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"The country's political elite is still wedded to the European project even though Germany is no longer willing to pay over the odds to make European compromises possible," said Katinka Barysch, an analyst at the London-based Centre for European Reform think tank, in a research note. "The risk is that the Greek crisis brings a latent sense of frustration and disillusionment with the EU to the boil", she said. "It is hard to see how the EU could make progress on anything ...

"It does not address the underlying issue – the terrible economic growth prospects of the southern eurozone countries and Ireland," said Simon Tilford, chief economist at the Centre for European Reform think tank. "Unless these economies can avoid deflation and get their economies growing, they have no future in the eurozone."

Katinka Barysch, deputy director of the Centre for European Reform, an independent research organisation in London, said this partly explained why Mrs Merkel had taken such a very tough stance against bailing out Greece. "Merkel felt that her hands were tied by very real and immediate constraints," Ms Barysch said. "But her cautious and delayed reaction is also in line with a deeper shift in Germany's European policies. In a European Union of 27, Germans no longer automatically assume that their national interest coincides with that of the Union."

But putting changes into effect that would give the European Commission or other governments real control over national budgets is easier said than done, says Simon Tilford of the Centre for European Reform in London. Governments "are going to say all the right things." … "This isn't an issue that's going to be resolved by one or two governments getting tough on public spending," he says.

But the problem is more fundamental, said Simon Tilford, chief economist at the Centre for European Reform in London. "Most of the time, the gap between European rhetoric and reality is just an annoyance," he said. "But that gap is simply lethal when it comes to the euro." Instead of attacking markets and forming a new European agency, "the leaders need to focus on the issue that is driving the markets: the dire growth prospects for the southern rim" of the eurozone, meaning Greece, Portugal, Spain and even Italy.

"Leaders must find a way of preventing the crisis in Greece spiralling out of control, prevent it from bankrupting Greece and prevent it from spreading to the other eurozone countries. Because if it does, it will quite possibly lead to the unravelling of the eurozone," says Simon Tilford, chief economist at the CER. "That would be terribly damaging for Europe, for the EU and the political fall-out would be enormous."

Katinka Barysch, of the CER, said that that realization had hit home in Germany. "It might be unpopular for the Germans and Europeans to bail out Greece, but it will be even more unpopular for them to bail out the banks that owned Greek bonds… If growth stays negative or low in Greece, the fiscal debt will continue to increase, whatever they do," Ms Barysch said, while difficult structural reforms to liberalise the economy will take time. The economists she speaks to "don't really see a solution for Greece in the longer run," she said. …Greece is functionally bankrupt, Ms Barysch said.

As Hugo Brady, an analyst with the Centre for European Reform, said this week: "The EU tried for 10 years on the basis of peer review to make structural changes to the EU economy and no one really listened… Now that simple message might get through."

Alogoskoufis and Papantoniou were joined in a panel discussion by Wim Koesters, a professor at the Ruhr University in Bochum, Germany, and Simon Tilford, chief economist at the CER. "The point really now is about the degree of default, not whether there is going to be one," Tilford said. In the long term, in the absence of a common euro-region budget policy, "then I think we will see ongoing crises and a managed dismantling of the eurozone."