This issue is particularly acute in places like Spain and Ireland that have recently experienced a lending boom propped up by euro’s low interest rates. The adoption of the euro in Spain, Portugal, Italy and Ireland spread low interest rates normally reserved for the highly developed, low-inflation economy of Germany to typically credit-starved countries like Spain and Ireland, granting consumers there cheap credit for the first time. The subsequent real estate boom — Spain built more homes in 2006 than Germany, France and the United Kingdom combined — led to the growth of the banking and construction industry. Banks pushed for more lending by giving out liberal mortgage terms — in Ireland the no-down-payment 110 percent mortgage was a popular product, and in Spain credit c hecks were often waived — creating a pool of mortgages that might soon become as unstable as the U.S. subprime pool.

The poorer, smaller and newer European countries gorged the most on this new credit, and none gorged more deeply than the Baltic and Balkan countries, leading to the third problem: Baltic and Balkan overexposure. Growth rates approached 15 percent in the Baltics, surpassing even East Asian possibilities — but all on the back of borrowed money. This scorching growth caused double-digit inflation, which will now make it more difficult for the Baltic states to take out loans to service their enormous trade imbalances. The only reason that growth rates were less impressive (or frightening) in the Balkans is because these countries either came later to EU membership, as with Bulgaria and Romania, or have not yet joined at all, in the case of Croatia and Serbia, so they did not experience the full credit-expanding effect of being associated with the European Union.

Fueling the surges were Italian, French, Austrian, Greek and Scandinavian banks. Limited as they were by their local domestic markets, they pushed aggressively into their Eastern neighbors. The Scandinavian banks rushed into the Baltic countries and the Greek and Austrian banks focused on the Balkans, while the Italian and French also went to Russia. UniCredit, the Italian behemoth with vast operations across Eastern Europe, announced Oct. 6 that it was facing a credit crisis, and it is hardly alone.

The “new” European states have witnessed the greatest expansion in terms of credit, by any measure, of any countries in the world in the past five years (with the possible exceptions of oil-booming Qatar and United Arab Emirates). But because that credit is almost entirely sourced from abroad, the easy credit environment has now collapsed, and heavy foreign ownership of even the domestic banks means that those who have the money have their core interests elsewhere. This swathe of states is now mired in almost Soviet-era credit starvation, while the banks that once led the charge are having difficulty even maintaining credit lines in their home markets.

The Challenge of Coordinating a Response

Europe’s inability to adequately address the challenge goes well beyond the issue that different portions of Europe face very different banking problems.

The capacity of European capitals to deal with the crisis varies greatly, but the core concern lies in the fact that it is the capitals, not Brussels, that must do the dealing. When the Maastricht Treaty was signed in 1992, EU member states agreed to form a common currency, but they refused to surrender control over their individual financial and banking sectors. European banks therefore are not regulated at the Continental level, hugely limiting the possibilities of any sort of coordinated action like the U.S. $700 billion bailout plan.

The Oct. 12-13 announcements are cases in point. While the eurozone members have agreed to follow general guidelines, any assistance packages must be developed, staffed, funded and managed by the national authorities, not Brussels or the ECB. This means that the administrative burden will have to be multiplied 15-fold at least, as every country undertakes and implements its own bailout/liquidity injection package.

As the crisis unfolded, disagreements on the member state level were immediately evident, with France and Italy initially recommending a Europe-wide bailout proposal similar to the American plan. France and Italy, both saddled with large and growing budget deficits and national debts, are the two major states most in need of such a bailout. But Germany and the United Kingdom, the more fiscally healthy states that would have been expected to pay for the bulk of the plan, quickly vetoed the idea.

The Europeans then decided to go with an EU-wide set of measures that would guide the individual member states’ liquidity injection packages. At the EU level, the only actual proposals have been two steps: a broad reduction in interest rates and an increase in the minimum government-guaranteed bank deposit from 20,000 euros ($27,000) to 50,000 euros ($68,300). It is worth noting that many individual European countries are now guaranteeing all personal deposits to shore up depositor confidence.

Even in the case of the interest rate cut, Europe had to dodge EU structures. The ECB’s sole treaty-dictated basis for guiding interest rate policy is inflation; the treaty ceiling is 2 percent. Eurozone inflation is already at 3.6 percent, indicating that rates should not have been reduced. Obviously, circumstances dictated that they needed to be, but like many states’ decisions to increase deposit insurance, this move could only be made by ignoring EU law and convention.