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The European Union’s much-touted €200bn fiscal stimulus package is looking more and more like one of those trick cigars I remember from years ago. A trick cigar looks like a cigar. It even feels like a cigar. But when you try to smoke it, nothing happens.

In the case of the EU’s fiscal stimulus - an initiative designed to pull Europe out of its deep recession, and approved by EU leaders at last week’s summit in Brussels - one gets the distinct feeling that someone somewhere is trying to pull wool over the general public’s eyes. The €200bn is there on paper, but there is not much evidence of it in the real world.

This is explained very clearly by David Saha and Jakob von Weizsäcker in a freshly published study for the Bruegel think-tank, “Estimating the Size of the European Stimulus Packages for 2009″. They say only one country in the 15-nation eurozone is genuinely applying the classic Keynesian recipe of increased deficit spending to counter a downturn. That country is Spain.

Particularly startling is their analysis of the measures recently unveiled in Italy by Prime Minister Silvio Berlusconi’s government. Officials in Rome portrayed this as an €80bn stimulus, or roughly 5 per cent of Italian gross domestic product. What nonsense. The Bruegel economists conclude that the Italian measures announced since September add up not to a stimulus, but to the opposite - a small fiscal tightening of €0.3bn!

As it happens, there are very good reasons why it would be imprudent for Italy to embark on a spending spree right now. With a public debt higher than its annual economic output, and with financial markets acutely nervous about traditionally profligate borrowers such as the Italian state, Berlusconi and his colleagues need to show great care in navigating their way out of the recession.

As the Italian example suggests, there is rather more support in private around Europe for Germany’s well-known apprehension about the EU-wide fiscal stimulus than is admitted in public. To name just a few countries - in and outside the eurozone - that share Germany’s wariness, think of Lithuania, the Netherlands, Poland and Sweden. And, of course, the European Central Bank is sympathetic to Germany’s position, too.

The bottom line is that, whatever the severity of the recession, Europe’s leaders are loath to do anything that might imperil the euro and the cohesion of the eurozone. For them, this is the multi-national European project that matters. As far as possible, therefore, they will try to stay within the limits set by the Stability and Growth Pact, the EU’s fiscal rulebook. And this means restricting the scope of a European fiscal stimulus.  

More than six weeks ago, I drew attention to the way that the global financial crisis was testing the eurozone’s stability by widening the yield spreads between German and other government bonds. This topic won’t exactly dominate the two-day European Union summit that starts in Brussels on Thursday, but you know what? Perhaps some leader or other - Angela Merkel, for example - should mention it.

Because the fact is that the problem is more serious today than it was in late October. Back then, the spread between German and Italian 10-year bonds was 95.6 basis points, compared with 72.3 a week earlier, 69.6 a month earlier and 25.8 a year earlier. Today the spread is 129.9 basis points, compared with 122.8 a week earlier, 91.9 a month earlier and 26.9 a year earlier.

The spread with Greek government bonds hit 174 basis points this week, compared with about 120 points when I was blogging in late October. Bond traders will tell you this has little or nothing to do with the urban riots that broke out last weekend and represent the most serious violence in Greece for six decades. I agree - but I would add that the picture of an unpopular government helpless in the face of street battles, arson and looting hardly helps.

In any case, the yield spreads are attracting attention at the European Central Bank’s highest levels. Here is what Jürgen Stark, the German member of the ECB’s executive board, wrote in an article in today’s Wall Street Journal Europe: “Interest rate spreads for government bonds are already very high in some euro area countries. Moreover, the current calls for a particularly loose application of the European Union’s framework of fiscal rules questions the credibility of politicians’ commitment to sound public finances.”

If you are looking for an explanation as to why Merkel’s government will only reluctantly sign up to the EU’s planned €200bn fiscal stimulus to overcome Europe’s recession, here it is in a nutshell - kurz gesagt, as the Germans say. They think the integrity of the EU’s fiscal framework, and hence the very future of the eurozone itself, is being put recklessly at risk.

And who knows? They may be right. Certainly, José Manuel Barroso, the European Commission president, sees the problem. Though a supporter of a well-timed, carefully planned fiscal stimulus, he told me this week: “I sense in the German position the traditional, prudent approach to spending that is very rational, reasonable and wise. We have to respect the way Germany sees the situation and the way they take decisions.”

To get a sense of how the financial turmoil and economic recession are reshaping European politics, take a look at the socialists’ manifesto for next June’s European Parliament elections. “This crisis marks the end of a conservative era of badly regulated markets. Conservatives believe in a market society and letting the rich get richer, to the detriment of everyone else. We believe in a social market economy…”

When they plotted their strategy, socialist leaders across Europe clearly decided that their best line of rhetorical attack would be to paint their opponents as reckless advocates of unrestrained free market economics. “The conservatives often talk about economic and social crises as if they are unavoidable, a law of nature… Conservatives have pursued a policy of blind faith in the market - serving the interests of the few rather than the general public…”

The manifesto was agreed this week at a conference in Madrid by leaders as varied as Prime Minister José Luis Rodríguez Zapatero of Spain; Martine Aubry, the newly crowned leader of the French socialists; Sergei Stanishev, Bulgaria’s prime minister; and Gediminas Kirkilas, Lithuania’s outgoing premier.

For Europe’s humbled financial institutions, the manifesto proposes “rigorous capital requirements”, limits on borrowing and bad loans to prevent excessive risk-taking, caps on executive pay and bonuses, curbs on short-selling, stronger regulation of hedge funds and private equity funds, and an end to “tax havens, tax avoidance scams and tax evasion”.

Some of these measures are already in the works at European Union level, and in a sense it’s disappointing to see the socialists shrink from proposing more imaginative steps that would marry the need for better regulation with acceptance of innovation as a fact of financial life.

Nevertheless, the socialists do go further in other areas, for example by calling for a “European Social Progress Pact”. This would require that every piece of EU legislation include a “social progress clause” - that is, something setting out goals and standards in the fields of social policy, health and education. Potentially, pretty expensive.

The socialists also propose a European pact on wages, establishing “decent minimum wages” in all EU member-states, and “a European framework for cross-border collective bargaining and collective agreements”. There are some veiled hints at trade protectionism, as in their support for steps that would prevent energy-intensive industries in Europe from relocating to parts of the world where climate change policies are less strict (read: China and other Asian countries).

Because of the European Parliament’s growing importance in framing EU laws, it is important to listen to what the socialists are saying. At present they have 215 seats in the legislature, compared with 288 for the centre-right group and 101 for the liberal group. But they will surely increase their presence after the June vote.

And then, who knows? Perhaps they will be strong enough to bring their ideas to bear on the membership and political direction of the next European Commission, due to be chosen less than a year from now. Then we will really know that we’re in a new era.

According to French President Nicolas Sarkozy, last weekend’s G20 summit was a big success. “Never before have Anglo-Saxons agreed to subject credit ratings agencies to oversight and regulation,” he declared.

You know what, he’s right. Check out the ‘Historia Ecclesiastica gentis Anglorum’, the 8th century AD masterpiece by the Venerable Bede. This greatest of all Anglo-Saxon chroniclers had nothing to say about credit ratings agencies, and not just because he wrote in Latin.

Almost every day, all over the European media, one comes across the term ”Anglo-Saxons”. It is usually intended to mean Brits and Americans, with perhaps a glance in the direction of Australians, Canadians and New Zealanders.

To my mind, the term carries a deeply unpleasant undertone of invoking alleged racial origin to define nationality and establish a stereotype of national character. Weren’t Europeans supposed to have stopped doing things like that after the destruction of Nazism? Moreover, the term is, of course, utterly inaccurate.

After all, whom did American voters just elect as their next president? A direct descendant of the Venerable Bede? (A Belgian newspaper reported two days after Barack Obama’s victory that genealogical researchers had discovered he was 1 per cent Belgian. But that’s another story.)

The millions of African-Americans, Hispanics, Asians and many others who live in New York, Chicago and Los Angeles would be flabbergasted, and possibly rather amused, to hear that in Europe they are categorised as Anglo-Saxon. So would all sorts of people in Montreal, Toronto and Sydney.

It goes for the UK, too. Huge numbers of Londoners are no more Anglo-Saxon than my cats. Look at the family tree of any Englishman - which is what is generally meant when “Anglo-Saxon” is applied in a British context - and you will soon discover an Irish father-in-law here, a Scottish aunt there, a Polish or Indian grandmother somewhere else.

So, speaking as someone with three half-Japanese nephews, two of whom recently played in the famous Eton v Harrow annual cricket match, I say - it’s time to stop calling us, or them, Anglo-Saxons!

Vladimir Chizhov, Russia’s ambassador to the European Union, was having some fun this week at the expense of western countries as he mused about the impact of the financial crisis on world capitalism. “I’ve noticed an upsurge of interest in theoretical works by certain authors of the past, such as Karl Marx,” he said. “A German publishing house has just reprinted 2m copies of ‘Das Kapital’.”

Whether or not ’Das Kapital’ has anything useful to say about today’s turmoil, there is no doubt that the crisis is producing a shift in the European intellectual climate against classical free market liberalism and in favour of state interventionism and economic nationalism. The political and cultural soil for this shift was already rather fertile in France, Germany and Italy, though less so in young democracies such as the Czech Republic and Poland.

But if this is so, then why are political parties of the left in such poor shape across much of Europe? It’s the worst financial crisis since the early 1930s, the worst economic recession since the early 1990s, if not the 1970s - and where is the left?

In France, it is mired in internal disputes between Ségolène Royal and her enemies - disputes that seem incredibly petty, given the scale of the crisis in the world outside. President Nicolas Sarkozy’s popularity ratings, which crashed after his over-publicised romance with Carla Bruni, are going up.

In Germany, the Social Democrats are only just emerging from a miserable phase in which they were led by Kurt Beck, one of the least effective leaders in their post-1945 history. They do not look in great shape to displace Chancellor Angela Merkel’s Christian Democrats as Germany’s biggest party in next year’s federal elections. A poll this week gave the Social Democrats only 23 per cent, against 37 per cent for the Christian Democrats and their Bavarian allies.

In Italy, the centre-left opposition led by Walter Veltroni almost disappeared from public sight after losing this year’s election to Silvio Berlusconi. He is riding high on a programme of sorting out problems at Alitalia, Italy’s dysfunctional national airline, and cracking down on criminals and immigrants from outside western Europe.

It would be a rash person who predicted that the Labour party will hold on to power after the next UK election, even though Gordon Brown is recovering in the polls thanks to his recent performance during the financial crisis.

In short, the European left appears bereft of ideas and incapable of inspiring voters at a time when economic conditions ought to be working strongly in its favour.

After Barack Obama’s presidential election victory in the US last week, many commentators noted how difficult it was to imagine a black politician achieving a similar triumph in Europe. But I would ask another question. Where in Europe is the politician who will match Obama by raising the banner of modern centre-left values and winning an election?

What is the European Commission doing in the financial crisis? Commission president José Manuel Barroso answered that question last Friday in a speech that deserved rather more attention than it got.

After listing various initiatives the Commission is advancing on capital requirements, deposit guarantees, accountancy rules, credit ratings agencies, executive pay and cross-border financial supervision, Barroso delivered a remarkable message.

“One thing is clear: there is no national ‘autostrada’ out of this crisis - our economies are too interconnected. And protectionism is no solution either,” he said. “…There are political forces at work that are trying to use the crisis to turn the clock back. To question open societies. To impose failed recipes based on failed ideas. So I want to be quite clear: the solution will not be found by looking backwards, it will be found by looking forwards.”

This passage of Barroso’s speech is worth a second look. The language he used to denounce opportunistic protectionists and economic Neanderthals could hardly have been stronger, and yet he carefully avoided putting a name to the bad guys.

Who, for example, is “questioning open societies”? That is a pretty dramatic accusation to level at anyone in today’s Europe - and Barroso surely meant political forces in the European Union, not the usual suspects in Russia, North Korea or Zimbabwe. And who is promoting “failed recipes based on failed ideas”?

Perhaps the key to Barroso’s thinking lies in his unusual choice of the word ‘autostrada’ - the Italian word for highway or motorway - to explain why defensive economic nationalism leads to a dead end. He could have said ‘ road’ - this part of his speech was in English - but he didn’t.

Barroso gave his speech at Milan’s Bocconi University, just as it emerged that Prime Minister Silvio Berlusconi’s government was preparing to tighten the rules against foreign takeovers of Italian companies. The government, aware that Italy’s economy is yet again in recession, is also demanding changes to the EU’s climate change policies on the grounds of cost. 

Could it be that the political forces Barroso was criticising are in Italy itself?

As the Asian financial crisis deepened in 1997, the then Japanese prime minister Ryutaro Hashimoto made the memorable remark: “Japan cannot save Asia, it can only save itself.”

Until Sunday, it looked as if most of the European Union’s national leaders were falling over themselves to take a leaf out of Hashimoto’s book.

Unilateral steps on everything from deposit guarantee schemes to emergency bank bail-outs were the order of the day. Government ministers were also falling prey to the temptation of diverting voters’ attention to issues, such as excessive pay for bank executives, that had no relevance to overcoming the immediate crisis.

Now a more comprehensive plan is in place, focusing on the right questions - the vulnerability of many of Europe’s internationally active banks because of their high leverage; the intricate interdependence of these and other Europe-based banks; and the need to restart interbank lending.

Once the storm swept into Europe in September, recapitalisation of the banking sector through the injection of public equity was always going to be part of the answer to Europe’s financial crisis. That was clear to anyone familiar with the situation of European banks over at least the past five years.

Even in good times they had, on aggregrate, lower profits and lower interest margins than their US counterparts. Consequently, as a team of analysts at Citigroup noted in late September, the European banks had less of “a cushion to absorb the strains and losses” of a full-blown crisis in the financial markets.

The problem during the past month hasn’t been a lack of understanding of what caused the financial crisis and how to tackle the European end of it. It has been a lack of courage in political circles, in particular to take measures that may involve acting on a pan-European scale. This explains the haste with which German officials shot down a French- and Dutch-inspired idea for a common EU bank bail-out fund.

Even now, what we’re looking at is a bundle of co-ordinated national plans to rescue the banking system. Conveniently for governments that have never exactly shone at balancing their budgets, we’re also looking at the slide into irrelevance for years to come of the EU’s fiscal rules, enshrined in the Stability and Growth Pact.

The emergency measures may work, but it is by no means clear that Europeans have yet cured themselves of the Hashimoto habit.

It is only human to search for a ray of light in the European Union’s ever-darkening financial landscape. Could it take the form of an unexpected boost to the cause of EU political and economic integration?

One such optimist, a genial and perceptive diplomat who has immersed himself in EU affairs for the past 30 years, suggested to me the other day that it often takes a crisis to inject real momentum into what he and others in Brussels like to call “the European project”.  For example, the 1992 crisis in the European exchange mechanism appeared to deal a serious blow to the goal of creating a single European currency. But the reaction was spirited. Only seven years later, the euro was up and running.

Similarly, it took the 9/11 terrorist attacks on New York and Washington in September 2001 to prompt EU leaders into agreeing, at a summit just three months later, on the principle of a European arrest warrant. This allows the swift transfer of criminal suspects for trial and detention from one EU member-state to another. It proved effective in securing the extradition from Italy to the UK of Hussain Osman, an Ethiopian-born Briton accused of involvement in a plot to attack London’s transport system in July 2005.

On the face of things, the financial crisis offers a perfect opportunity to push forward closer European integration. If a big cross-border European financial institution fell into trouble , it would be ludicrous to argue that it was purely a matter for the government of the country where the institution has its headquarters. Tommaso Padoa-Schioppa, the former Italian finance minister and European Central Bank executive board member, thinks the financial crisis merely reinforces the case for a powerful pan-European regulator that he used to make in front of his EU colleagues.

However, the response of governments so far indicates that they are not ready - yet - for a Great Leap Forward in terms of closer integration. This was well illustrated last week by the curious tale of the French plan for European bank bail-out fund, which turned out, after a feverish 24-hour news cycle, not to be a French plan for a European bank bail-out after all.

Only the Dutch authorities were brave enough to state publicly that, yes, they thought such a plan would be a pretty good idea. But given the opposition of the UK and , more importantly, Germany - still the EU’s paymaster and the country that would surely bear the brunt of the cost of such a fund - the plan was dead before it started.

Of course, European integration can come in many shapes and sizes and an EU bank bail-out fund doesn’t have to be one of them. But solidarity among all 27 EU member-states is a a fundamental principle. Without it, the EU is nothing. If a large bank fails in an EU country that does not have the resources to rescue it, it will not be long before that principle is put to the test.