Talleyrand said of the Bourbon dynasty that ruled France both before and after that country’s revolution: “They have learned nothing and have forgotten nothing.” Today, with the same shortsightedness, Europe’s leaders stick unblinkingly to policies that the whole world can see have already failed.

Having learned nothing and forgotten nothing, they have just announced yet another version of a seemingly never-ending succession of Greek rescue plans that they must surely know will not work.

But the unfolding tragedy of a bankrupt Greece is only a symptom of an even more fundamental miscalculation: a wrong-headed conviction, widely held across Europe, that if austerity is failing, it is because there is not enough of it.Already the half of the euro zone that is in recession threatens to bring down the other half. But, by holding dogmatically to a policy of ever more austerity despite all the evidence of stagnation, Europe now threatens the economic recovery of not just the euro area but also the wider world.

Understandably the biggest U.S. economic worry of 2012 is that of a recovery derailed in an election year by another sharp European shock.

But the current infection in Europe is potentially even more damaging in the longer term. Another downturn could condemn the continent to perhaps a decade of misery, with low growth, high unemployment and social unrest. It would destroy Europe’s pivotal position as the world’s second-largest engine of growth, and condemn the euro zone to permanent decline and marginalization from the wider world, severely damaging international trade and curtailing global growth for at least the rest of the decade.

Europe’s problems are not exclusively fiscal, as current policymakers argue, but stem also from a deep-seated and ongoing banking crisis and a long-term collapse in competitiveness. These problems are so profound that they are now reshaping the continent’s role in the world, yet its leaders seem to think them of secondary importance.

While many U.S. banks still have leverage ratios that are 10 times their assets, the banks of Germany have a leverage ratio 32 times their assets, and French banks are leveraged 26 times their assets. Europe’s banks have done only a fraction of what their U.S. counterparts did to rid themselves of toxic assets and to recapitalize, leaving them no choice now but to liquidate their assets.

A European banking model that is suffocating under such leveraging, financed by short-term borrowing, is fatally damaged and cannot survive without fundamental reform. That model also massively damages the prospects of economic recovery for a private sector that needs liquidity and investment to function efficiently.

Europe’s loss of global competitiveness, however, presents an even more profound problem.

Read More: http://www.washingtonpost.com/opinions/europes-role-in-the-world-reshaped-by-economic-crises/2012/02/21/gIQAoNUiRR_story.html