Austerity has failed in the eurozone. This simple truth is grasped more widely than ever, including in the most unlikely places. Explaining its decision to downgrade the credit ratings of nine eurozone countries including France, Standard & Poor's - hitherto an advocate of extreme fiscal tightening - cited concerns over growth, not borrowing. "A reform process based on a pillar of fiscal austerity alone risks becoming self-defeating," it warned, "as domestic demand falls in line with consumers' rising concerns about job security." The lesson of the 1930s - that you can't cut your way out of a recession - is as true today as it was then.
The downgrades, already priced in by the markets, have had little practical effect on the ability of EU countries to borrow. But they were symbolic of the wider malaise that afflicts the eurozone. Two years after the crisis began, the threat of a catastrophic Greek default remains, and with it the collapse of the single currency. Facing its fifth year in recession, the country is trapped in a death spiral of low growth, greater austerity and higher borrowing. With investors increasingly sceptical, there is no guarantee that Greece will avoid defaulting on the €14.5bn of bonds that are due for repayment on 20 March.
Eurozone leaders, principally Angela Merkel, the German chancellor, have missed numerous opportunities to stabilise the crisis by allowing the European Central Bank (ECB) to begin quantitative easing and act as a lender of last resort. Mrs Merkel's absurd response to the downgrades was to call for the faster implementation of a fiscal compact that would outlaw the sort of Keynesian expansionism needed to prevent a prolonged recession.
By requiring member states to curb structural deficits at 0.5 per cent and by introducing tougher sanctions for those that breach the deficit limit of 3 per cent, the proposed agreement would pile austerity on austerity. While wiser heads call for exemptions, Mrs Merkel insists that she will not allow the compact to be softened "here, there and everywhere". Even as her own country drifts into recession, she does not contemplate any alternative to ever greater cuts.
Contrasting Britain's fortunes with those of the eurozone, George Osborne continues to boast that the UK's ultra-low market interest rates are evidence of the success of his deficit-reduction plan. But, as in the US, they owe more to monetary activism than to fiscal conservatism. The Bank of England's programme of quantitative easing, once described by Mr Osborne as "the last resort of desperate governments when all other policies have failed", has allowed it to buy up hundreds of billions of pounds of gilts and keep yields artificially low. Rather than complacently declaring the UK a "safe haven" as forecasters warn that Britain is already back in recession, the Chancellor should take advantage of historically low rates to borrow more to stimulate growth and employment. As the Nobel Prize-winning economist Christopher Pissarides argued in our "Plan B" special issue last October, "a small rise in gilt interest rates is a small price to pay for more jobs".
“If the euro fails, then Europe fails," Mrs Merkel has said, implying an unconditional commitment to the single currency. But the disparity between her rhetoric and her actions grows wider every day. So long as governments continue to lack the political authority to engage in further fiscal stimulus, the ECB alone has the capacity to make a difference. Germany must abandon its narrow fixation on price stability and allow the bank to print money as the Bank of England and the US Federal Reserve have done successfully. Should Europe's leaders prove unequal to the challenge, the continent's hard-won prosperity could be lost for a generation.