The Dutch government collapsed today, after the far-right wing party withdrew its support over the government’s planned austerity measures.  This event foreshadows likely changes in France as well, where the far right did unexpectedly well (indeed better than ever), and has made clear its opposition to Sarkozy’s austerity plans for France and for Europe.

What does it mean when the far right joins the left in refusing to back austerity programs?  On the one hand, it means Germany is alone — if the Netherlands and France back away, no strong Euro states remain on course for austerity, while Spain, Italy, and Greece are struggling to meet their targets and facing fierce popular opposition.

That could be a good thing, as austerity policies have driven Europe into renewed recession, while not enabling any governments to meet their deficit targets (even the right-of-center journal THE ECONOMIST this week embraced the view that adopting austerity policies in the midst of a near depression only makes things worse).

Unfortunately, I fear that the outcome of far right, far left, and leftist parties rising across Europe will not be a rational, well-reasoned approach to state finances that seeks to balance short-term stimulus and fiscal unity (such as Eurobonds and greater leeway and powers for the European Central Bank) with long-term measures to both boost growth and limit government spending.  Rather, the extremist parties and even the mainstream left parties are in denial about the adjustment required by Europe’s aging population and the lack of competitiveness in the Mediterranean countries.  Huge changes are needed, including opening up to immigration, raising retirement ages, encouraging more women to work, and adjusting labor laws to incentivize the hiring and training of young workers before they lose crucial skills.  Creative approaches to globalization and deepening partnerships with fast-growing Middle Eastern and African nations, and new ideas on defense (which aging populations and rising state deficits cannot support) are desperately needed.

Yet what we are likely to get from the extreme parties and the mainstream left parties is an effort to return to a nostalgic past when European nations were fast growing and rich enough to enact generous social policies and focus only on their own interests and needs.  That world has slipped wholly out of reach, and efforts to go back will only waste time and sink European nations deeper in debt and slipping competitiveness.

Germany is the exception to all of this — a mainstream moderately conservative government has presided over an economy that is fully globalized yet very strong, and a govenment with tight finances.  Yet rather than solving Europe’s problems, Germany’s exceptionalism is contributing to it by leading Germany to see the world in terms of its virtue vs. everyone else’s failings.  Rather than using its strength to lift Europe onto a new path toward the future, Germany is using its power to resist fiscal consolidation for Europe as a whole, and to force countries to imitate its policies even when inappropriate for quite different economies. The tragedy of Europe is that Germany’s success is contributing to Europe’s failure.

At the worst, the revival of extremist left and right parties is something we have seen before in the aftermath of economic depression — and it is not at all a welcome sight.  It seems we are just at the beginning of the long and wrenching adjustments to the Great Recession, and we may see some major political swings still ahead.  Assuming Sarkozy is defeated by the socialist Hollande in two weeks, the question then is how long Merkel can stand in a continent that has bereft her of economic allies.