But even this 750-billion-euro package agreed between the euro zone and the IMF has not been enough to convince observers that the euro zone has turned the corner. It too only buys time for the euro zone to demonstrate better management skills.

How long does the euro zone have? Widespread doubts over the future of the euro zone have been ignited and they will be hard to eradicate. Even if the substantial ESM and other short-term measures, such as the quantitative easing of the European Central Bank, have stemmed immediate concerns about lack of funds and the risk of defaults on debt, it will take both action and time for the euro zone to rebuild its reputation and re-establish confidence in its future.

If investors remain unconvinced and shy away from further involvement in the financing of the high risk European markets, leaving the ESM to finance rollovers of debt and annual budgets, then the 750 billion euros currently earmarked may run out by 2013. If Italy is also dragged into the investor strike, the ESM might last little more than a year. In fact, if such a widespread bailout began to unfold over the next six to 12 months, with little sign of improvement in the problem countries and euro zone governance, then confidence would evaporate before the ESM's money ran out. The euro zone has little time left to be convincing, at least in its current form.

The stark alternative to making the euro zone function better, if all efforts fail, is to plan an alternative future. It would be wise to consider this backstop. This may possibly involve the creation of an exit strategy, a living will, for countries that cannot meet euro zone membership conditions or even consideration of the break up of the currency union.

Future options

Some see Greece being forced to exit the euro—setting up a new drachma and letting this devalue against the euro to boost competitiveness. The three-year aid package buys time for this to be a feasible option, as estimates suggest that exit could take around two years. But this poses three problems. First, Greece performed poorly prior to euro zone entry—devaluations did not resolve its economic problems before and almost certainly will not now—so structural and governance issues must be tackled instead and in principle this could be done from within the euro zone. Second, other countries might be forced to leave as well, depending on the criteria set for demotion from the euro. And third, it is hard for weak countries to leave the shelter of the euro: Apart from this taking time, such a move would probably send interest rates soaring, preventing access to financial markets and creating an even deeper, longer recession. This might correct an external trade deficit, chiefly by cutting imports, and reduce external borrowing but the turbulence in the economy would be harsh—as typically happens in an emerging market crisis, domestic demand may fall by 20-30 percent while GDP could drop by as much as 10-15 percent.