of capitalism. In Europe, however, and in other parts of the world like Latin America, there is a growing strand of thinking suggesting that capitalism, or at least its Anglo-Saxon variant, is inherently flawed.

Partisans of this position argue that the strength of the American economy over the past two decades has been a chimera, a credit-fueled consumer boom that could never last. They see the decline of the once-almighty dollar against the euro as a sign of change in the global economic hierarchy. And they note that features of the European economy that were long maligned are suddenly becoming a role model for American players. They observe that when it comes to energy efficiency or universal health insurance, Europe is now looked to as a model.

All that is well enough, but there is another more pernicious idea lurking in the background. The countries with the strongest growth rates in recent years have been from the emerging world, and in particular China and Russia.

While the two giants have followed different paths to development, the leaders of both countries strongly believe in a dominant role of the state in the economy. Perhaps it is state capitalism and not the free market that will come to dominate the global economy in the 21st century, so the argument goes. And perhaps it is time for European countries and the European Union to abandon the American mantra of free markets, free trade, privatization and lightly regulated financial markets and return to a state-centered economic policy.

As public opinion in various European countries rallies against the spread of sovereign-wealth funds from Asia and the Middle East that are eyeing their national champions, the hostility is mixed with respect and even admiration for these new global economic players. In contrast, nobody in Europe is showing much admiration these days for American banks or car companies.

While this view seem attractive at this moment, it is also incorrect. Russia’s current prosperity is based solely on high oil and gas prices and will quickly fade if energy prices fall. China is an economic success story, but it remains overall a poor country suffering from huge problems such as corruption, pollution and social injustice. The true economic powerhouses will remain the advanced industrialized countries in North America and Europe. This will be the case for decades to come.

Yes, the United States is in a slump due to its sub-prime follies and may drag the whole world into recession. But when the next upswing starts, it will act again as the world’s main economic engine. The main asset of America and Europe is still a commitment to free markets, combined with such virtues as efficient government, good governance and democracy. So if Europeans think they can learn a lesson from any of the less liberal and more authoritarian powers, they will threaten their own prosperity in the longer run.

Americans are only responsible for their own economic successes and mistakes, not those of others. But as the global superpower starts to clean up the regulatory mess left behind the latest era of financial excesses, it should be aware that giving capitalism a bad name is a costly affair.

Eric Frey is managing editor of the Vienna daily Der Standard.

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