Euro Zone’s Only Option: Ask for the Bill in German

Germany's economy has defied gravity month after month, recording growth when many of the country's euro zone peers were struggling to avoid or emerge from recession, but even the so-called "engine" of Europe is now succumbing to the crisis.

Unemployment is on the rise, the government has cut its outlook for 2013 growth, and government benefits have been slashed.

Economists have long warned that the country's export-led growth — other troubled euro zone countries are among Germany's main trading partners — would likely stall towards the end of 2012 . With the economies of other export partners like China slowing too, Germany may have little choice but to swallow its pride and hand over more powers to Europe.

Satyajit Das, author of the book "Extreme Money, " told CNBC that Germany's problem is that it has two options — cut and run, or stay in the euro zone — and both lead to the same conclusion.

If the country stays in the euro it will be forced to sign more checks, and if Spain or Italy need money the "last man standing" is Germany, he said. "They take on these liabilities. This is what they fear: debt mutualization, " Das said.

If the country leaves the euro zone, however, Germany's Bundesbank will never recoup the money Europe's periphery owes it, he said. In addition, the new German currency would revalue sharply and the country would lose its competitiveness.

Debt mutualization — through the creation of common euro bonds — has been advocated by French President Francois Hollande, but vehemently opposed by Germany.

Polls show that many Germans are opposed to ceding greater national economic sovereignty to Europe, but in the run-up to yet another European Union summit starting later on Thursday, German Chancellor Angela Merkel is calling for just that. (Read More: Why a German Recession Could Hurt the Euro .)

In a speech to German Parliament or Bundestag earlier on Thursday, Merkel called for the creation of an EU monetary commissioner, who would oversee national budgets and would have the power to veto them.

She also wants to hand over power to European agencies to intervene if EU member states violate euro zone rules. Before the crisis, those rules said national budget deficits must not exceed 3 percent of gross domestic product , although many exceptions to that rule have been granted as the crisis worsened.

Neil MacKinnon, chief economist at VTB Capital, said the key issue to resolving the crisis was whether Germany decided to monetize the debt of southern Europe.

"If it does, then there will be eventual progress towards fiscal union, banking union, " he said. "There's no doubt an element of subterfuge and political tactics going on. Certainly German tax payers are worried about having to foot the bill and they don't want to do that."

Merkel, who will be challenged by Germany's former Finance Minister Peer Steinbrueck in elections in September 2013, has already backed the European Central Bank's bond-buying plans — a program which many analysts have said also amounts to a loss of national sovereignty.

All of the above places Merkel in a precarious position ahead of the German elections.

"The Germans have to be seen getting something in return. Whether it's greater political control over budgets, greater control over bank supervision, they want something, " Das said. "If they go back to the electorate and say: We've just handed over the keys of the citadel … without any controls, it's going to be politically suicide for them."

Das added: "It's still about the politics and the politics is: The Germans want to do the absolute bare minimum until September 2013. They certainly don't want to increase any more financial commitments … so we'll just drag this thing on and in that process we're going to see what everybody wants, which will occur through the back door — mutualization of debt."

—By CNBC's Antonia van de Velde