Outsiders to the world of money who start to take an interest in it soon notice that most of the things that alarm and outrage the wider public are taken by insiders to be perfectly routine and unremarkable. Consider the sums that bankers get paid, or the disruptive impact of hot money zipping around the world at the click of a mouse, tearing up industries and whole economies at will. To moneymen, those are just givens of the way the world works, and have to be accepted, in the absence of a credible plan to go off to found a new system on another planet.

Illustration by TOM BACHTELL

Once in a great while, though, something happens that reverses the loop, and has the moneymen more scared than the rest of us. That happened in late 2007, when the credit crunch began, and it’s happening again now. The cause is the crisis affecting the euro, and the risk that the economic difficulties of the seventeen euro-zone countries will break up the European Union. That prospect once seemed like an alarmist fantasy. Today, it is something that reasonable people see as a possibility—and if it did happen it would cause a financial convulsion that would make the collapse of Lehman Brothers seem like a theme-park ride.

The proximate cause of the current crisis is the economic situation in Greece. The Greek state, having relied for years on borrowed money and largely fraudulent economic data, cannot meet its debts, which are approaching half a trillion dollars—a lot of money for a country with a population of eleven million. As a result, Greece is verging on a default on its debts. The only question is whether the default will be orderly, cushioned by loans from the European Central Bank and the International Monetary Fund, and with deals about enforced losses to bondholders, euphemistically known as “haircuts,” in place. If it isn’t, the sequence of events will be chaotic and impromptu, and will almost certainly involve Greece’s exit from the euro zone and potentially also from the European Union.

There is no model or map or mechanism for this eventuality; it was supposed to be impossible. That’s why people are so scared of it. That lack of a viable exit route may come to be seen as one of the defining flaws of the euro zone. The guiding principles of the currency, which opened for business in 1999, were supposed to be a set of rules to limit a country’s annual deficit to three per cent of gross domestic product, and the total accumulated debt to sixty per cent of G.D.P. It was a nice idea, but by 2004 the two biggest economies in the euro zone, Germany and France, had broken the rules for three years in a row. It belatedly occurred to everyone that the proposed sanction on rule-busting countries—huge fines—wasn’t the smartest solution for economies that were already having trouble balancing their books. So no sanction was actually imposed.

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Perhaps that was the euro’s original sin—the reality that fiscal and budgetary rules could be broken without consequence. Or perhaps the sin was more fundamental than that: perhaps it was the attempt to create a currency union among countries with different economies, histories, cultures, tax rates, fiscal systems, legal frameworks—and doing so with a European Central Bank to oversee the currency but with no controlling political institution in parallel with that bank. Or perhaps it was a simpler, democratic deficit: the fact that for voters unhappy with pan-European policy there was no direct mechanism to commit the most basic political act of all—throw the bums out. Voters could manage this at the level of their local governments, but the management of the euro was always an uncomfortable compromise between varying, and often competing, national interests.

In the short term, all that matters is what measures are taken next. This is the moment when the grownups are supposed to step in and clean up the mess. The bigger and stronger euro-zone economies—in alliance with the International Monetary Fund—must step in with bailouts for Greece, before the mayhem spreads to other euro-zone countries and the banks. If “contagion,” the term favored by policy analysts, spreads widely, governments are going to have trouble borrowing money and repaying their debts; if governments have trouble repaying their debts, the institutions that own those debts—the already stretched European banks—are in serious difficulty.

The condition of these banks, since 2008, has been the elephant in the room, the big issue that everyone is assiduously ignoring. The reality check imposed on the balance sheet of American banks hasn’t happened in Europe. The European Central Bank did supervise “stress tests,” but they lost credibility in 2010, when Irish banks passed the tests and then promptly collapsed, forcing the country to be bailed out by the European Union and the I.M.F. Widespread skepticism about the condition of some banks has led to a run on their shares, and to a position where banks are growing reluctant to lend to one another—which is the first symptom of a proper 2008-style credit crisis.

What’s roiling the markets is the fact that the governments of the richer European nations, especially that of Chancellor Angela Merkel, in Germany, have been putting the domestic unpopularity of bailouts ahead of their evident economic necessity. This might be only a piece of theatre, taking the crisis right to the brink before the need for action becomes so apparent that its political cost is lowered. (Merkel is facing reëlection in 2013.) German politicians seem to have a block about making clear to their electorate just how much the country has benefitted, and continues to benefit, from the euro, mainly through its enormously helpful effect on Germany’s strong export economy. That could turn out to be a historic failure of leadership. The parliaments of all seventeen euro-zone countries are constitutionally compelled to vote on whether to reform and extend the euro’s too puny bailout mechanism; the measure passed in Germany, but elsewhere the projected margins for the vote are razor-thin. The difference between a safe euro and a euro on the verge of failure is the difference between that metaphorical elephant in the room, which you can ignore, and an actual elephant in the room with you, right now, filling the air with its hot, dank breath. That situation would be unignorable, and the source of a rising panic. The euro zone is already in the room with that elephant; unless some decisive steps are quickly taken, the rest of the world will soon be joining it. ♦