It was the best of deals; it was the worst of deals. Now it is Germany waving a piece of paper declaring peace in our time. Now it is Germany taking the burden of what Angela Merkel, its leader, calls "the worst crisis since the second world war". Greece has defaulted by 50% on its debt. The afflicted banks are to be aided, and the wider eurozone is to be underpinned by a trillion-euro credit line, as yet obscure in origin. The euro, and with it the ramshackle, backfiring, gold-plated jalopy of European union, is back on the road, albeit without driver or map.

The Greek default was necessary from the moment the euro was invented. The line may now be held, if sufficient growth can be stimulated fast enough to redeem the ever mounting debts. But a precedent has been set. If Italian or Spanish debts should prove unsustainable from the revenues of their citizens, the same crisis as afflicted Greece could overwhelm the new bailout fund. Socialist economies have proved the useful idiots of banker capitalism, piling liabilities on to future generations, like Gordon Brown's PFI hospitals. The day of reckoning has come, but not yet gone.

Champions of the euro breathing sighs of relief deserve no sympathy. Since its launch in 1999 they knew this would happen. They knew the preconditions for a single currency – economic convergence and an enforceable "stability and growth pact" – were not in place. They knew that putting Europe back on a sort of gold standard would not bind national economies together into a single homogeneous powerhouse. As the uncompetitive members lurched into debt, they tut-tutted about sinfulness but did nothing. Instead the eurocrats waffled on about a solution lying with closer fiscal and political union, a sort of Holy Roman Empire reborn. They knew this was rubbish. Yet I have not detected an ounce of shame for the misery this policy has inflicted on the Greeks, and will soon inflict on the Italians and the Spanish. Youth unemployment is now 46% in Spain, fighting an estimated 30% overvaluation of Spanish output against Germany. The single currency is mad, and politically dangerous.

What now? The cliche, in both Europe and America, is that the credit crunch has shown up a deficit in leadership comparable to that seen between the two world wars. But leadership derives from democracy, and that in turn derives from clearly delineated constitutions. Europe has been a constitutional shambles for half a century, with a widening gulf between its electorates and those taking increasingly intrusive decisions over them. The unpopular Lisbon treaty had to be enacted in the teeth of European public opinion. No British party had the nerve to put it to referendum.

Push now comes to shove. Merkel spoke yesterday of what is needed to realise and entrench the rescue package. It was yet more Lisbon-style fantasy. She talked of imposing German überwachung, or political discipline, on the Greek public sector. How? When she and Nicolas Sarkozy smirked over Italy's inability to curb its spending, the message was clear. Something must be done about Italy. By whom? Merkel rejected a proper European central bank to bolster the single currency, but as France pointed out, how can a currency function without one?

To Merkel all this meant "a revision of the union treaties" to reflect the new disciplines. The euro needs the support of a single fiscal regime, which would mean one European tax system, one inspectorate and one police to enforce it. It would in turn imply a single European social benefit regime, again somehow policed. It implies one government. From the start, this is what European unionists wanted, but wanting is not having.

Merkel cannot be serious. There is no way a drastic increase in the central control of the European economy will gain support from national electorates. Nor will they accept that the European parliament offers sufficient accountability. People will not be further divorced from those who run their lives and fix their taxes. Were Germany and France to impose a single socioeconomic regime on all Europe as the price for a single currency, most governments that co-operated would be voted out of office.

That is why Germany's demands will not be met. The politics will not sustain them. But if they are not to be met, what is the point of these crises, each one of which costs billions of euros and postpones the day when Europe's leaders can concentrate on growth rather than regret and redemption? As long as there is no united European state, there can be no united European currency. The euro may suit converged economies, like Germany's immediate neighbours, but it cannot be a tool of political suzerainty by Brussels over 17 diverse nations. Whatever the question, the euro is not the answer.

The marginal states of the European Union must, like Britain, revert to floating exchange rates, to take the strain of different lifestyles and working practices. Britain had to learn that painfully when Churchill adopted the gold standard in 1924. After the war Britain tied itself to the dollar and suffered. After it broke free in the 1970s it prospered. No amount of "pro-Europe" platitudinising will find jobs for millions of unemployed workers who are the euro's victims round the Mediterranean basin. No amount of patronising analysis will turn Italian farmers or Spanish fishermen into German technicians. The differences between states must be reflected in their terms of exchange. This is not a matter of being "pro- or anti-Europe". It is why the eurozone must find a way to a "managed shrink".

America has precious few messages to give Europe just now, but one is as old as the republic itself. It is that constitutions matter in confederacies. The rights and duties between related states matter. It matters how a supranational government orders a subordinate one. Sovereign assemblies must know where they stand. Voters, too, must know where they stand. Constitutions must reflect and respect tiers of responsibility or voters will rise up and defy them.

The dream of a fused Europe, like that of one America, was noble after the horrors of the 20th century. But it was unrealisable as envisaged. It instead morphed into a sanctimonious, mono-cultural elitism, dominated by the bankers and bureaucrats that have brought it to the present pass. At first the EU was just a mildly corrupt way of shuffling taxpayers' money round the continent. Under monetary union after 1999 it went both reckless and rigid. It has snapped, yet its apologists have nothing better to offer than bromides about budgetary discipline and fiscal union.

Europe is a confederation that needs a working constitution. But it needs one detoxified of "ever closer union". There must be clear boundaries of sovereign discretion. Members should be able to trade with each other free of the shackles of politico-economic union, even if the result is many un-level playing fields. The nation states of Europe must have legislative space to breathe free. That is what a new constitution should offer. We were a million miles from it today.