Now, I'm not quite sure that I agree with Gerics' classification of Observers as "keepers of the spirit", but they sure as hell aren't destroyers of it.
In one sense, having them is like locking your front door: it helps honest people stay honest, but it doesn't deter professional criminals. I like to think that people obey the rules because the rules themselves are good and you ought to behave well, but if a little fear of penalty keeps them honest, well, I can live with that, and can even pretend that it's still basic honesty that is doing it.
Where the Europeans get this wrong is in the apparent belief that everything's a judgment call to be made only by the player(s) involved in the call (on my more right-wing days, I'd blame the left for their cowardly "moral relativism", but it's not one of those days, so 97% of you don't have to roll your eyes). I can still remember a game at Worlds in 1996 against Belgium or Holland where one of their players landed clear as day on the line, directly in front of half a dozen teammates. If this happened to an "unspirited" US team, there is no doubt in my mind that the team would call him out (maybe not every player, but enough to make it happen). But all our pleadings did to this European team was to make them avoid our eyes even more and to keep their mouths even tighter.
The player who landed out may have truly believed himself to be in, but what kind of a moral system is it if he is unable to ask people with better perspectives what they say? Americans place much more emphasis (rightly, of course (little smiley face)) on getting the call right, rather than worrying about hurting the bad caller's feelings or respecting his autonomy or whatever the hell they're thinking.
And then there's the matter of how to deal with the 1% of the player who truly can't handle himself. Yes, he exists, no matter how much peer pressure you exert. Why not allow a system that contains this player (who creates 25% of the problems) while simultaneously allowing the 99% of players to develop and show their true character?
Next: the crowd.