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Policy makers from the major developed economies are all reading from the same script these days. Conditions may be deteriorating rapidly, but don't worry. Our fearless leaders stand ready to intervene with their usual "strong and co-ordinated response." That was the formal message from the latest gathering of Group of Seven finance ministers and central bank chiefs in Marseilles over the weekend.

But the informal message was that, in the event things go from bad to worse and we get stuck in the Great Recession Part 2, they stand equally ready to put the blame squarely on those bumbling Europeans, who can't seem to get their debt-drenched house in order.

U.S. Treasury Secretary Timothy Geithner made that plain enough, warning in a TV interview that the Europeans are going to have to show the world they have the political will to resolve the sovereign debt crisis that has devastated the weaker euro zone countries, battered the stronger members of the club and sent shock waves around the world.

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"Europe's still under enormous pressure," Mr. Geithner said. "They have a really very difficult, challenging set of problems they're going to have to deal with over a long period of time. And it's not just, of course, what's happening in Greece and Ireland and Portugal."

Actually, the still-unfolding European crisis merely highlights what has been going wrong on the policy front everywhere since the shocking financial meltdown and ensuing global slump three years ago.

In 2008, critical problems that previously had been partly hidden from public view all surfaced when credit markets seized up after a series of hedge fund failures and the collapse of Wall Street heavyweight Lehman Brothers. This prompted an unusually rapid and well co-ordinated emergency response. Most governments had the fiscal capacity to bail out failing banks and pour stimulus money into the markets and their battered economies. Central banks had room to slash interest rates, turn the money taps wide open and reboot the frozen financial system.

What they failed to do was to prepare for life after this near-death experience. And this time around, the politicians and central bankers don't have much left in their arsenals.

"Basically, we resolved nothing. And what we did was waste a lot of valuable time. But we also wasted a lot of money," argues Satyajit Das, author of Extreme Money, which delves into the causes and consequences of a global financial crisis whose origins he traces back several decades. "Now, central banks basically have run out of ammunition. The enemy has regrouped and returned. And this time, the problem is much more serious. The lender of last resort has run out of money."

Mr. Das, 54, a globe-trotting risk consultant and derivatives expert based in Sydney, Australia, likens what occurred to that of a person rushed to ER after a heart attack. The emergency treatment stabilizes the patient. But "what they forgot was the whole program of change that needs to happen afterward."

Which means giving up rich diets and smoking, and getting regular exercise.

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The world needed to give up its addiction to debt-fuelled growth and learn to live within its means. But bad habits die hard, especially when they have proved politically popular and made so many finance types unbelievably wealthy.

Governments quickly forgot their pledges to work together on everything from international financial regulations to global imbalances and currency misalignments and have largely gone their own way ever since.

Now, Mr. Das asserts, we'll see one of two likely scenarios play out. Either countries will go through a painful, gradual but orderly process of recovery. Or their leaders will bungle things, and the workout will be decidedly messy and considerably more painful (hello, Greece). For now, he puts the odds of an orderly cleanup for key economies at 75 per cent.

Even the euro zone can still be fixed without a catastrophic breakup, he insists.

His prescription: Greece, Ireland and Portugal have to restructure their debt. Germany and France have to bail out their domestic banks (a process on which Germany has just embarked), and they have to take advantage of the opportunity to impose more discipline on the financial sector.

Finally, the Europeans have to use their new bailout fund to try to keep Italy and Spain from coming unglued, which almost certainly would sound the death knell for the euro zone. Both countries have to help themselves through tough fiscal discipline. The recent performance of their respective leaders doesn't inspire a great deal of confidence. "But I don't think Spain and Italy are beyond redemption. They can be made to work."

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Still, there are no easy solutions to any of this, "short of Martians arriving in a spaceship full of money," Mr. Das says with a chuckle as he surveys the wreckage he predicted back in 2006.

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