When Standard and Poor’s downgraded nine European countries last Friday, they said plainly that European leaders were blinding themselves to the full crisis:

We also believe that the agreement [the latest euro rescue plan] is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.

Right after that, German Chancellor Angela Merkel stressed the need to implement fiscal straitjackets quickly in the wake of the downgrade. It’s like nobody even read the S&P report. And nowhere is this more true than Greece, where poverty has risen almost to the level to call the situation an humanitarian disaster, but where European leaders still strive for more “reform”, the equivalent of giving the patient more poison and wondering why they just get sicker. Now they plan to kill the patient outright.

Officials from the so-called troika of foreign lenders to Greece — the European Central Bank, European Union and International Monetary Fund — have come to believe that the country has neither the ability nor the will to carry out the broad economic reforms it has promised in exchange for aid, people familiar with the talks say, and they say they are even prepared to withhold the next installment of aid in March [...]

As recently as November, Greece and its lenders were optimistic that the country’s newly installed prime minister, Lucas Papademos, a well-respected financial technocrat, would stabilize Greece’s soaring debt and help nurse the country back to health.

But since then, his interim government — stocked not with technocrats but with politicians gunning for national elections as soon as March — has been paralyzed. Although it passed the 2012 national budget, it has failed to put into effect most of the unpopular changes mandated by the loan agreement that the previous government made back in 2010, when the country first admitted it was broke.

Yes, it’s amazing Papademos can’t get this done, right? It’s like giving a lumberjack a plastic spoon and wondering why he hasn’t clear-cut the forest yet. Austerity has become self-defeating, whether you call it what it is, or “reform.” Either way, it’s destroying Greece, and mere technocratic leadership won’t solve the problem.

Talks between Greece and its creditors will resume this week. The problem, as I understand it, is that Greek debt has been bought up by hedge funds [and other creditors with default insurance they believe will pay off] and they are playing a game of chicken to recoup the full [or larger] amount for the debt. Greece is simply too weak to have leverage here, since the hedgies are really negotiating by proxy with the EU and ECB and IMF, on the idea that an uncontrolled default is so undesirable that the troika will pay them off at par. So I see nothing coming out of the first level of negotiations unless the troika gets involved.

The European mess will dominate the economic picture until the horrible policy from Europe’s leaders reverses itself.