Whether the eurozone is viable or not remains an openquestion. But what if a breakup can only be postponed, not avoided? Ifso, delaying the inevitable would merelymake the endgame worse – much worse.

Germany increasingly recognizes that if the adjustment needed torestore growth, competitiveness, and debt sustainability in the eurozone’speriphery comes through austerity andinternal devaluation rather than debt restructuring and exit (leading to the reintroduction of sharply depreciated nationalcurrencies), the cost will most likely be trillions of euros. Indeed,sufficient official financing will be needed to allow cross-borderand even domestic investors to exit. As investors reduce their exposure to the eurozone periphery’s sovereigns,banks, and corporations, both flow and stock imbalances will need to befinanced. The adjustment process will take many years, and, until policycredibility is fully restored, capital flightwill continue, requiring massive amounts of official finance.

Until recently, such official finance came from fiscal authorities (theEuropean Financial Stability Facility, soon to be the European StabilityMechanism) and the International Monetary Fund. But, increasingly, officialfinancing is coming from the European Central Bank –first with bond purchases, and then withliquidity support to banks and the resulting buildup of balances withinthe eurozone’s Target2 payment system. With political constraints in Germanyand elsewhere preventing further strengthening of fiscally-based firewalls, theECB now plans to provide another round of large-scalefinancing to Spain and Italy (with more bond purchases).

Thus, Germanyand the eurozone core have increasingly outsourcedofficial financing of the eurozone’s distressed members to the ECB. If Italy and Spain are illiquidbut solvent, and large-scale financingprovides enough time for austerity and economic reforms to restore debtsustainability, competitiveness, and growth, the current strategy will work andthe eurozone will survive.

In the process, some form of fiscal and banking union may also emerge,together with some progress on political integration. But, however importantthe fiscal and banking union elements of this process may be, the key iswhether large-scale financing and gradual adjustments can restore sustainablegrowth in time. This will require considerablepatience from governments and publics in thecore and periphery alike – in the former to maintain large-scale financing, andin the latter to avoid a social and political backlashagainst years of painful contraction and loss of welfare.

Is this scenario plausible? Justconsider what must be overcome: economic divergenceand deepening recessions; irreversible balkanization of the banking system and financialmarkets; unsustainable debt burdens for public and private agents; daunting growth and balance-sheet costs incountries that pursue internal devaluation and deflationto restore competitiveness; asymmetrical adjustment, with moral-hazard risks inthe core and insufficient financing in the periphery fueling incompatiblepolitical dynamics; fickle and impatientmarkets and investors; austerity fatigue inthe periphery and bailout fatigue in thecore; the absence of conditions for an optimal currency area; and seriousdifficulties in achieving full fiscal, banking, economic, and political union.

If a gradual process of disintegration eventually makes a eurozone breakupunavoidable, the path chosen by Germanyand the ECB – large-scale financing for the eurozone periphery – would destroythe core central banks’ balance sheets. Worse still,massive losses resulting from the materializationof credit risk might jeopardize core eurozone economies’ debt sustainability,placing the survival of the European Union itself inquestion. In that case, surely an “orderly divorce” now is preferable toa messy splitdown the line.

Of course, a breakup now would be very costly, requiring an internationaldebt conference to restructure the periphery’s debts and the core’s claims. Butbreaking up earlier could allow the survival of the single market and of theEU. A futile attempt to avoid a breakup fora year or two – after wasting trillions of euros in additional officialfinancing by the core – would mean a disorderly end, including the destructionof the single market, owing to the introduction of protectionist policies on amassive scale. So, if a breakup is unavoidable, delaying it implies much highercosts.

But politics in the eurozone does not permit consideration of an earlybreakup. Germanyand the ECB are relying on large-scale liquidity to buy time to allow theadjustments necessary to restore growth and debt sustainability. And, despitethe huge risk implied if a breakup eventually occurs, this remains the strategyto which most of the players in the eurozone are committed. Only time will tellwhether betting the house to save the garagewas the right move.