THIS historic referendum has proven a watershed.

A small European state has dared to face down pressure from the big industrial nations and global agencies to accept the neo-liberal, pro-austerity orthodoxy that has prevailed over the past four or five decades.

Are the Greeks correct to rebel? By rejecting the latest EU, European Central Bank (ECB) and International Monetary Fund (IMF) proposals – more accurately, asking ordinary Greek voters to judge – is the Syriza government in Athens not risking economic Armageddon out of ideological spite?

The reality is that Syriza had nowhere else to go. As I wrote here last week, the immediate crisis was precipitated by the IMF and the ECB. Both agencies, acting in concert, tried to bounce Syriza into accepting their latest demands for more austerity by publicly proclaiming there would be a run on local banks if the Greek Government refused to do as it was told. But Syriza outsmarted everyone by calling the referendum, and handing the decision to the Greek people.

In a bid to derail the referendum, the IMF and the ECB immediately withdrew their offer of more financial support for Greek banks – claiming there was now no deal for the Greek electorate to pronounce upon. In doing so, they misread what the vote is all about. Syriza still wants to stay in the eurozone, as do most Greeks. The referendum is aimed at forcing more concessions from Europe. By taking matters to the brink, a No might just secure more concessions.

By way of proof, Germany’s hardline finance minister Wolfgang Schäuble struck a conciliatory tone towards Athens over the weekend. I’ve met Schäuble; he’s a tough but sardonic right-winger who survived an assassination attempt. He is the main architect of Germany’s pro-austerity programme – for the rest of Europe, that is. If Wolfgang is prepared to move, the Greeks might stand a chance. For it there is one thing that Schäuble wants more than austerity it is to preserve the euro, and hence German economic dominance. Forcing Greece out of the eurozone might undermine confidence in the whole common currency project.

The eurozone is not a proper, fully functioning monetary union. Rather, it is a disguised fixed exchange rate system based (implicitly) on the old German Deutsche mark. And therein lies its cardinal weakness. Monetary unions are quite useful things, if properly constructed. They remove the risks and uncertainty of local currencies suddenly changing in value. Britain’s soaring trade deficit, for instance, has a lot to do with the high value of sterling, which is making manufactured exports dearer.

But to create a functioning monetary union shared by separate nations requires a bit of engineering. For starters it requires a common central bank equipped to print money in emergencies, both to provide private banks with liquidity (lest they go bust), and to act as a purchaser of bonds (debt) issued by member state governments. The latter is necessary in case a naughty government – think Greece – heads for insolvency, which might spook the markets into dumping every member’s bonds, sending interest rates sky-rocketing across the monetary union.

HERE’S the insane thing: the euro was created without any of these safety mechanisms. This was largely because the Bundesbank – the fiercely independent German central bank created by the Allies after Wold War II – refused to countenance any situation where a rival all-European central bank would be in a position to print euros willy-nilly and thus risk inflation, or to underwrite profligate foreign governments. Ordinary German voters, mindful of the raging inflation of the Weimar period that gave birth to the Nazis, concurred. They would only give up their cherished Deutsche mark for the new-fangled euro provided the latter was actually the old Deutsche mark under a different name.

The result was a disaster waiting to happen. True, the eurozone had something called a European Central Bank, located in downtown Frankfurt, not far from the real (and still very active) Bundesbank. But the new ECB was deliberately prevented from acting as a lender of last resort to private banks in the eurozone and from supporting the market for bonds issued by member states. In other words, the eurozone had no monetary fire brigade if a financial conflagration broke out.

You might ask why the Germans and everyone else sleepwalked into this all-too-predictable nightmare? Answer: Berlin wanted to bind the other economies of Europe into its industrial network via fixed exchange rates guaranteed by a common currency. The richer eurozone countries such as France would not be able to devalue to compete, while new East European entrants such as the Czech Republic and Poland would serve as cheap sources of components and labour. All those advantages could be lost if Greece leaves and, in its wake, the global currency markets conclude the eurozone is unstable and may not last.

Which may explain why Germany’s economic strong man, Wolfgang Schäuble, suddenly announced at the weekend that a Greek exit from the euro could be “temporary”. This suggests letting Greece revert to its national currency, the drachma, while the economy recovers. Or reintroducing the drachma for domestic purposes and keeping the euro for international payments. That may sound complicated but is quite feasible – all the eurozone members ran joint currencies for a period before the euro went “live” in 2001.

A Yes vote, on the other hand, will close the door to any concessions from Europe. It is also certain to trigger a Greek election which could theoretically elect a new government that accepts the EU, IMF and ECB demands for more austerity. That would be a counsel of despair. For there is another aspect of the eurozone model that is not fit for purpose. The richer euro zone countries – Germany and the Netherlands – run a permanent trade surplus. In other words, they refuse to recycle their export earnings to buy goods from the rest of Europe. This means countries such as Greece cannot generate growth through selling to the richer states. They are locked into perpetual austerity.

In Britain, the Tories are gloating about the problems in the eurozone.

This is short-sighted. It forgets that the euro project is not really about furthering European unity per se – anathema to the Little Englander Tory right. Succeed or fail, the euro is about strengthening the dynamic German export machine. Chancellor Osborne’s consumption-led economic strategy, on the other hand, is based on a mini house price bubble stoking up more consumer debt.

The UK current account deficit – what we borrow each year from abroad to fund our imports – hit an unsustainable 5.8 per cent of GDP in the first quarter. British workers are splurging more than 95 per cent of what they earn, with household savings back to their lowest since the start of the downturn. In other words, Osborne has “revived” the UK economy by pursuing the debt-led strategy he and the Germans accuse the Greeks of pursuing.