German Chancellor Angela Merkel and European Central Bank President Mario Draghi are at the center of a high stakes game of chicken. At risk is nothing less than the future of the single currency eurozone.

The European debt crisis has been roiling global markets and threatening another worldwide recession for more than two years, with no end in sight. Optimism in the wake of a treaty announced last week that would create a centralized structure for imposing fiscal discipline within the eurozone faded in a matter of days. 

Indeed, on Friday Fitch placed the ratings of Belgium, Spain, Slovenia, Italy, Ireland and Cyprus on watch for a potential downgrade, saying that after the EU summit last week that it finds a comprehensive solution to the eurozone problem "technically and politically beyond reach."

Now the focus is back on Merkel and Draghi.  

The German chancellor has emerged for all practical purposes as the undisputed political leader of Europe, her leverage stemming from her position atop what is by far Europe’s healthiest economy. For his part, as president of the ECB, Draghi controls the purse strings of the only purse in Europe that matters anymore.

The ground rules for Merkel’s and Draghi’s game are simple: wayward eurozone countries, namely Greece, Spain, Italy, Portugal and Ireland, must commit to plausible, enforceable long-term austerity measures or face the prospect of going it alone, without help from Germany or the ECB.

Without that help, which could come either in the form of additional small-scale bailouts of the kind already employed to prop up Greece, or, as many prefer, large-scale bond purchases by the ECB, defaults by one or more of those countries seems inevitable.  

A default by Greece, let alone Italy or Spain, is viewed by many as the first domino in a chain reaction that would lead to the disintegration of the single currency euro.

Ahead of last week’s summit in Brussels global markets trudged along apparently under the impression that a quid pro quo existed in which Merkel and Draghi would flinch if some sort of austerity pact was reached. Markets soared on the treaty headlines, but Merkel and Draghi haven’t flinched. If anything, they’ve dug in deeper.

“The game of chicken is absolutely necessary.”

- Axel Merk, president of Merk Funds

For anyone still missing the point, Germany’s central bank, the Bundesbank, undoubtedly taking its lead from Merkel, made it clear this week that it has no plans to participate in a large-scale, ECB-led bond buying program. The bank’s president in fact likened such a program to giving an alcoholic another bottle of booze.

And in a speech on Thursday in -- perhaps not coincidentally -- Berlin, Draghi said, “There is no external savior for a country that doesn’t want to save itself.”  

Now the question is how long Merkel and Draghi can hold out under increasing pressure from all sides -- the U.S., Britain, global markets -- to ease their positions and get on board with a fiscal windfall for cash-starved countries. Also, and more broadly perhaps, are they doing the right thing.

“The game of chicken is absolutely necessary,” said Axel Merk, president of Merk Funds and an expert in European finance. “The moment that the pressure is gone policy makers are wandering off and not making the sort of policy decisions they need to make. We’ve seen that over and over in the past few years.”

By “holding the feet of the policy makers over the fire,” Merkel and Draghi are “doing exactly what they should be doing,” Merk added.

But are Merkel and Draghi pushing still-salvageable economies in Italy and Spain toward a point-of-no-return, after which default is inevitable?

For instance, when borrowing costs in Greece, Portugal and Ireland topped 7%, making it impossible for those countries to get the short-term funds they needed to pay down and refinance their debt, all three sought and received bailouts. In November, as Merkel and Draghi stepped up their game, Italy and Spain crossed that 7% threshold and have been hovering near it ever since.  

Also looming on the immediate horizon is a threat by the major credit rating firms to downgrade the entire eurozone, even healthy economies such as Germany, if leaders remain incapable of finding a solution. In August, Standard & Poor’s made good on a similar threat issued to the     U.S., and the historic downgrade of U.S. debt left markets reeling for weeks.

Merk said global markets have already downgraded European debt on their own. So actual downgrades by the ratings firms would be old news before it happened.

Other analysts have suggested that defaults by one or more weak European economy might not lead to the economic apocalypse predicted by others.

Peter Tchir, founder of TF Market Advisors in Connecticut, acknowledged that Merkel and Draghi are engaged in a “very tricky” battle of wills. But, he asked, might they believe (like he does) that a default or two could have a sobering and therefore positive effect on the rest of Europe.

Tchir said Merkel’s and Draghi’s tough love strategy also extends to private European banks that will face massive losses if one or more country goes into default. And global markets be damned, apparently.

“I think they will play much tougher than we realize as they view banks as more state-controlled than the U.S. does and view the stock market with more disdain than our Fed,” he said.

The stakes are personally high for Merkel and Draghi, as well. Especially for Merkel, who is currently riding a wave of popularity in Germany, where a majority of business leaders and taxpayers of all stripes have grown weary of German money being used to bail out the failing economies of Southern Europe.

If austerity is successfully imposed with a minimal level of intervention by the ECB, Merkel and Draghi could see their names added to a list of contemporary European leaders whose policies helped shape the continent for the better: former British Prime Minister Margaret Thatcher, Polish politician Lech Walesa, and former Czech Republic President Vaclav Havel.

If the eurozone collapses under the weight of its own debt, however, and the hardline taken by these two is viewed as a significant contributing factor, their legacies could be very different.  

Follow Dunstan Prial on Twitter @DunstanPrial