The world is running out of options unless a spaceship arrives from Mars with more money

The newest proposal by French President Nicolas Sarkozy and German Chancellor Angela Merkel creates what amounts to a fiscal KGB in Brussels to beat up on euro zone countries that break ranks on budget policy. It’s as preposterous as all the others that have come before.

The citizens of countries ranging from Finland to Slovakia are not going to give up any more of their sovereign rights to technocrats running an organization that has already failed miserably at its goal of creating economic stability through currency union.

Anyone with a high school textbook can read about how centrally planned economies are a relic of the barbaric Soviet era — in which Merkel herself came of age in East Germany. Even in the U.S., the federal government does not tell the states how much money to raise or how to spend it.

The problem of course is that Merkel and Sarkozy have come to this Plan E, F or G — I've lost count — because Plans A, B, C and D for dealing with the creditors knocking at the door of overleveraged European governments have hit dead ends.

Borrowing money is fun. Paying it back is a real drag. Let's take off the rose-colored glasses and look at the reality with help from analyst Satyajit Das in Australia:

-- European governments and banks need 1.9 trillion euros to refinance maturing debt in 2012.

-- Italy alone needs 113 billion euros in the first quarter and 300 billion over the full year.

-- European banks need 500 billion euros in the first half of 2012 and 275 billion in the second half.

-- This means they need to raise 230 billion euros per quarter in 2012, versus 132 billion per quarter in 2011.

-- Yet since June 2011, European banks have been only able to raise 17 billion euros, compared to 120 billion in 2010.

Europe does not have a liquidity problem that can be solved by cutting the cost of swaps. In other words, you can't just replace private-sector lenders with official lenders such as the ECB, IMF or the Fed.

Rather, Europe has a solvency problem. Stronger nations can't save the peripheral nations without destroying their own credit ratings and ability to raise funds. That’s what Standard & Poor's was saying Monday when it put the top six countries in the euro zone on "creditwatch negative."

The only foreseeable way out is realistic write-downs of the debt of Greece, Portugal and Ireland, preparedness to do the same for Italy and Spain, and an aggressive recapitalization of European banks and the ECB. And by realistic, I mean 100% in the case of Greece, and around 80% for the rest.

The emergency euro-zone fund known as the EFSF is far too feeble to take on this task, and the Chinese have emphatically said they will not help.

Meanwhile, the new ideas of "fiscal integration," in which Germany guarantees the debts of southern countries, or "debt monetization," in which the ECB prints money to buy bonds, have already been rejected repeatedly, and with good reason: Germany and France cannot increase commitments without ruining their credit, and the ECB is forbidden to buy bonds directly.

This incredible scramble for funds is unseemly and should make everyone extremely uncomfortable. These are like loans to a drunk to buy more booze so he can shed the DTs. It's not a solution; it's buying time.

The euro zone is dysfunctional and unstable. Governments are spending less as part of new austerity measures, consumers are pulling back, and industrial growth is contracting. The shock waves are hitting China, and it's hard to see how they won't also smack the United States. And yet serious debt write-downs for the banks aren't even on the table — yet.

Let's say the Dec. 9 summit results in cuts of euro-zone interest rates, easier collateral rules and a provision of 300 million more euros from stronger European central banks to the IMF to help the worst-hit countries. These measures would still not be enough, not even close.

The world is running out of options unless a spaceship arrives from Mars with more money. The time to fix this is long past, and now we just have to figure out how to live with the consequences.