Some people believe the Greek fiasco won't spread to the rest of southern Europe. Unfortunately, the contagion has already begun. Banks in France, Germany, Spain, etc. owns hundreds of billions dollars of the Greek debt. Recently, the large French and Spanish banks with large Greek debt saw their stock prices plunge and the cost of borrowing rise. During the U.S. subprime debacle, many people thought the crisis would be contained with the help of the government. Well, it was not. 

We could be seeing the repetition of the Argentine debt default in 1981. The domestic pressure against austerity was so intense that Argentina repudiated its foreign debt. The crisis of confidence spread throughout Latin America leading to the so-called "lost decade." Argentina went through a depression and its neighbors suffered a great deal.

From the global perspective, Greece, a small economy, is not the major issue. The worry is that the contagion could spread to the rest of the continent. If, for example, Spain got in trouble, the size of the rescue package will be at least five times what Greece is expected to get. Germany, France and the IMF can't afford such huge sums especially because there will be other countries in line asking for aid.

In addition, it is not at all clear that the legislatures of the donor countries would approve the rescue packages. Even for the Greek rescue program, Germany is having difficulty ratifying it. Many Germans feel that the profligate Greece should be kicked out of the euro-zone and be allowed to fend for itself. Persuading the reluctant German public for much larger packages would be very difficult. The Germans do not look upon the debt rescue kindly. Moral hazard is another issue. The rescue could simply encourage the poor fiscal management that put the countries in this mess inthe first place.

Heavily indebted countries such as Spain, Greece and Portugal are caught between a rock and a hard place. The economies are rapidly deteriorating and the jobless rate has shot up, to 20% in case of Spain. These countries have no ability to create the euro, nor the option of depreciating their currencies, as they could before monetary union. The only alternative is to further shrink the economy in order to increase exports and suppress imports, leading to a better balance of trade. Creating more unemployment in the current situation would be politically not acceptable.

The only other option is to leave the euro-zone and return to the old national currencies. With their own currencies, they can print money and allow the currency to depreciate, increasing their competitiveness in the international markets.

However, returning to their national currencies would be very difficult and messy. Their euro denominated debts won't go away, and currency volatility would return. Foreign investors would be reluctant to embrace the local currencies. Interest rate would jump. It is no panacea.

In short, the $143 billion Greek package won't stop the contagion. Defaults and restructuring of the debt are possibilities. Stitching together 16 countries with such diverse economic, social and cultural backgrounds turns out to be a lot more difficult than anticipated. The euro concept will be tested again and again.

The original purpose of the euro zone was more political than economic. After the two world wars, the key countries including Germany had decided that the best path to a political union was through an economic cooperation. If the current leaders in Germany and France still believe in the concept, they will try hard to keep the euro-zone together. If not, the zone could shrink in size.

Sung Won Sohn is the Martin V. Smith professor of economics and finance at California State University, Channel Islands.