A financial crisis is generally caused by the collision of dreams and reality. Usually, it is investors who do the dreaming and a shortage of cash, often induced by central bankers, that causes the crash. In the current eurozone mess, it is the other way round.
The dreamers are the central bankers, bureaucrats and politicians (not just in Europe) who believe bad debts do not need to be written down. The delegation heading for Dublin to cut a bank deal with a reluctant government is not going to give a “put up or shut up” order to banks short of funding. It will offer European Union funding to keep the dream of solvency alive.
The troubled debtors’ dream could come true, with the correct mix of modest inflation, rapid growth and fiscal tightening. But there are already signs of trouble. The Portuguese unemployment rate is rising and an embarrassingly realistic politician, the Austrian finance minister, has just pointed out that Greece already seems to be falling behind on its fiscal promises.