Fault lines open in talks over global crisis fixes

“People are divided on whether the Germans are posturing while preparing sensibly for these very difficult and increasingly likely contingencies or whether they’re totally asleep at the wheel,” said Johnson. “I guess we’ll find out.

Smaller Eurozone countries that have been slow to boost spending have another reason to drag their feet, say analysts. Some would rather let other, bigger countries do the spending, as long as it boosts demand for everyone’s exports.

“The risk at the moment is that if one or two countries do fiscal packages, that’s simply going to boost the export market for countries which haven’t,” said Tom Vosa, head of economic research at nabCapital in London.  “That’s why in the U.S. they’ve put in those 'Buy American' provisions to stop those leakages from happening.”

Those “buy local” restrictions on stimulus spending could backfire if they open a round of trade retaliation that could further slow the global economy.

All politics are local
Much of the conflict is being driven by politics back home, say analysts. The European focus on regulation, said Johnson, plays well among voters who believe the crisis was caused by excessive spending and risk-taking by American. 

“The story they want to tell about the crisis — that American finance got out of control and they’ve now got to be reregulated and the initiative of the Europeans and that (Europe) saved the day. Of course nothing could be further from the truth,”  he said. “Their banks were just as much involved in causing the problems as were the U.S.”

While the response to the crisis in the U.S. has occasionally bogged down over bickering between two political parties, the Europe Union faces the much more daunting task of forging consensus among its 27 member countries. Fault lines are already opening. Heavy borrowing by eastern European countries with weaker economies, for example, has left them saddled with debts they can’t pay to banks in richer countries that now face heavy losses.

Local conflicts also loom as Europe tries to develop a unified approach to shoring up its financial system, said Mallaby. 

“When taxpayers put money into a bank they tend to want to say ‘In return you’ve got to start lending in our country to stimulate demand so we don’t lose too many jobs,’” he said. “If everybody says that to their banks, then it just exports the credit crunch to other places in Europe. This is the financial sector equivalent of ‘Buy American’ or ‘Buy France’ instinct.”

AP Jobs, spending data hint at recovery In a hopeful sign for the economy, the number of newly laid-off workers filing claims for unemployment benefits fell below 500,000 last week for the first time since January. New-home sales rise to highest level in a year Consumers log stronger-than-expected rebound Durable goods orders fall unexpectedly Recovery's pace slower than first thought

The debate over European banking bailouts is further complicated by the scope of the resources that each country can bring to bear. Despite the staggering cost of the $700 billion U.S. TARP bank bailout, that figure is still a relatively small portion of the roughly $14 trillion U.S. economy. Some European countries now face the prospect of bailing out banks that are substantially bigger than their entire economies.

One solution being proposed is a doubling of the International Monetary Fund’s emergency account to $500 billion. That’s forced the G-20 countries to look to newer, emerging market countries like China for help. But that’s revived a contentious debate over giving those countries more IMF voting power.

While expanded IMF funding could provide an important financial backstop, it’s not the most appealing solution for the countries that end up tapping the fund for a bailout, according to MIT's Johnson.

“It’s the complete failure of a country and of a system of government if you have to go to the IMF,” he said. “It’s the most humiliating experience you can imagine, having these faceless bureaucrats, many of whom are my good friends, tell you what to do. It’s horrible.“

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