BERLIN Contagion spreads from Ireland to Portugal and then to Spain, forcing European leaders to exhaust the $1 trillion bailout fund they set up only half a year ago to defend their ambitious single currency project.
Sniping within the 16-nation euro zone mounts and popular support for the euro erodes as German taxpayers rebel against a series of costly rescues and austerity fatigue in the bloc's periphery reaches breaking point.
Eventually one or more countries decide enough is enough and break away or are forced out, reintroducing the national currencies they used before tying their fate to Europe's audacious economic and monetary union.
Unthinkable only a few weeks ago, a small but growing number of experts now believe some version of this nightmare scenario could become a reality for the euro zone if policymakers fail to unite behind a more forceful strategy for saving the euro and address investor concerns about fiscal and economic imbalances.
Until now, doomsday predictions of a euro zone breakup have come mainly from Anglo-Saxon skeptics, some of whom saw the single currency bloc and its one-size-fits-all monetary policy as fatally flawed from the very start.
Over the summer, British economist Christopher Smallwood of consultants Capital Economics produced a 20-page paper entitled "Why the euro-one needs to break up" and U.S. economist Nouriel Roubini, alias Dr. Doom, predicted euro members would be forced to abandon the single currency.
But as the second wave of Europe's debt crisis gathers pace, engulfing Ireland and heaping pressure on Portugal and Spain, a new group of doubters is emerging. They believe it may be difficult for the euro zone to hold in its current form, even if many think that remains the most likely scenario.
Some, like Financial Times commentator Gideon Rachman, say Germany could bolt if public frustration with bailouts mounts or if Berlin is unable to convince its euro partners to back its controversial plan for a new permanent rescue mechanism.
Dissident academics have challenged the legality of German participation in the Greek rescue in the Federal Constitutional Court. If they won, the impact on the euro could be devastating.
Others see a risk that economic divergence between Europe's stable core and debt-saddled periphery could end up splintering the bloc into a two-tier "Euro-North" and "Euro-South."
Still others believe Germany could engineer the expulsion of euro weaklings like Greece that it feels should never have been allowed in.
"I don't think we'll see a breakup of the euro and Germany returning to the deutschemark, but what we could see is a more homogeneous euro area purged of its low performers," said Domenico Lombardi, a former executive board member at the IMF who is president of the Oxford Institute for Economic Policy.
HUGE POLITICAL WILL
These voices still represent a small minority and few of the skeptics are convinced the euro zone will fracture anytime soon.
Close observers of Europe, and the policymakers charged with defending the euro, dismiss the possibility of a breakup out of hand.
They cite the huge emotional as well as economic investment in the project, the political will behind it, and the pain, complexity and humiliation an exit would bring.
They point to the resilience of the euro itself, which has lost some 6 percent of its value against the U.S. dollar in the past three weeks but remains a strong, stable currency by historical standards.
German Bundesbank president Axel Weber said on Wednesday there was "no way back" from the euro, reassuring his French audience that politicians would simply come up with more money if their $1 trillion safety net proved insufficient.
"My guess is that for quite a few years yet policymakers will do whatever they can to save this thing," said Katinka Barysch, deputy director of the Center for European Reform.
"If you sit in London, it's doomed. They don't understand the political investment. They look at the bond spreads and think it's doomed."
Jacob Funk Kirkegaard, a fellow at the Peterson Institute for International Economics in Washington, said a breakup remained "unthinkable" and pointed to the bloc's response to the Greek meltdown, in which, after repeated delays, it tore up the rulebook and took decisive action to stop the rot.
"If the euro were seriously at risk one could expect a much more forceful response," he said. "You would see the ECB printing 500 euro notes and dropping them from helicopters before Spain was forced to default or could endanger the euro."
FISCAL UNION A NON-STARTER
Still, if the recent turbulence has proven anything, it's that "shock and awe" measures are unlikely to appease investors for long, nor change their view that the bloc is fundamentally flawed because of a steep competitiveness gap that only a closer fiscal union may be able to solve.
Going down this path is a non-starter for Germany, which has insisted instead that peripheral euro countries push through deflationary wage cuts and painful structural reforms to boost productivity, in line with its own successful economic model.
The Greeks, Irish and Portuguese are going along with these policies for now, but skeptics worry that in the years to come this strategy will be exposed as deeply flawed and that destabilizing imbalances within the bloc will re-emerge.
The OECD predicted last week that Germany's current account surplus would rise back to peaks of around 7 percent of GDP by 2012. It forecast 2012 deficits for Greece and Portugal of 5.9 percent and 8.0 percent respectively, well down from their pre-crisis double-digit highs but still substantial.
The realization that markets may not allow the euro zone to muddle along making only minor tweaks to its fiscal rules, as it did in its first decade, appears to be sinking in among European policymakers.
On Wednesday, the finance minister of euro newcomer Slovakia described the risk of a euro zone breakup as "very real," a day after German Chancellor Angela Merkel told parliament the euro was in an "exceptionally serious" situation.
"This is a systemic crisis which requires a systemic response but we haven't seen that so far," said Lombardi. "This is being dealt with on a country by country basis, first Greece, now Ireland, and you can be sure they won't be the last country."
(editing by Paul Taylor)