THE European single currency and the Sunday Herald are the same age.

Both entered the world in January 1999, a coincidence our first editorial thought highly auspicious. Well, the Sunday Herald is still here, but incredibly there are now serious doubts about how much longer the single currency will survive. The great liberal project that was supposed to bind the nations of Europe together in economic harmony seems to have hit the rocks.

The Governor of the Bank of England, Mervyn King, isn't exactly renowned for telling it like it is, but he hit the mark last week when he expressed his dismay at the European Union "tearing itself apart without any obvious solution". It's as if Europe's political leaders no longer possess the will to make it stop. There is a fatalism seeping through the corridors of Brussels and Strasbourg about the hitherto unthinkable prospect of Greece leaving the eurozone. The euro, like diamonds, is supposed to be forever, but last week the German finance minister, numerous central bankers and even the head of the IMF were openly speculating about Greece restoring the drachma. There is talk of a "Grexit" – an "orderly" departure.

It is likely to be anything but. Make no mistake, the Greek people, who go to the polls again on June 17, are holding a gun to the head of the entire European financial system. If Greece falls, the bond investors who hold the fate of nations in their hands will start to price in the prospect of other countries following Greece. This can only increase the interest on the debts of the other so-called PIIGS nations, Portugal, Ireland, Italy, Spain – debts which are already unsustainable. Last week, Spain was having to pay more than 6% on its sovereign debt – dangerously close to the 7% tipping point beyond which it becomes impossible to repay. The credit rating of Spanish banks is being slashed and even in Britain people are talking about taking their money out of banks such as Santander. The shock of a Greek default/exit could be fatal to Spain, Portugal and Ireland.

But we shouldn't be too hard on the Greeks. Default may be a coward's way out – like personal bankruptcy. But it is a way out. If Greece restores the drachma it will wipe out most of its crippling debts overnight by devaluing its currency. Inflation will do the rest – destroying savings, pensions and slashing the cost of Greek labour and the price of Greek exports. Yes, banks will fail, thousands of public-sector jobs will go and hundreds of thousands will be left destitute and homeless. But within a few years Greece will probably be on the mend, its cheap exports selling well in European markets while those German tourists who scoff at the lazy Greeks will be flocking to its islands to take advantage of cheap drachma holidays.

But if Greece devalues its way out of its debt, there will be pressure in countries such as Ireland and Spain to do the same. The deflationary policies that have destroyed the Greek economy are also squeezing the life out of much larger countries such as Italy. There is only so long that democracies can tolerate mass unemployment, declining output, cuts in public services, increased taxes and slashed wages. The people will simply call a halt – as they have done in Greece. The technocrats of the European bureaucracy have always failed to grasp this inconvenient truth – that in democracies you have to win the hearts and minds of the voters in the member states. The Greek voters seem minded to take the bankruptcy route rather than suffer the long, slow death of debt/depression imposed by the ECB/IMF bailout conditions. Paying down debt is hard at the best of times; it is impossible when your economy is collapsing. Yet that is what is being expected of Greece, where the economy has shrunk by a quarter since 2008. Europe is imposing a kind of impoverishment that no German or French voter would tolerate. And what is sad is that the countries that have benefited so much from the single currency, most notably Germany, seem unable to understand with the Greek condition.

The German finance minister, Wolfgang Schaeuble, talks of Greece and the debtor nations as if they were errant children in want of discipline. Certainly, Greece suffered from petty corruption, an intense reluctance to pay taxes and a general sense of unreality about its economic predicament. But you could say much the same about Britain. It is said that Greece should never have been allowed in to the EU in the first place – but there is surely a matter of collective responsibility here. European banks poured money into Greece hoping for a quick return, rather like Northern Rock lent 125% mortgages to people who could never pay them back. Like the Rock, the lending policies of the big European banks – including ours – were a large part of the problem and they should accept some of the consequences.

Germany needs to be reminded that the strength of its export industries is the other side of the coin from Greek debt. If Greece is suffering from an overvalued currency that makes it uncompetitive, Germany, as the financier George Soros has pointed out, is benefiting from an undervalued currency that makes it hyper-competitive. If Germany left the EU, the deutsche mark would soar in value and people in the rest of Europe would stop buying all those VWs and BMWs because they would be too expensive. In a real currency union everyone is responsible for everyone else. In America, when California defaulted on its debts 10 years ago, it wasn't invited to leave the United States and set up its own currency. The matter was resolved at a federal level. We are entitled to ask what part of the phrase "European Union" does Germany still not understand?

In its 60 years of existence, the EEC/EU has often been accused of paralysis, of stifling bureaucracy, but now it appears to have acquired a death wish. The Mexican stand-off between Germany and the ECB on the one hand and Greece and the PIIGS on the other can only end in disaster. This is not really a financial problem; it is a political problem. The political will is no longer there to make Europe work. Spin back to the days of Francois Mitterrand and Helmut Kohl and you cannot imagine a situation like this. The French President and the German Chancellor would never have allowed it.

Helmut Kohl famously said in 1999 that the single currency is "a matter of war and peace in the 21st century". To his post-war generation, the euro was not just an economic project, it was a means to abolishing the economic nationalism that had caused two world wars and one Great Depression. These statesmen would never have permitted their finest achievement to fall into the current mess. Unfortunately, statesmanship seems to have deserted Europe at its moment of crisis.

On the day the new euro notes and coins were introduced across Europe, I was in Dublin taking the temperature. There had been great scepticism in the British press about the project ever happening at all – isn't a currency the defining characteristic of a free nation? But in the bars, streets and taxis, Irish citizens shed no tears about the loss of the Irish punt. Quite the reverse. They saw it as a great achievement to have joined this great international enterprise, a final end to their national inferiority complex.

They were no longer a second-class country sitting uneasily amid the remains of the British Isles. This shiny new currency put them on a par with the best in Europe. Well, four years after the banking crisis, the euro is no longer looking so shiny and the countries that invested their faith in the project feel cheated and demeaned. Ireland is suffering a return of the outward migration that has dogged its history. People are saying that Ireland was played for a fool when it embraced austerity four years ago.

Across Europe, nations are watching developments in Greece with awe and anxiety. We are on a count-down to a constitutional Armageddon in Europe – an institutional failure that would be followed by financial meltdown and a profound and prolonged economic depression. Europe has not seen instability like this in 80 years. It appears, once again, as if the lights are going out all over Europe, and we may not see them again in our lifetime.