EU citizens would have a harder time finding jobs and the economy would suffer should Europe's internal passport-free zone collapse under the pressure of the migration crisis, the head of the bloc's executive said.
European Commission President Jean-Claude Juncker conceded it would not be easy to curb the mass influx of migrants and refugees, a top priority for Germany.
Germany is the euro zone's biggest economy and the main destination for those arriving.
The migration crisis, Europe's worst since World War Two, exposed bitter disagreements between EU members and has put the Schengen zone of passport-free travel on the verge of collapse, a prospect Juncker set out to warn against.
"Less Schengen means less employment, less economic growth," he told a news conference in Brussels.
"Schengen is one of the biggest achievements of the European integration process. Without Schengen, without the free movement of workers, without freedom of European citizens to travel, the euro makes no sense," he stated.
"And the same applies to the link between Schengen, freedom of movement and the internal market. If anybody wants to kill off Schengen, then ultimately what they are going to do is do away with the single market as well. And that's going to lead to unemployment issues in Europe," Mr Juncker added.
He said the brake-up of Schengen would also make freight and business travel much more expensive as he urged member states to deliver on measures the bloc has already adopted to mitigate the crisis but largely failed to deliver on.
EU members have traded accusations over who is to blame for the crisis, with Brussels and Germany accusing Italy and Greece of letting too many people in.
The southern states lambasted Berlin for an open-door policy that encouraged more arrivals.
Last year, more than one million arrived in the EU.
The bloc had little success in creating migrant registration "hot-spot" sites in Greece and Italy, relocating people who already arrived to other EU countries or getting Turkey to keep more of the migrants and asylum-seekers on its soil.
Juncker said he would not give up seeking a European solution to prevent member states from resorting to national fixes, like reintroducing border controls within Schengen.
But he admitted that would continue to be an uphill battle.
"I don't have too many illusions about the year ahead because everything is going to be difficult. But I'm not going to give up, I reject the idea that this is somehow the beginning of an end," he said.