Eighteen years have passed since the signing of the Treaty of Maastricht, a historic agreement which forged the economic and political amalgamation of twenty seven nations located primarily in Europe. This European Union developed a single market through a standardized system of laws, binding all of its members and ensuring the free movement of people goods, services, and capital across all borders. The creation of a single currency became a vigorously sought after objective of the European Union,  and today sixteen member states have adopted a common currency- the Euro- and constitute the Eurozone.

Under different circumstances, this eighteenth anniversary of the European Union would be cause for much celebration. What an enormous and ambitious accomplishment; the bringing together of such different groups of people into a union with one central bank, one set of interest rates, and a single currency. Kudos as well to the European Central Bank which despite a mixed bag of distractions has been able to stay focused on its mandated goal of price stability. And while the inflation rate exceeds the 3% official target rate, the European Central Bank has succeeded in dodging the high and feral inflation numbers garroting other world markets.

Despite all this good, the Euro has fallen dramatically against the U.S. dollar and other major currencies in recent weeks. The sovereign debt crisis in Greece has exposed some serious design flaws in the Euro. As a result, this adolescent currency and the polygamous marriage that created it are being severely tested, and never in these eighteen years have either been in as much trouble as they are now.

Dark clouds have been gathering as economic conditions in Europe deteriorate. The 300 billion debt eruption in Greece is the eye of a powerful storm poised to batter the European markets foundations and send the Euro into a tailspin. Sadly the crisis in Greece is just the tip of the iceberg. Lurking ominously beneath the surface are the enormous debts of other Eurozone members accrued from years of similarly egregious fiscal irresponsibility, poor planning, and lack of production. If Greece defaults on its debts, and this is followed by Spain, Portugal, and possibly Ireland and Italy, then the collapse of Lehman Brothers in 2008, which triggered the global economic crisis and wiped out trillions of dollars of global wealth, will seem like a rude burp. It isn't so much the default risk by Greece alone that is spooking the markets - after all Greece is only 2.6% of Europe's GDP - It is the fear of the unknown. Uncertainty over which direction all of this is heading is what has investors dumping Euros and scurrying for safer investment havens. What is the solution?

Normally Greece would be constrained to devalue the drachma, or allow the markets to do it for them ,  and that adjustment would help  rebalance their  economy and eventually make it more competitive . This can't happen because Greece is part of a monetary union and therefore bound to the one monetary policy of the entire Eurozone. The economic cost of a single currency for the Greeks becomes a harsh reality. The strait-jacket tightens as a single monetary policy allows for one exchange rate only. For such a diverse group of nations that experience different economic challenges this is less than optimal. Like waistlines, when it comes to monetary policy one size does not fit all. Factor in unemployment as well as inflation, and the average cyclical unemployment rate will also be higher with a single currency. A single currency also means that a country experiencing an increased trade deficit caused by a reduced demand for its exports cannot be helped by a reflexive exchange rate adjustment. This is a design flaw in the Euro laid bare. It is ill prepared to deal with problems and special situations that require flexibility because its balancing mechanisms are inadequate.

There is talk of Greece leaving the Euro or getting booted out the door. This would only make matters worse. An outcast and destitute Greece would complete its spiral around the drain, and thereby dramatically increase the value of its euro-denominated debts, creating hyper-inflation. A general devaluation of the euro helps nobody within the European Union because most of the trade is within Europe and they mostly exchange Euros between themselves.

Greece could throw up its hands and default now, like Lehman Brothers, and endure a debt restructuring, but the European Union would then have to brace for defaults from Spain, Portugal, Ireland, and Italy. The four trillion in U.S. dollars owed by these countries is seven times the debt Lehman Brothers had outstanding when it went belly up and propagated a global economic   tsunami. An even more volatile exploding set of European default dominos would be disastrous and represent an unthinkable nightmare for the world's banks.

A 'bail-out' of Greece by other Eurozone members is another option, but tight legal and constitutional restrictions make this highly unlikely. In fact Germany –with all the tact and diplomacy of a clenched fist-has flatly stated that a bailout would violate the European Union's treaties and undermine the foundation of the European Monetary Union itself, and that there could be no compromise. Not much room for interpretation there. Of course this makes perfect sense. Once Greece was helped the precedent would be set for the other countries in need. It would become impossible to deny aid to any other rule breakers. Financial assistance for countries that violated the terms of their participation in the European Monetary Union would seriously impair the credibility of the entire organization.

Loss of face aside for the moment, another problem with the bailout solution is that it doesn't solve the fundamental defects in the Greek economy. Another crisis would sooner or later present itself and as Yogi Berra would say, "it would be de'ja vu all over again." This is the reason for the stern response from Berlin. They do not want to create a welfare state and are demanding that the Greeks make the necessary internal adjustments, such as lowering real wages, raising taxes, and lowering government spending.

Bailout or bust; those are the parameters of the debate.  While it is unclear which course of action will be taken or if a favorable compromise between these sterile extremes even exists, the one certainty is that this situation is a long way from being resolved. As conditions in Europe continue to deteriorate, serious economic policy disagreements among the Eurozone countries will erupt. A prelude to this is playing out now. Germany is demanding that Greece adhere to the tenets of the Union and get its house in order by March 16th or lose control over its own tax and spend policies. If it fails to do so, the European Union   will   impose cuts under the draconian article 126.9 of the Lisbon Treaty in what would amount to economic suzerainty.

Greece will attempt to comply , perhaps humus a few bars of 'I'm sorry', to their German 'over-lords' and posture a bit more to save face but in the end will be unable to meet Berlin's demands. Losing control of their economic future will not sit well with Athens allowing resentment to fester, and paving the way for a Eurozone exit or eviction

The euro is in trouble. Its faulty foundation and that of the European Monetary Union are at the heart of the current problems. Economic conditions are developing in which a troubled nation might need a more expansive monetary and fiscal policy than what exists and leave or at least threaten to leave the Union. How could anyone fault Spain for example, with its 13% unemployment rate and a trade deficit of 10% of GDP from wanting to take charge of its economic future by spitting the Euro bit and pursuing a strategy more conducive to its needs? Try as they will, it is too difficult to reconcile the unique economic and  cultural differences that exist between the European nations. Nationalism and self preservation will always prevail and throw a wrench into the gears as long as an Italian considers himself an Italian before he does a European and a Frenchman a Frenchman. This seems like a case where the scope of the undertaking, namely the weaving of the European Union mosaic, may have been too ambitious. Rarely does a marriage of convenience last.

Nobody can predict with absolute certainty how the final act to this modern Greek tragedy will be resolved, or at the very least mitigated. But the following is a distinct possibility. The default of sovereign debt is assured by Greece and this will be followed in the long run by Spain, Portugal and Italy. Germany walks the diplomatic tightrope a while longer to prevent total collapse of a defective structure and when the time is right pushes for defaults along with expulsions from the European Monetary Union. The 'PIIG' nations will be carved away like fat from a T-bone, leaving behind a leaner core. The rendered nations will be forced to bear the shame of debt default, and return to their former domestic currencies, only with steep devaluations and contract adjustments. The European Monetary Union will not dissolve any time soon, as too many political favors where granted and secret markers called in to form the common market in the first place for that to happen without resistance. The new Union will however undergo an extreme makeover.

The Euro will yo-yo for a while as the bankers and politicians in Europe attempt to halt its decline, or else face rising systemic costs across the European Union's economic fronts. After the Euro stabilizes a bit and perhaps even enjoys a tiny bounce as it did for six hours on Wednesday, look for the Euro to slip on the next banana peel strewn carelessly about. It is important to keep in mind that until things come into better focus the migration will be away from the Euro currency, and that any up-tic will be the result of market correction rather  than anything that the Euro merited on its own.

The continent of Europe has never in the last eighteen years been more uncertain about its future. The plight of the deeply indebted and insolvent southern European nations has dragged down the Euro. For myriad reasons both political and non the Euro will see expulsions but not ruin. Consolidation will occur with Germany at the fore, but the effect of a collapsing currency can only lead to hyper-inflation and depression.

The Sovereign debt crisis unfolding in Europe is a reflection of the potentially catastrophic global financial problems bubbling at the surface everywhere. This  intractable recession that has wrapped it's coils around the worlds markets is the result of an era of grand illusion, where governments through their central bankers thought they could create prosperity from unlimited money printing, vast borrowing, and industrial neglect. The world is finding out that bankers are not alchemist and that paper cannot be transmuted into gold.