The June summit of the eurozone was initially trumpeted as a decisive step towards resolving the crisis. Italy and Spain won agreement to allow European institutions to recapitalise banks and purchase sovereign debt directly.
But once financial markets had a closer look, it became clear that little of substance had been achieved, and the borrowing costs of Italy and Spain again approached forbidding heights. Meanwhile the Spanish government has imposed fresh austerity, breaking its promises to the electorate. And unemployment in the eurozone continues to rise, exceeding 11% on average.
It is now a fair guess that the European Monetary Union (or the eurozone) has crossed the Rubicon and is heading towards breakup or collapse. In the periphery of Greece, Portugal, Ireland and Spain, there is despair at the ever-deepening recession. In France and Italy there is burgeoning opposition to long-term austerity. In Germany there is frustration at feckless southerners.
Disintegration is likely to take a turn for the worse in 2013, as a global slump is in the offing. The large economies of Europe, including the UK, are entering recession largely due to austerity policies. The US economy is veering towards negative territory, as Barack Obama's expansionary policies were never vigorous enough. China is facing a hard landing that will force a re-examination of its growth strategy. The international financial system, meanwhile, remains weak and unreformed.
After three years of festering, truly drastic action is now required. Peripheral countries must abandon austerity as part of a Europe-wide programme to raise productivity, financial institutions must be taken into public ownership, and debt written off. But it is unthinkable that Europe's current political leaders would embark on such changes. Hidebound by neoliberal economics, they will continue with austerity, privatisation and liberalisation. The financial markets have sensed it and are preparing for disaster.
The disaster is likely to start in Greece. The country is in the midst of an unprecedented depression, made largely in Brussels. In 2012 output is likely to contract by 7% to 9%, on top of about 14% in 2008-11. Not surprisingly, the bailout programme is again missing its targets as recession has reduced tax revenues.
Yet the EU is insisting that the country should stick with the failed programme by imposing huge cuts in public expenditure in 2012-14. The aim is to achieve a primary surplus at the earliest date. If the cuts do take place and a global slump does indeed materialise, the Greek economy will contract ruthlessly in 2013, even by 10%. It would be an economic and social catastrophe, especially as unemployment is already at 23%, including 52% for the youth.
The present Greek government, formed out of the establishment parties of New Democracy and Pasok with the addition of the ardent Europeanist Dimar, is incapable of dealing with the crisis. They won the June election by playing on middle-class fears about returning to the drachma and losing savings.
They also cynically promised to renegotiate bailout terms knowing full well that renegotiation was impossible as long as the framework of the bailout was accepted. In practice, they are about to impose the spending cuts demanded by the EU, while liberalising closed professions and selling public assets in the ludicrous hope of boosting growth.
The government is unlikely to survive for long. As depression worsens in the next six months to a year, Greece will again confront the impossibility of sticking with bailout policies.
This time the decision is likely to be final, with profound implications for the ruling elite that took the country into the EMU on a wing and a prayer. The elite is now watching in horror as its strategy is falling apart, and seems incapable of devising an alternative path.
But Greece is unlikely to attempt suicide: at some point it will default on its debts and exit the EMU. There will then be a genuinely new government, perhaps formed by the left, which will navigate the chaos and guide the rebuilding of economy and society. Once Greece has made its move, the unravelling of the EMU will probably start in full earnest.
Costas Lapavitsas is a professor of economics at the School of Oriental and African Studies, University of London.