Well-placed European sources say last weekend's meeting of Group of 20 finance ministers saw a strident row between U.S. Treasury Secretary Timothy Geithner and Jean-Claude Trichet, head of the European Central Bank.

It began when Geithner made his appeal for the Europeans to go easy on their austerity program, saying that zero growth from the world's largest economic bloc was the last thing the global economy needed at this time.

The various stimulus packages were working, Geithner argued. The emergent economies were doing well and the United States was recovering; but both could be derailed if the Europeans slammed on the collective brakes. (One source says that Geithner went on to say that massive European spending cuts would be like adding the deflationary crash of 1931 to the stock market collapse of 1929.)

Trichet, his face red and his voice raised in anger, turned on Geithner. How dare the Americans speak this way, when the whole crisis was the fault of the Americans? It was the U.S. sub-prime mortgage crisis and the bonus-crazed culture of Wall Street that had got the world into this mess. But the Americans were taking no responsibility and very little of the burden.

Doubtless the tale has lost a little in the telling. But the nature of the public remarks by Trichet and Geithner after the G-20 meeting makes it clear that there was indeed a fundamental clash of policies.

Trichet made a point of stressing that European spending cuts would actually help the global economy by restoring market confidence, shaken by Greece's sovereign debt problem and concerns about other members of the euro currency.

"Stronger domestic demand growth in Japan and in the European surplus countries" is needed, Geithner countered in his separate news briefing, adding that spending cuts should be delayed "until the medium term."

Perhaps Geithner was too polite to turn the tables on Trichet and point out that it was the eurozone and its policies that had let Greece drift steadily into such trouble. The eurozone had allowed Greek government bonds to be used as collateral with the European Central Bank as if they were as sound as German bonds -- even though the interest rates required from Greece were sharply higher.

The eurozone, Geithner might have added, had also allowed France and Germany to flout the core rule that budget deficits shouldn't go to more than 3 percent of gross domestic product. The eurozone, by trying to marry a single currency with more than a dozen separate national economic policies, had brought this problem upon itself. Many eminent economists, including the 1989 report for EU Commission President Jacques Delors, had warned specifically that this would be a critical problem.

But Europe is going ahead with the cuts. German Chancellor Angela Merkel last week announced $100 billion in reductions over three years and French Prime Minister Francois Fillon followed with a plan for $120 billion over the same period.

Worse is to come. On Thursday, the EU Commission is to present its new plan to solve the problem through fiscal "harmonization," which includes including giving prior EU approval to national budgets and a ban on short-selling. The EU Commission and the European Parliament also want a levy on financial transactions -- a measure that looks squarely aimed at the City of London, by far the biggest financial center in Europe.

The last thing that Britain's new Prime Minister David Cameron wants right now is a crisis with Europe but he might not be able to duck this one. Already EU officials are saying that since British banks would suffer from a Spanish default on its sovereign debt, Britain should therefore contribute to a bailout fund, even though Britain has stayed out of the euro.

The great fear is that the trillion-dollar rescue package that the Europeans put together last month (with support from the International Monetary Fund and the Obama administration) hasn't succeeded in reassuring the markets. The sheer size of the package was meant to deliver shock and awe to the markets and frighten them off from more speculation on a Greek or Spanish default. It isn't succeeding, as last week's report from the Atlanta branch of the Federal Reserve made clear.

"Following a decline after the initial reports of the EU/IMF 750 billion euro package and ECB bond purchases, peripheral euro area bond spreads (over German bonds) have widened," the Atlanta report said. "In particular, the bond spreads for Italy and Spain have widened the most relative to their levels before the rescue package was unveiled. After initially declining four weeks ago, sovereign debt spreads have begun widening for peripheral euro area countries."

This is looking grim. The Europeans are resorting to panic measures, while continuing to blame Anglo-Saxon capitalism for the problem. And the Europeans, committed at all costs to defending the cause of European integration and the single currency, are in denial over their core problem. The inbuilt flaw in the euro's design is that if the Greeks and Spaniards and Italians are to have common interest rates with Germany, they will have to work and save and export and pay taxes like Germans. They never have and it isn't easy to believe they ever will.

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