At the end of July the Brussels headquarters of the European Union is usually winding down for the summer break. But not this year: The EU is facing its biggest crisis since the founding of its common currency, the euro, 12 years ago.
After more than a year of argument among the leaders of the 17-member euro zone, the financial markets have sent a clear message: they are dancing on the cliff edge and have two options. They can dither and let the euro collapse, with incalculable consequences for the European and global financial system, or they can agree on who is going to pick up the tab for the orgy of debt incurred by Greece and other weaker economies.
The leaders could be in no doubt about the seriousness of the crisis as they gathered in Brussels yesterday for an emergency summit.
The president of the European Commission, Jose Manuel Barroso, has been unusually blunt. "Leaders need to come to the table saying what they can do, and what they want to do, and what they will do. Not what they can't do and won't do."
To someone coming to the problem afresh, it looks ridiculously easy to resolve. Everyone recognises that Greece can never repay its debts. In the past, debtors have got into difficulty, and their loans have been extended in time, or partially cancelled, so they have a chance of paying. The banks, which are most exposed to Greek debt (mainly German and French varieties), made good profits from the business over the years, so why should they not take - as the financial jargon has it - a painful "haircut"?
This would be fine but for the unique peculiarity of the European Union. It is not a nation state, but a commonwealth of sovereign states, each with its own budget and borrowings.
In the US, states can and do go bankrupt, without endangering the credit-worthiness of the country as a whole. But the common currency was founded on the assumption that no euro-zone country would be allowed to default, the borrowing of the weaker economies being implicitly guaranteed by the stronger ones, which in effect means the German taxpayer.
If Greece is allowed to default, the implicit guarantee is torn up and banks would be less willing to lend to Ireland and Portugal (both of which, like Greece, have received massive bailouts) and, more seriously, to the major economies of Spain and Portugal. The people of Ireland and Portugal would demand the same terms as Greece. No democratic nation would tolerate labouring for a generation to repay foreign bankers.
The mere suspicion of a looming default would empty the Greek banks of their deposits, as people stuffed their savings in 500-euro notes under their mattresses. The European Central Bank would face an unlimited liability to keep the country and its banking system afloat.
In this Armageddon scenario, commercial bank lending would dry up, and the so-called "peripheral" economies would be bailed out by European governments, putting the burden on the European taxpayer.
For weeks the German chancellor, Angela Merkel, has stood her ground against the principle that her fellow countrymen will pick up the bill for profligate Mediterranean countries. This is a toxic issue in Germany, where voters are angry that, while they will have to work until 67, many in Greece retire at 55. Her popularity is sinking, as she is seen as too ready to bail out the euro deadbeats.
Standing against Mrs Merkel has been the French President, Nicolas Sarkozy, who has argued that any default on Greece's debts would bring the euro crashing down. He has favoured a tax on all bank assets in the euro zone. But that was shot down by Mrs Merkel during seven hours of talks in Berlin on Wednesday evening.
With the bank tax apparently off the table, the way is open for the euro zone leaders to agree on a menu of options to share the burden of the great debt overhang.
Ideas gaining traction yesterday included a second bailout of Greece with a limited restructuring of its debt; longer-term measures to prevent the contagion spreading to other countries; and boosting the resources of the European Financial Stability Facility to turn it into a baby IMF, capable of acting with speed and resolution when the next crisis comes.
European leaders also said Thursday they couldn't rule out a "selective", or short-term, default by Greece, in order to reduce its impossible debt burden. Commercial banks would remain engaged, but would have to take some losses. This would keep the euro from collapsing.
But it would not resolve the longer-term issue that Ireland, Portugal, Spain and Italy are weighed down by so much debt they cannot hope for economic recovery. These countries are caught in a debt trap, and will need a lot of help.
The real issue is more basic. All of these measures will be meaningless unless the "core" euro zone members - including Germany, France and the Netherlands - accept the principle that they are responsible for the problems of the periphery.
At the moment the EU is stuck half way between a commonwealth of nations and a sovereign state. It has a budget and a parliament and law-making abilities, yet each country has its own tax-and-spend policies. The wishful thinking that a unified currency and interest rate would magically bring together the 17 widely divergent euro zone economies has been exposed as nonsense.
The lessons of this week are that the EU needs to move towards a fiscal union, effectively depriving member states of their sovereign decisions on borrowing. In exchange, the richer countries would accept a commitment to solidarity with the weaker economies.
Ultimately this would be in Germany's interest. But Mrs Merkel, a stubborn and legal-minded politician lacking in rhetorical ability, is not the person to persuade a sceptical German electorate. Without it, however, this week's cliff-hanger summit will be endlessly repeated.
