Crisis is testing limits of the global economy

WASHINGTON -- The way the current financial crisis spread around the world like a brush fire, outracing all efforts to contain it, underscored a painful reality: We have a global economy, but nothing close to a global system for managing it. The world may be flat when it comes to the increasingly interconnected economies of the 21st century, but still has borders — and conflicting national interests to go with them.

Now, as senior economic policy-makers from the major developed nations meet here Friday, the question is whether the worst economic crisis since before World War II will open the door for a comprehensive, unified economic strategy.

U.S. officials have been careful not to raise expectations for the meeting, which brings together the top financial officials of Britain, France, Germany, Italy, Spain, Canada, Japan and the United States.

“We have very different countries, economies of different sizes, financial systems with different needs,” U.S. Treasury Secretary Henry Paulson Jr. said earlier this week. “You’re going to have different policies ... “

But pressure is building for that to change — both in response to this crisis and to head off future ones. The head of the International Monetary Fund warned Thursday that governments must act “quickly, forcefully and cooperatively” to prevent a serious global recession.

“There’s no domestic solution to crises like this one,” said IMF Managing Director Dominique Strauss-Kahn. “All kinds of cooperation has to be commended. All lonely acts have to be avoided if not condemned.”

Most immediately, finance ministers attending the meeting will confront the fact that the response to the global crisis thus far has reflected the differing approaches to the crisis taken by U.S. policy-makers and many of their counter-parts abroad:

As the problems that began with the subprime mortgage debacle have grown steadily worse, Paulson and Fed chairman Benjamin Bernanke have thrown out the old playbook, devising one dramatic new program after another and committing billions of tax dollars aimed at reviving the economy.

Overseas, however, most central bankers have hesitated to take joint action beyond the sphere of setting interest rates. Where joint action beyond that has occurred, it usually has been ad hoc, not part of a comprehensive global strategy.

Several major central banks cut interest rates together on Wednesday, for example, and three European countries joined to save a major cross-border bank on Thursday. Agreement on a wider scale has proved elusive.

The European Union has created a common currency and gone a long way toward erasing national borders for people and businesses on the Continent. But when it took up a proposal to create a pool of money to undergird all the banks in member countries, Germany vetoed the idea because it would not control how its money would be used.

Individual countries were left to deal with the crisis on their own, and the problem with that approach soon became apparent: When Ireland promised to guarantee all deposits in its banks — and extended the protection Thursday to some foreign-owned banks in the country — the action angered Britain and other nations that feared cash would drain out of their financial institutions and into the banks in Ireland.

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