For the EU's smaller countries, the lesson is clear: if they do not reduce their budget deficits, there is a high risk of a speculative attack, with little hope for adequate assistance from their neighbors.

It may be useful to see the euro's problems from a global perspective.

The US has complained about China's current-account (trade) surpluses; but, as a percentage of GDP, Germany's surplus is even greater. Assume that the euro was set so that trade in the eurozone was roughly in balance. In that case, Germany's surplus means that the rest of Europe is in deficit.

And the fact that these countries are importing more than they are exporting contributes to their weak economies.

One proposed solution is for these countries to engineer the equivalent of a devaluation - a uniform decrease in wages. This is unachievable, and its distributive consequences are unacceptable. The social tensions would be enormous.

There is a second solution: the exit of Germany from the eurozone or the division of the eurozone into two sub-regions. The euro was an interesting experiment, but, like the almost-forgotten exchange-rate mechanism (ERM) that preceded it and fell apart when speculators attacked the British pound in 1992, it lacks the institutional support required to make it work.

There is a third solution, which Europe may come to realize is the most promising for all: implement the institutional reforms. It is not too late for Europe to implement these reforms and thus live up to the ideals, based on solidarity, that underlay the euro's creation.

If Europe cannot do so, perhaps it is better to admit failure and move on than to extract a high price in unemployment and human suffering in the name of a flawed economic model.

The author is University Professor at Columbia University and a Nobel laureate in Economics. Copyright: Project Syndicate, 2010. www.project-syndicate.org. Shanghai Daily condensed the article.