(FORTUNE Magazine) – The American economy is striding into its 49th month of expansion, coming off a year in which it grew 4.1%, unemployment fell to 5.4%, and profits, investment, and exports all boomed. Americans nevertheless seem pretty underwhelmed by their economic situation. For a different perspective, consider how it must feel these days to be European. In Europe the recession came later (1993 in most countries), and the recovery--just starting --is already stumbling. Overall economic growth in Western Europe was 2.5% in 1994 and will peak a bit higher than 3% this year and then fade, says DRI/McGraw-Hill's forecast.

Look beyond the current business cycle in Europe and what you see are impediments to growth and signs of economic strain. Most European nations do just as wretched a job managing their tax and spending policies as we do. Some do a whole lot worse. More ominous, unemployment is running at around 11% in Europe. That's twice as high as in the U.S., and it looks ever more like a permanent feature of the economic landscape. No wonder there's pessimism. A survey of European business leaders last fall found that 26% thought Western Europe would decline more than any other region in the next 15 years.

For all the fuss America makes about its spendthrift government, the $203 billion U.S. budget deficit last year came to 3% of GDP, about half the average for larger European countries. Total government debt as a percent of GDP in the U.S. is only about 65%. While that's high for us, it's not so high next to the debt levels of European nations. Belgium is most in hock, with debt at 142% of GDP, and Italy and Greece are close behind. Sweden, the Netherlands, Ireland, Finland--all have notably bigger shares of debt outstanding than the U.S.

As economists in the U.S. never tire of telling policymakers, deficit finance not only bequeaths the bill for current spending to future generations and creates a drag on growth but can also cause more immediate problems. Persist in borrowing unwisely, and at some point the world's debt markets will tell you to stop. Just how nastily that game plays out is being demonstrated today in Italy--a European poster boy for fiscal irresponsibility. Italy's numerous governments have borrowed and spent with such abandon that they've run the national debt up to 123% of GDP. The annual budget deficit is something like 9% of GDP. International investors are rightly scared by this and will buy Italian paper only at junk-bond rates (recently about 13% for ten-year bonds). But paying such high interest rates increases government spending, which worsens the budget deficit, which . you get the idea. A recent report on Italy by Merrill Lynch summed up the outlook with its three-word title: "No Way Out."

Unemployment is the other specter haunting Europe. Through the 1950s, 1960s, and 1970s, unemployment rates were lower in Europe than in the U.S. Average unemployment in the European Community, for instance, was 3.7% in the 1970s, vs. 6.1% in the U.S. Beginning in the 1980s, however, European joblessness has grown consistently worse. By 1993 the EC average had soared above 10%. Unemployment in France seems stuck above 12%. Worst of all is Spain, with an unemployment rate of 24%. "Think about it," says Allan Meltzer, an economist at Carnegie Mellon University and the American Enterprise Institute. "You have three-quarters of the work force carrying the other quarter on their backs."

Economists see two reasons for the new European unemployment: One is the well-padded safety nets that many countries have built for workers, which create incentives for the unemployed to stay that way. The other is the rococo structure of regulatory and legal rigidities that makes it hard to do business in Europe. So-called employment-protection laws, for instance, make it expensive and difficult for employers to fire people. An unintended consequence: Companies are less willing to hire workers in the first place.

America should learn two lessons from Europe's problems. The first is that we're right to be worried about the budget deficit. We have a way to go before we arrive at an Italianate state of fiscal moribundity, but we are riding down the same road. Second: The flexibility and dynamism of U.S. industry is worth defending. Things like minimum-wage laws, unfunded employer mandates, and new benefits that require higher payroll taxes--virtuous though they may be--have costs that can outweigh their benefits.