NEW YORK – Losing a long war is always hard to accept. Hemmed in by the Americans and the Russians in the final days of World War II, Hitler convinced himself that he had two armies in reserve to mount a counter-attack and win the war. Meanwhile, having lost the entire Pacific, Japan’s Imperial Cabinet believed that no enemy could set foot upon the country’s sacred soil. When the truth is unimaginable, human psychology finds an alternative reality in which to dwell.
That describes the global situation today. The entire planet seems to be in denial about what is about to occur in the eurozone. Pundits keep expecting Germany to pull a rabbit out of the hat and flood the continent with Eurobonds, or that Mario Draghi will mount a coup at the European Central Bank and buy up every deadbeat country’s bonds.
Either could happen, but both are extremely unlikely. Germany cannot guarantee the eurozone’s debt without control over the eurozone, which no one has offered, and Northern Europe will not permit the ECB to be hijacked by “Club Med” and turned into a charity organization. It is not just a matter of politics; it is also – as the Germans keep pointing out – a matter of law.
Europe has a Plan A, whereby each country would reform its economy, recapitalize its banks, and balance its budget. But Plan A is not working: its intended participants, most notably France, are rejecting it, and there is an emerging southern European consensus that austerity is not the solution.