The current situation in the euro zone is "untenable" and policymakers will have to either pursue greater European economic integration or see countries exit the euro, George Magnus, Senior Economic Advisor, UBS told CNBC Tuesday.
"Every crisis takes us closer to the point where an existential decision has to be taken," Magnus said. "This sequential crisis that the euro zone has been through since the beginning of last year must be resolved."
"Greece has reached the end of the road in terms of austerity imposed by outside," the UBS economist added.
The European Central Bank will accept Greek debt as collateral for loans unless all the major credit rating agencies declare it to be in default, the Financial Times reported Tuesday.
On Monday, Standard & Poor's warned that a plan, backed by both France and Germany, for banks to roll over their holdings of Greek debt into new bonds, would constitute a “selective default”.
While the Greek government has managed to push austerity measures through parliament despite street protests in Athens, there are still doubts as to whether Greece will meet its debt reduction and asset sell-off targets.
The euro has also been affected by worries that problems in the Greek banking system could affect banks elsewhere in Europe.
"Whichever part of the financial market you mix with, in whatever region of the world, all eyes remain firmly focused on European sovereigns and on Greece in particular," Jim Reid, credit analyst at Deutsche Bank, wrote in a note Tuesday. "Without some kind of stability in Europe the financial market dominoes would likely tumble."
The issue of deleveraging, or companies reducing their debt levels, will move further up the agenda in Europe, Magnus believes.
A "sequential cycles of ups and downs, based around a very weak rate of growth while deleveraging continues" will hamper growth as companies battle economic uncertainty in 2012-12, he said.
The relatively low levels of saving in Europe and the US compared to Japan, which went through an extended period of deleveraging in the late 1990s, could make the situation worse, according to Magnus.