Now, Europe

As financial instability crosses the Atlantic, the need for policy coordination grows.

THE DOW JONES Industrial Average dropped below 10,000 yesterday for the first time in four years -- and there will probably be worse news in the days ahead. One day's results on Wall Street do not amount to a final verdict on the Treasury's newly authorized Troubled Assets Relief Program (TARP). But certainly it will be some time before the $700 billion bailout is up and running. In the meantime, panic is spreading through the global financial system -- and is manifest in a near-breakdown of lending among banks as well as in extremely tight conditions in the market for commercial paper, the short-term debt with which companies finance their operations. The Federal Reserve, its crisis-fighting capacities already stretched, announced yesterday that it would begin paying interest on reserves that banks hold at the Fed, allowing it to pump more cash into the markets without yet cutting interest rates. The Fed also expanded its 28-day and 84-day Term Auction Facility -- or TAF -- to $150 billion each. Still, a sharp and possibly long recession seems inevitable.

A new and troubling wrinkle is that the pending downturn looks like it is going global. In Europe, where governments have had to rush to the rescue of several failed banks in recent days, stock markets are also tanking. Several countries, fearing bank runs, have felt compelled to guarantee deposits. As European officials and media say, this represents transatlantic "contagion" -- the spread of financial instability originating in sour U.S. mortgages and mortgage-backed securities. But we are also witnessing the consequences of characteristically European vulnerabilities: One of these is the continent's relatively higher dependence on bank financing of corporations. Another is Europe's dependence on exports, which renders it susceptible to a U.S. recession. And, yes, America has just gone through an extreme boom-bust cycle in housing, but so have Spain, Ireland and Greece. Neither the free-market United States nor more statist Europe was immune to speculative excess fueled by a global glut of savings; neither had perfected a crisis-proof form of capitalism.

Compared with Europe, though, the United States has one advantage: One federal political authority governs our market. Not so the European Union. The "euro zone" has a single central bank to control money supply and interest rates. But individual nations still largely control bank regulation and other crucial levers of policy. At times, this has not been an obstacle to an effective crisis response, as in last weekend's joint Belgian, Dutch and Luxembourger mop-up of the troubled Fortis bank. But the haphazard expansion of deposit insurance by various governments from Ireland to Germany threatened to send money zipping across borders in search of the safest haven. As of this writing, the continent's major governments were still resisting a collective bailout like the TARP. Germany, which has shouldered a big share of the costs of European integration, has been particularly resistant. This is no time for the multilateral Europeans to go nationalist. They need to cooperate with one another, and with the United States, lest a scary situation become even scarier.