HAMBURG, Germany — In the spring it was Greece. Now it is Ireland. Last Sunday, Ireland received 85 billion euros ($112 billion) in financial aid. Soon Portugal and Spain will follow, and maybe even Italy. Debtor states are losing borrowing power in financial markets. Higher interest rates—effectively a risk premium–are the consequence. Refinancing is becoming increasingly expensive which, in turn, feeds the debt spiral even further. Some countries might find themselves on the brink of insolvency. Eurozone governments are careful to play down the dangers in order not to raise questions in financial markets about the adequacy of the 700-billion euro rescue umbrella provided by the European Commission, the European Union, and the International Monetary Fund.

Having contributed more than 120 billion euros to recent bailout efforts, Germany, more than any other European country, looks with horror at how all dams are breaking, at how the stability pact is eroding, and how ailing eurozone countries need to be saved by others’ tax money. And there is growing worry that eurozone countries may need to pony up even more money.

From its inception, the euro was an unloved child in Germany, the product of an unwanted pregnancy, insisted upon by France as a trade-off for French acceptance of German reunification. From its birth, many Germans wanted to strangle the euro in its crib; a few even tried, unsuccessfully, to have the German Constitutional Court declare it unconstitutional. Now, at this moment of crisis, some see a chance to get rid of the ill-mannered teenager. However, neither the EU Treaty nor European laws offer a legal way of doing so. There is no plan B to get rid of the euro. So it is here to stay.

Above all, breaking away from the euro would lead to the economic implosion of the already weak peripheral EU countries. Which investors would then want the “South-Euro,” or a revitalized Greek Drachma, or another national soft currency? What would be the risk premiums that the southern Europeans would have to pay? Interest rates would be sure to skyrocket for the peripheral countries. Bankrupt states could no longer pay salaries, public services would barely be available, public infrastructure would decay, pensions would be worth nothing, unemployment would skyrocket, protests and strikes would reduce economic output. Private investors would barely invest, thereby reducing purchase of new equipment, research and development, and labor productivity. International competition and wages would decrease. The best and brightest people would leave the south and look for work in the north. One only needs to study the drama of the Mezzogiorno-region, the depopulating region south of Naples, to understand the consequences of such a scenario. It suffices to remind one’s self of the collapse of East Germany to understand what it would mean for Europe for a member state economy to go belly up.

German Chancellor Angela Merkel and her Finance Minister Wolfgang Schäuble know what’s at stake. Not only the future of the euro, but also the fate of Europe. They know that there is no alternative to the euro. Europe without the euro, or without the EU, and a return to old-style sovereign nations would bring about immense political, economic, material, and also ideological costs. This destruction would be costlier than muddling through – however complicated that might prove to be and whatever regulatory inconsistencies if might necessitate. That is why the Europeans held their nose and agreed to a compromise last week. Germany and France, in cooperation with Council President Herman Van Rompuy, Commission President José Manuel Barroso, and Eurogroup Chairman Jean-Claude Juncker, are working on a plan to replace the current emergency fund with a permanent bailout and restructuring mechanism by mid-2013.

If the eurozone broke up, there would be an adjustment shock rather than gradualism.  Last week’s compromise has bought time. Given time, indebted nations can slowly adjust and, in a step-by-step-process, develop responsible budgets. The peripheral countries could justifiably hope for improved economic conditions. They could work toward higher growth, more employment, reduced social transfers, and higher tax revenue. This period of adjustment could be an opportunity for the European institutions and the national governments to reform the Stability and Growth Pact. Such an agreement would eliminate the past bailout shortcomings and mistakes while creating  both credible sanctions for those who violate the terms of the agreement as well as a bail-in clause for private creditors and banks so that they too will bear the cost of any future bailouts.

Convincing the German population that sticking with the euro-marriage is better than divorcing the unloved currency will prove to be a tough task.  But, for the Chancellor there is no credible alternative. Better she embark on this arduous path sooner rather than later.

Thomas Straubhaar is the Director of the Hamburg Institute for International Economics and was a Transatlantic Academy Fellow at the German Marshall Fund of the United States

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