In fact, all Western countries are in the mess together. The speculators in AIG turn out to include many leading European banks. So when AIG was bailed out by Washington, the U.S. government funds were passed to the speculators in risky derivatives, starting with Goldman Sachs. The emblematic Wall Street firm of recent American capitalism got $13 billion, but five of the six next biggest beneficiaries of these U.S. taxpayers’ dollars were European: Société Générale of France, Deutsche Bank of Germany ($12 billion each), followed by Barclays of Britain, UBS of Switzerland and Calyon, the investment arm of France’s Crédit Agricole. Americans are already angry about paying to bail out Wall Street operators; if they decide that they are paying too much to help bail out European banks, too, the Obama administration could face a populist backlash. That would spoil prospects for better U.S.-European ties. So, runs the U.S. argument, a little more stimulus, please, from Europe. Conversely, Washington needs to heed Europe’s call for better regulation and more intrusive oversight of all banking-type entities. U.S. financial scandals leave Washington with no alternative to greater regulatory oversight, according to Paul Volker, an Obama adviser who has solid free-market credentials. At a minimum, Americans needs to “bifurcate” its banking system to separate banks – big and closely regulated, and investment ventures, which can be unregulated but must remain too small to pose “systemic risk.” That is the philosophical change from the heyday of Volker’s successor at the head of the Fed, Alan Greenspan.

Can these very different objectives be reached? Perhaps, with the right sequencing in which the two steps are firmly inseparable. Some analysts say that there is no time to wait, that the priority must be economic recovery by deficit spending. The chances of reconciling these conflicting priorities are unclear. What is plain, however, is the G-20 in London must produce concrete results if Western leaders are to preserve any credibility about a common response, including rejection of protectionism.

This article was published in European Affairs: Volume number 10, Issue number 1-2 in the Winter/Spring of 2009.