The Eurozone south of the Netherlands has been emabarked on a painful austerity strategy — the goal of which was to reassure the credit markets that these nations will be economically sound.

That strategy has so far failed spectacularly as Paul Krugman has been predicting for years.  Spain and Portugal are facing ever-worse recessions, Greece’s economy is rapidly crumbling to Depression-level depths of unemployment and loss of public services, even Germany may have fallen into a slight recession in Q4 due to declining economic activity in its neighbors.

Yet S&P said it all in their decision to downgrade NINE Eurozone countries, taking formerly AAA France and Austria out of the top-tier soverign credit rating, and dropping Italy (which has major bond auctions coming up) to just above junk rating.  As I told my wife last week, something is really wrong when I have better credit and can borrow long-term at better rates than the state of Italy!

S&P stated that Europe has “not produced a breakthrough of sufficient size and scope to fully address the euro zone’s financial problems.”   In technical terms:  Well, duh!

I see no prospect of Europe doing so anytime soon.  The political fallout from the loss of AAA rating will likely paralyze France, rather than motivate it.  Germany is in a cloud of complacency, assured that its economic management is correct and that the fault lies in all other countries who do not follow the German fiscal/economic model.  Britain has forefeited leadership two-fold, first by embarked on its own disastrous austerity plan, and second by pulling out of the EU agreement, half-hearted and misguided as it was, on future fiscal restraint.

So Europe drifts on, with no one pushing in the right direction (PRINT EUROS!)  Instead, Germany leads the smug brigade; France flails, Britain sulks, Greece is falling into the sea, Italy can’t borrow at reasonable rates, unemployment in Spain is over 20%, and Hungary is slipping into fascism [on that see Kim Scheppele’s blog at http://krugman.blogs.nytimes.com/2012/01/12/somewhere-in-europe/]

2012 opened with optimism in the markets — how long can it last?