Since the eruption of the economic crisis last fall, armies of corporate lobbyists have been battling to keep even modest changes in executive compensation rules off the legislative table. Their most common argument: pay restrictions will drive “top talent” out of U.S. firms and into the welcoming arms of higher-paying European companies.

This argument has always been laughable. Was it really a résumé-builder to lose trillions of dollars in financial wealth and drive the global economy off a cliff? Is that what makes one a hot commodity in the global labor pool? Were European companies, while shedding thousands of their own employees, really aggressively recruiting on Wall Street?

Ludicrous as they might sound, the financial industry’s professed fears about losing their best and brightest seem to have had an impact in Washington. Whether policymakers actually believe these claims or not, they have failed so far to pass meaningful restrictions on executive compensation. Nearly a year into the economic crisis, the CEO pay bubble that was a key cause of the meltdown remains un-popped.

The executive pay “restrictions” put in place since last September affect only a small number of executives of firms that have collected funds from one of the federal government’s bailout initiatives, the Troubled Asset Relief Program, or TARP. And these pay rules contain gaping loopholes that have left the practice of mammoth executive pay packages largely intact.

In fact, many of the executives responsible for the crash are actually using the crisis as a springboard to their next fortunes. A just-released report that I co-authored at the Institute for Policy Studies, America’s Bailout Barons, shows how it works. At 10 of the financial firms that are among the top recipients of bailout money, executives were awarded stock options early this year when the market was at the bottom. Now that taxpayer support has helped lift the price of their stock, the executives who brought the global economy to the brink of disaster now have seen their portfolios increase in value by $90 million.

European governments, however, may be about to let some of the air out of the U.S. CEO pay bubble. The French, German, and UK governments have recently adopted regulations on pay in the financial industry that go beyond U.S. restrictions. French banks will now have to spread bonus payments over three years; if a trader’s investments lose money, the bonus won’t be paid. In Germany, new rules set to go into effect on January 1 will also prohibit bonuses tied to short-term profits and require repayment if deals prove too risky. The UK government has banned guaranteed banker bonuses of more than one year and mandated that two-thirds of bonuses for senior employees be paid out over three years to discourage short-term risk-taking.

And now, French President Sarkozy and German Chancellor Angela Merkel are speaking out forcefully for an international agreement to crack down on banker pay; they plan to press for this regulation at the Group of 20 meeting to be hosted by President Obama in Pittsburgh on September 24-25. Sarkozy said he’d like to see a fixed international limit on bonuses, as well as a bonus tax that could generate funds for use in times of crisis.

An obvious criticism of the European actions thus far is that they focus primarily on one form of compensation – bonuses – leaving open the possibility that firms will simply shift money from one kind of pay to another. But these actions still put them, particularly the French and German governments (both, by the way, led by governments the Europeans consider “conservatives”), clearly in the lead when it comes to reining in executive pay.

Looks like the foreign havens for earners of eight-figure bonuses are nothing but an illusion. What better offer do these executives have waiting in the wings? None at all.

Hopefully, by undercutting the U.S. financial industry’s favorite argument against reform, the European governments will open up opportunities in Washington for real change to an executive compensation system that now threatens our economy and our democracy.