Returning after a week in Berlin and Frankfurt talking to the German policy establishment, it is very strange to read the entries to the Wolfson Prize on EMU break-up, brilliant though they may be.

One contestant talked of a secret German task force to break the euro overnight into 17 national currencies, others of the need for a planned and "orderly" withdrawal by Club Med and Ireland, others for jurisdictional clarity on debts so that investors can prepare in good time (I kid you not).

Yet if anything is clear in Berlin, it is that Germany’s elites think they have basically solved the crisis by pushing through debt relief for Greece, by imposing their Fiscal Compact on Europe, and by beefing up the firewall to ?700bn (actually just ?500bn).

They are on a different planet from City grunts at the coal face of global debt markets, who mostly suspect that Euroland’s cancer is in brief remission, and who know that Europe is going to pay a very high price for forcing banks, insurers, pension funds, and sovereign wealth funds to accept a 75pc haircut on ?200bn of Greek debt – the biggest act of expropriation and theft in history. (The Norwegian Petroleum Fund has already declared war.)

The German elites seem to believe that a new cycle of global growth is safely under way after the nasty scare of the winter, and that the European Central Bank has done more than enough to shore up Club Med and the EMU banking system – too much, if anything, risking an inflationary surge (in their view, obviously, not mine).

Quietly overlooked is the frightening collapse of the Greco-Latin money supply. Real M1 deposits are still falling at double-digit rates in five countries, a leading indicator of very big trouble later this year. But it is easy to overlook such things if – as in Germany – unemployment is at a 21-year low and you are at the other end of the long cycle.

The idea that Berlin might conceivably have a plan up its sleeve to dissolve EMU at any time in the foreseeable future seems quaint. The sorts of City critics shortlisted for the Wolfson Prize are dismissed in Germany as chattering speculators who will soon be crushed by superior force of European political will – or merely deluded Anglo-Saxons (like me), sad relics from a declining nation that has missed history’s boat and is indulging in a big "sulk", as one person said in my presence at a dinner speech in Berlin.

It would be an exaggeration to say that German policy-makers think they have just saved EMU, or to say that they are glowing in well-earned self-righteousness, but not a big exaggeration.

Some clearly think it is enough to have played the good European by endorsing a bigger loan-fund (not grants, mind you, or transfers, subsidies, debt pooling, or fiscal union); that it is enough to be virtuous in thought and motive; that the German nation has redeemed itself after last year’s flirtation with a eurosceptic Sonderweg.

Let me be clear, I am not questioning the good intentions of the German people. The country is a vibrant democracy, and a model to us all in many ways. My contention is that their leaders are profoundly wrong about the nature of the crisis at hand, and that this misjudgment is lethal.

While there are differences between the Left (SPD) and Right (CDU) on the pace of austerity, they broadly agree that belt-tightening can nurse the Club Med bloc back to health. It worked for Germany. "We have been taught over the last twenty years that consolidation works, and we have come to believe it," said one dissenter.

It is an irritating comparison, of course. The debt-deflation facing southern Europe is of an entirely different character. These countries must claw back 20pc to 30pc in lost unit labour competitiveness against a formidably competitive Germany that is already preparing pre-emptive measures – through the Bundesbank – to crush any sign of nascent demand, let alone a credit boom. They must do so in a global slump, with punitive borrowing costs and debt dynamics from Hell.

Angela Merkel and Wolfgang Schäuble really do seem to believe that the Fiscal Compact can deliver their cherished "Stability Union", that debt-brakes can ensure discipline, and that economic expansion can be the moral reward of fiscal contraction – as if an economy were ruled by the crude zero-sum mechanics of a family budget.

There is almost no intellectual recognition – except among those who have lived abroad and worked in global finance – that monetary union has become an engine of contractionary havoc along the lines of the 1930s Gold Standard (which Germany should understand better, since it was the chief victim on that occasion); or that Euroland would be in crisis today whether or not the Greeks fiddled their books a decade ago, or even if Spain and Ireland had taken drastic measures to offset ECB stimulus six years ago.

Be that as it may, Wolfgang Schäuble is not going to oversee the dismantling of EMU – the project that he, more than anyone else still in public life, helped to create. He is a fanatic.

The risk is not that he will take Germany out of the euro in a huff, but that he will refuse to do so, that he will pursue scorched-earth policies until the bitter end to keep the mad scheme alive.

Will he demand yet more austerity when the time comes to secure the political backing in the Bundestag for yet more of bail-out packages? Will he drive half Europe deeper into its downward spiral of deflation and depression in order to save the dream, with calamitous results for German foreign policy and Germany’s 60 year investment in an enlightened post-War order?

Europe will remain in danger as long as Germany’s leadership class is packed with European true-believers. The Continent will be safe again only once Germany has rid itself of this ideological obsession and regained its rightful place as a proud, patriotic, sovereign state.

None of the short-listed contestants seriously backed the Henkel Plan – put forward by Hans-Olaf Henkel, the former head of the German industry federation (BDI) – proposing that Germany itself should withdraw from EMU. Most stuck to the conventional script that the weak states should withdraw in an orderly fashion to restore competitiveness and break out of debt-deflation traps.

I do not think that such an outcome can possibly by orderly (a point also made by Jens Nordvig from Nomura). It would set off a lethal chain reaction, engulfing Spain and Italy in short order. This in turn would embroil France through the exposure of French banks to Italian debt.

The only way to break up EMU without a disaster is for the Teutonic bloc to withdraw, leaving a Latin euro with the existing institutions of monetary union in tact and euro contracts upheld.

The new Teutonic 'Thaler’ would revalue. Exchange controls and central bank intervention could prevent this going too far at first, perhaps by 25pc or so to avoid a drastic shock to northern banks and exporters. If the Swiss can hold the franc at CHF 1.20 against the euro against the whole world, the Bundesbank can certainly hold the down Thaler for as long as needed.

Some Teutonic banks would be left underwater by their devalued Club Med debts. They would have to be recapitalised. Tough luck.

I stick to my view that such a plan can be executed technically, and would restore prosperity to Europe far more quickly than often supposed. I do not see the need for the convoluted plans put forward by some of the Wolfson contestants.

Will it happen? Of course not. Politics prohibit such a painless liberation. There is no figure in Germany able or willing to lead such a move. The intellectual ground has not been prepared.

Europe will instead hurtle towards its great, final, and obliterating crisis, cursed by sheer lack of imagination. The Project will be defended by its fanatics in the bunkers until the social, political, and diplomatic landscape has been reduced to rubble… and one day historians will ask why they did such a foolish thing.