WHEN Italy was faking its way into the euro, one favourite trick was to encourage arms of the Italian Government to trade gold among themselves.

Economically, this was absurd, insane, or at best supremely irrelevant to reality. Within the fiction of the national accounts, however, it looked sensationally clever.

That's the Italians for you, you might say: naughty but creative. You wouldn't catch the Bank of England, whose word is its bond, engaging in such hocus pocus. It would not, for example, invent a £325 billion mountain of pretend money just to buy back the British Government's debts from British banks, thereby using those institutions as a front to inflate away the problems of the British state.

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That would be unthinkable, clearly. The collective intelligence of the markets would not stand for the insult. They would not be taken in by a fancy term – "quantitive easing", let's say – and forget why Threadneedle Street would risk adding to its intractable inflation problem when the time comes, as come it must, to dump £325 billion worth of paper.

The French have noticed what we're up to, as have the Greeks. The Germans have taken note, sourly, of the Bank of England's re-emergence as a printing press for all seasons. Because of the euro and its obligations, they cannot pull the same sort of trick. But they take with a pinch of salt the idea that a country in a double-dip recession is entitled to a triple-A gold star for virtue. They regard that as a fiction of the Italian sort.

Those tricky foreigners have a point. Britain's budget deficit has fallen, yet George Osborne's borrowings have increased. How does that pass muster as sustainable? In plain language, how does our version of austerity possess the glitter of plausibility that is absent, patently, amid the agonies of Greece, Spain, or Portugal?

Last week, Liam Fox popped up on TV. The former defence minister seems to be going for the record in tracing the shortest arc from disgrace to rehabilitation. On this occasion, he had a familiar message. Just because the madcap French had picked pinkish Francois Hollande as president, he argued, that was no reason for Britain to turn from the path of righteousness and austerity.

It would be, said Dr Fox, like giving a drink to an alcoholic. This made a change from the maxed-out credit card, the family cutting its cloth to suit its budget, or balancing the till in a Grantham grocer's shop. It remained nonsense. Had Dr Fox named a British enterprise, large or small, that has not once drawn on a line of credit to fund growth he might have cobbled together a case. Perhaps he's been talking to the wrong sort of lobbyist.

But what's so wrong with the British economy? By common consent: not enough credit. The banks won't lend. Which is to say, there are too few chances to borrow. As all agree, this is unfortunate. Yet once suggest that a national economy – a Greek economy, let's say – should pursue the same sort of credit-led business plan and you are breaking what the Germans have taken to calling "the rules".

Businesses must borrow, and be helped to do so, but countries must not: such is one rule in 2012. Yet if states are whipped into austerity, where does that leave private demand, corporate or individual? Without a handy printing press, they are heading for collapse. Without the state as an economic actor the curtain falls.

Economists struggle with people. Their pseudo-science has difficulty even in deciding whether human beings are rational or irrational, wholly self-interested or sometimes a bit unpredictable. Mathematical models attempting to account for the vagaries of the species have come up a little short, therefore, over the past five years: you probably noticed.

One result is that the austerity schemes imposed on the northern hemisphere rarely manage a footnote for social effects. Nor is it noticed that these effects might have economic consequences. Greece is being subjected to the standard IMF restructuring model, the one that calls for mass privatisation, endless wage cuts, grotesque unemployment, an end to welfare, and wholesale expropriation. The masterplan has been imposed on the developing world for decades, and it has failed time and again.

So what happens when this shotgun is put to the head of a European nation? The pondering class have begun to wonder whether a Greek exit from the euro would be "orderly" or otherwise. They have begun to consider whether a return to the drachma, the collapse of the Greek banking system, starvation and disorder might herald a return to "competitiveness".

They have not yet begun to contemplate a Greece tipped back into neo-fascism, or the economic consequences for Europe of such a development. So what, "economically speaking", would the avoidance of such a thing be worth?

Germany's Angela Merkel is still fretting over "moral hazard", and the obnoxious idea that Greece should be rewarded for breaking the rules. That counts as short-sighted. It is almost as myopic as the conviction that Greece, after four austerity budgets, each one stripping muscle from a near-skeletal economy, has still not done "enough". The Greeks are insolvent; let's bankrupt Greece a little more. If Mr Hollande accepts that as "a growth plan" something has been lost in translation.

The symbolism of Greece is important in half a dozen different ways. On a parochial level, only one thing matters. The IMF model to which the Greeks are being subjected is merely a version of the prescription being applied across Europe. It isn't working. Britain, back in recession, despite the efforts of the Bank of England, is proof less that austerity is a dud than that no-one has begun to think about what "growth" involves.

The ghost of Franklin Roosevelt rolls his wheelchair out of the mist and says that the only thing worth fearing is fear itself. If Europe loses Greece it will have surrendered wholesale, as an entity, to the fear that nothing can be done. That's not a plan. That's a suicide pact.