My understanding is that in loser-pays as it is actually practiced in Europe, the courts limit the fees paid by the loser to reasonable and customary levels, an

My understanding is that in loser-pays as it is actually practiced in Europe, the courts limit the fees paid by the loser to reasonable and customary levels, and don't look kindly on parties that inflate their legal costs. Still, I think you're right, if one is not fairly confident of winning, loser-pays provides additional incentive to settle. I don't see this as a bad thing, personally.