The most shocking news from last week’s excellent Global Financial Stability Report from the International Monetary Fund was not the headline estimate of total bad assets. That number stands at $4,100bn (£2,800bn, €3,000bn) and will almost certainly be revised upwards. Much more shocking was that the lion’s share of these assets belong to European, not North American, banks. Of the total $4,100bn, the global banking system accounts for $2,800bn. Of that, a little over half – $1,426bn – is sitting in European banks, while US banks account for only $1,050bn.

Even worse, European banks have written down much less than American ones. According to Reuters, the US and European banking and insurance sector has so far written down $740bn. More than 70 per cent of the write-downs come from the US. The eurozone’s share has been an appalling 14 per cent.

Another statistic from the IMF report: to recapitalise the banking system to reach capital ratios that prevailed in the mid-1990s, capital injections of $275bn would be required for US banks, and a whopping $500bn for European banks.

You get the picture. All these data tell us that Europe has both the biggest problem and has made the least progress. And since recessions associated with financial crises last longer than ordinary recessions, as the economic literature on financial crises suggests, the eurozone has a big problem. The IMF says that even if the right policies are implemented at the right time the recovery will be slow and painful, because deleveraging takes its time. But if the right policies are not implemented, the recovery will take much longer.

The latest economic projections by German economic institutes are consistent with the IMF’s pessimistic analysis. The problem is not only that the German economy will shrink by some 6 per cent this year. The real issue is that there is no projected recovery even by the end of 2010. We are looking at economic stagnation that could last several years.

So whatever legitimate criticism we may have of the Geithner/Summers plan for the US banking rescue, both in terms of its effectiveness and fairness, the situation is a lot worse in Europe. For example, the German bank rescue plan, details of which will become known next month, will almost certainly remain a voluntary scheme. There will be no stress test to determine whether a bank should be forced to accept new capital. Of course, this plan is clearly better than nothing. But it is not going to solve the problem of an under-capitalised banking sector. Unlike the Geithner/Summers plan, it does not even pretend to do so.

Yet the core problem with the European policy response, both in terms of bank rescues and stimulus packages, is a failure to co-ordinate across national borders. Last week’s spat between Axel Weber, the president of the Bundesbank, and the European Commission, over whether banks in receipt of government aid should unwind “foreign” European operations, highlights the problem that a single market does not work when all the policy decisions in a crisis are taken at national level. As Lord Turner, chairman of the UK’s Financial Services Authority, rightly said about the future of European banking: “Faced with the reality we either need more European co-ordination or more national powers, more Europe or less Europe – we can’t stay where we are.”

The IMF has noted that unilateral government action to support the domestic financial sector can easily turn into financial protectionism. This is happening right now in the eurozone where governments have enacted policies that make public support conditional on maintaining domestic lending, thereby crowding out foreign-owned competitors.

Europe’s macroeconomic response suffers from the same fundamental problem. Uncoordinated national stimulus programmes have ended up both ineffective and protectionist – such as Germany’s infrastructure investments or French subsidies for the car sector. When only uncoordinated national stimulus plans are on offer, the benefits are drowned by negative externalities. On those grounds, I would oppose another round of national programmes. What the eurozone needs is a co-ordinated European stimulus.

Our Great Recession constitutes a seminal crisis for Europe’s internal market and its single currency. It still has the potential to strengthen both. If the eurozone were to enact policies to fix the banking sector and support growth, if it facilitated eurozone accession to central and east European countries (and the UK), and if it started to think about issuing a joint European bond, the euro could emerge strengthened from this crisis – both in terms of its exchange rate against the dollar, and its significance as a global currency.

At this moment, however, that optimistic scenario is not very likely. European leaders are by and large an intellectually complacent lot. They have never paid sufficient attention to the spillovers of national policies in a single market under a single currency during a crisis. By pursuing what they mistakenly perceive to be policies in their short-term national interest, they not only damage the long-term prospects of the eurozone, but they ultimately end up damaging themselves. They are all under the illusion that they have a national strategy. But adding it all up, there is no joint strategy.

I suspect that this ugly drama will play out the full five acts, in classic European style. And we are not even halfway through. Not even close.