WHEN BRITAIN ABANDONED the gold standard in 1931, it was not only forsaking a system for managing the currency but also acknowledging that it could no longer bear the mantle of empire. When America broke the dollar's peg with gold in 1971, it ushered in a decline that continued until Paul Volcker re-established confidence in the currency in the early 1980s. As Joseph Schumpeter, the great Austrian economist, once wrote: “The monetary system of a people reflects everything that the nation wants, does, suffers, is.” In the same way, the crisis that has engulfed the European Union (EU) is about much more than the euro. As government bonds, share prices and banks swoon and global recession knocks on the door, the first fear is of financial and economic collapse. But to understand what is happening to the currency you also need to look at what is happening to Europe. The euro will not be safe until Europe answers some fundamental questions that it has run away from for many years. At their root is how its nations should respond to a world that is rapidly changing around them. What will it do as globalisation strips the West of the monopoly over the technologies that have made it rich, and an ageing Europe starts to look increasingly like the western peninsula of a resurgent Asia? Some Europeans would like to put up carefully designed fences around the EU's still vast and wealthy market. Others, including a growing number of populist politicians, want to turn their nations inward and shut out not just the world but also the elites' project of European integration. And a few—from among those same elites, mostly—argue that the only means of paying for Europe's distinctive way of life is not to evade globalisation but to embrace it wholeheartedly.

This is not some abstract philosophical choice. It is a fierce struggle for Europe's future, being waged in Athens as George Papandreou loses power to a temporary government of national unity, in derelict factories in France and Belgium and in the wasted lives of millions of unemployed young Spaniards. This struggle will set the limits on Europe's welfare state. It will determine how the unbalanced partnership between Germany and France, and an increasingly detached Britain, will shape the EU. It will define the high politics of Brussels and the low politics of European populism. And it will decide the fate of the device that Schumpeter would see as the embodiment of all this: the euro. Just now the euro zone is caught in a dismal downward spiral. Fears about whether the governments in Greece, Portugal, Ireland, Spain and, most alarmingly, Italy will honour their €3 trillion ($4.2 trillion) or so of borrowing are wrecking European banks, which own their debt. Struggling banks undermine confidence and credit. Coming on top of fiscal austerity, this is bringing on recession, deepening fears that governments will be unable to pay back their debts, which further weakens the banks. And so the vice turns, down towards disaster. The euro zone still has the capacity to stop this run on its banks and governments. As a block, it is less indebted than America and its public-sector deficit is lower. It has the money to fortify its banks against the default of Greece—and Portugal and Ireland, if need be. And it is minded by the European Central Bank (ECB), which can in principle stand behind those vulnerable governments by buying their debt in unlimited quantities on the secondary market. But the EU has repeatedly failed to put forward a convincing euro rescue. Its latest and bravest attempt, at the end of last month, fell short of the mark—just like all the others. That is because the Europeans are deeply at odds over what the crisis is really about, and riven by disagreement over what each country must contribute towards solving it (see article). So long as the euro zone's members cannot settle these arguments, or at least agree that their differences matter less than finding a solution, the collective action needed to defend the euro will remain impossible. Many roads to disaster

While the world waits for Europe to make up its mind, catastrophe is in the air. It could take many forms. A country might storm out of the euro—which the treaty forbids, but who could stop a determined government? European banks might suffer a fatal loss of confidence. Italy or Spain might become unable to borrow on decent terms. Or a government trying to impose austerity might be replaced by one that rejects it. Any of these could cause contagion and plunge the world economy into depression.

Some people speculate that Germany might lead a breakaway core of euro-zone countries. But as the Teutonic euro soared in value, banks and companies would lose huge sums on their assets abroad and its exporters would find themselves at a disadvantage. Besides, for Germany to flout an EU treaty so brazenly would damage all EU law, which argues strongly against it.

Explore our interactive guide to Europe's troubled economies

Greece is more likely to buckle under austerity and quit after a succession of governments like the new one. But it would be a desperate act. Banks would collapse and capital flee, and many of Greece's companies, unable to pay their euro-denominated bills, would go bankrupt. Already shut out of debt markets, Greece would probably lose all financial aid from the EU.

Amid recession and the contagion of a debt default, bank collapse or Greek departure from the euro, Europe's single market would be in danger. At an EU summit in 2008, when the financial crisis was raging, Nicolas Sarkozy chastised the commission for being too zealous in upholding competition. A senior official reckons that, if the French president had at that moment asked for a vote, the heads of government would have suspended the rules. The crisis today is at least as grave as it was then.

Since it is possible to avoid such a catastrophe, you might think that the worst will not happen. And indeed it is unlikely—but not impossible. Precisely because of the dire consequences, everyone is counting on the next person to see reason. The new Greek government might reckon that Europe would never let Greece collapse. At the same time the ECB and Germany might refuse to step in, because they do not want countries to evade reform. Or perhaps austerity might eventually lead to populists that turn away from the euro—to hell with the consequences.

A euro-zone central banker confesses that he has lately been thinking about historical catastrophes such as the first world war and wondering how the world blundered into them. “From the middle of a crisis”, he says ominously, “you can see how easy it is to make mistakes.”

Economic and Monetary Union (EMU) was supposed to banish the competitive devaluations that threatened the single market in the early 1990s. It promised to bind a unified Germany into the EU and pave the way for some sort of political union in Europe. Today that dream has not vanished altogether, but the single market is under threat once more. Europe's nations are at loggerheads, Germany is in a state of outrage, and the link between the euro and the nation state is more fraught than ever. EMU truly is, writes David Marsh, author of a history of the euro, “Europe's Melancholy Union”.

“The 2008 crisis shows that the dominant economies were not as dominant as they thought,” says Dominique Strauss-Kahn, the French former head of the IMF. “If Europe fails, it will suffer from low growth, economic domination and cultural domination.” Can Europe turn back from the abyss? Only if the core countries will support the rest as they submit themselves to radical political, social and economic reform. Nobody should be under any illusions about how difficult that will be.