Ángel de la Peña, a Spanish government worker, is seriously considering the once unthinkable: converting some of his savings from euros to British pounds.

Alvaro Saavedra Lopez, a senior executive for I.B.M. in Spain, says many of his corporate counterparts across the country are similarly looking for safer havens by transferring their spare cash to stronger euro zone countries like Germany “on a daily basis.”

It is only a trickle so far, and not nearly enough to constitute a classic bank run. But these growing transfers of deposits out of troubled Spanish banks reflect a broader fear that the country’s problems could make it hard for Spaniards to get to their money if banks fail and cannot be supported by the government. In a worst case, some even worry their money will be worth substantially less if Spain is forced to leave the euro currency zone and re-adopt its old currency, the peseta.

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With Greece’s membership in the euro zone teetering, fears of bank insolvency rising and Europe’s leaders bickering about what to do, the euro crisis is once again intensifying and threatening to undermine fragile growth globally.

At a summit meeting in Brussels on Wednesday, regional leaders failed to signal any significant new steps to stimulate the sputtering regional economy or resolve the competing agendas of President François Hollande of France, who favors stronger action to spur growth, and his German counterpart, Chancellor Angela Merkel, who has opposed aggressive moves to ease the pressure on Europe’s weakest economies.

Yet, the urgency for a solution to the region’s debt crisis, now in its third year, may never have been greater.

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The 17-country eurozone risks falling into a “severe recession,” the Organization for Economic Cooperation and Development warned on Tuesday, as it called on governments and Europe’s central bank to act quickly to keep the slowdown from dragging down the global economy.

OECD Chief Economist Pier Carlo Padoan warned the eurozone economy could contract by as much as 2% this year, a figure that the Paris-based organization had laid out as its worst-case scenario in November.

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…I do think that it would ultimately be better if the eurozone broke up. This might not involve a complete reversion to national currencies. A hard core of euro-users, centred on Germany, might survive. But the current euro will have to go.
It is true that the transition from here to there will be painful and dangerous. My colleague Martin Wolf laid out an updated version of the full horror scenario in Friday’s FT ”“ involving a breakdown of law and order in Greece, and financial collapse across Europe. How could anyone responsibly run that risk?

The answer is that the alternatives to eurozone break-up are inherently implausible and deeply unattractive.At the weekend G8 leaders called for Greece to stay in the eurozone. Their present plan seems to involve some magical mix of stimulus and austerity that restores both budgetary balance and growth. But even if they can agree a real plan and even if it works ”“ and neither outcome is likely ”“ the eurozone’s structural problems would remain…..

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The immediate future of the global economy, including Australia, now depends on Europe, and whether it can restore confidence to markets. If European leaders can resolve their tangle of problems, growth is ahead of us. If they can’t, all bets are off.

Pessimism comes more naturally than optimism. It is now five years since we first heard the phrase ”the sub-prime crisis”, which rang the end of a golden era of debt-financed growth. Since then, we’ve had years of recurring crises, summits and resolutions that promised to solve the problems, but haven’t.

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The leaders of the Group of 8, emphasizing growth as well as fiscal discipline at their meeting on Saturday, made a strong plea for Greece to stay in the euro zone and the European Union.

And no wonder.

Despite efforts at official reassurance, no one really knows the consequences of a Greek exit from the euro zone, or how rapidly big countries like Spain and Italy, and their banks, will feel the effects….

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Like the single market before, …[the Euro] was conceived primarily as glue to bind Europe more closely together, tie Germany’s prosperity to that of its neighbors and prevent a third world war from the Continent, which had brought us two. A few engineering flaws wouldn’t be allowed to get in the way of such an important project.

A little over a decade since the first euro bills hit the shops in Madrid and Berlin, the euro’s design flaws have pushed much of the European Union into a deep economic pit. And political imperative is again being deployed as a major reason to stick to the common currency. “This enormously important motivation is often underestimated by outsiders,” argued the Financial Times columnist Martin Wolf, the most sober analyst of Europe’s economic maelstrom….
The main problem is that while leaders eagerly embraced the monetary bond, they rejected its necessary complement: a central budget that would transfer money from successful regions to underperforming ones, as the United States government sends tax dollars collected in Massachusetts to pay for unemployment benefits in Nevada.

The euro fed the illusion that Greece, Spain and Italy were as creditworthy as Germany or the Netherlands, propelling a decade-long credit boom in Europe’s less-developed periphery. And it was spectacularly ill-designed to deal with the shock when capital flows to those nations suddenly stopped. Weak countries not only had to rely on their own devices; they had to do so without a currency or a monetary policy of their own to absorb the blow….

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Homeward bound after the Trojan War, Odysseus of Greek myth had to pick a path through seas harboring a monster with six heads and a whirlpool that digested ships whole. Now, whether modern Greece exits the euro ”” potentially triggering global economic turmoil in the process ”” depends on the tough choices of Ivi Moreti and her 11 million countrymen.

Should the 60-year-old widow leave her nest egg of euros in a wobbly Greek bank and risk it being seized and converted into a devalued national currency? Or should she withdraw it all, joining what could become a panic forcing Greece out of the euro anyway by bringing down the financial system?

Who should she vote for June 17, when this nation mired in political chaos holds its second election in two months? A party willing to largely accept the crippling bailout conditions that have taken a bite out of her pension and run the economy into the ground? Or the rising rebels promising to buck the austerity imposed on Greece by its bigger neighbors, , a course that might cause total economic collapse?

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Brussels is preparing plans for Greece to quit the euro, a senior official has revealed, as analysts warned that the country’s exit would cost European taxpayers at least €225bn (£180bn).

European Union trade commissioner Karel De Gucht said that both the European Commission and the European Central Bank (ECB) were working behind the scenes on contingency plans for a break-up.

“Today there are in the European Central Bank, as well as in the Commission, services working on emergency scenarios if Greece shouldn’t make it. A Greek exit does not mean the end of the euro, as some claim,” he said.

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There could be immediate risks to the Spanish and Italian economies: Tens of billions of dollars have left those nations in recent months as investors doubt their ability to both control rising public debt and boost their economies from recession. A Greek departure from the euro would, officials and analysts fear, push the lack of confidence in the euro zone to another level, accelerate that capital flight and leave one or both nations close to economic collapse.

It is a pattern reminiscent of what happened in Latin America and Asia in the 1990s, and it is the most likely way that a Greek exit from the euro could ignite a global round of financial contagion. The risks were highlighted Thursday when the Moody’s rating agency cut its assessment of Spanish banks, saying it had less confidence in the ability of the Spanish government to support the country’s financial system.

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French President Francois Hollande and German Chancellor Angela Merkel, who held their first meeting yesterday, might want to consider that they have been attacking the problems of Greece, the euro, Spain, Portugal, Italy, and even France backwards.

All the talk and all the effort has been aimed at keeping Greece and the others in the euro. But the real, ideal solution is to get Germany out.

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The head of Greece’s radical left party””throwing down a gauntlet that could increase tensions between Greece and its frustrated European creditors””said he sees little chance Europe will cut off funding to the country but that if it does, Athens will stop paying its debts.

A financial collapse in Greece would drag down the rest of the euro zone, said Alexis Tsipras, the 37-year-old head of the Coalition of the Radical Left, known as Syriza, and potentially the country’s next prime minister. Instead, he said, Europe must consider a more growth-oriented policy to arrest Greece’s spiraling recession and address what he called a growing “humanitarian crisis” facing the country.

“Our first choice is to convince our European partners that, in their own interest, financing must not be stopped,” Mr. Tsipras said in an interview with The Wall Street Journal. He said Greece doesn’t intend to take any unilateral action, “but if they proceed with unilateral action on their side, in other words they cut off our funding, then we will be forced to stop paying our creditors, to go to a suspension in payments to our creditors.”

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A senior Greek Protestant has warned that minority denominations “face disaster” due to the country’s worsening economic crisis.

“Heavy taxation, high unemployment and all our other difficulties are fast-forwarding us to collapse,” said Dimitrios Boukis, general secretary of the Greek Evangelical church, which has 29 congregations in two regional synods in Greece and other communities abroad.

“We receive no state support and are fully dependent on our members, and we’re already short of pastors because we can’t afford them. The pastors we have are having to handle everything because we can’t employ staff, so some congregations will end up without any spiritual care.”

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There would be massive global pressure on Europe to handle the exit in a grown-up fashion, with backstops in place to stabilize Greece. The IMF would step in.

The German finance ministry is already drawing up such plans, and quite correctly so (unfortunately roping in the British too to spread the losses, which is a thorny subject).

Needless to say, the real danger is contagion to Portugal, Ireland, Spain, Italy, Belgium, France, and the deadly linkages between €15 trillion in public and private debt in these countries and the €27 trillion European banking nexus.

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Greece may be forced to leave the euro if the country refuses to implement spending cuts agreed with the European Union, Angela Merkel warned.

Raising the spectre of a Greek exit, the German chancellor said “solidarity for the euro” was threatened by the ongoing political crisis in Athens.

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The euro crisis is entering its final stages. Economic pain is now interacting with political resistance to produce intense financial pressure. I expect Greece to leave the euro ”“ and perhaps very soon.

It could happen voluntarily, but both the Greek people and Greek politicians are still clinging to the idea that they can put an end to austerity yet still stay in the euro. In order to try to achieve that, a new government may call the eurozone’s bluff.

At that point, the other eurozone members would face an awkward choice. Doubtless there would be voices in favour of providing the money, willy nilly. That might well be the French position. But if the eurozone gives way on this, what chance would there be of painful austerity being continued, not just in Greece but also in Portugal, Spain, Italy and Ireland? The northern countries would face the prospect of pouring money into a bottomless pit.

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Speaking exclusively to The Sunday Telegraph, Theodoros Pangalos said he was “very much afraid of what is going to happen” after Greek voters rejected the deal in elections last Sunday.

“The majority of the people voted for a very strange mental construction,” he said. “We want to be in the EU and the euro, but we don’t want to pay anything for the past.”

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The chief danger is not for Greece. It is for the rest of the eurozone. If the German political establishment is unwise enough to force Greece out of EMU on the assumption that the country is a special case, it will be disabused of this illusion very quickly.

Total debt levels are 100pc of GDP higher in Portugal, and the country has roughly the same current account deficit. The only difference is that Portugal began its austerity death cure later and has not yet had time to enter into the full vortex of debt-deflation and collapse. Give it a few more months.

Spain and Italy are 20pc overvalued against northern Europe….

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Greece’s political turmoil showed no signs of abating Tuesday as hopes faded that leading political parties can form a coalition government after Sunday’s splintered election result, increasing the possibility that Greeks will be called back to the polls as early as next month.

The inconclusive vote and ensuing coalition talks, combined with concerns about the emergence of a Socialist president in France who opposes German-led austerity measures for the euro zone, has revived speculation that Greece would leave the euro, stoking new worries about the fragility of Europe’s monetary union.

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Europe is a mess ”” politically, economically, fiscally, economist David Rosenberg said Monday.

“In less than two years, we are now up to a total of seven European leaders or ruling parties that have been forced out of office, courtesy of the spreading government debt crisis ”” tack on France now to Ireland, Portugal, Greece, Italy, Spain and the Netherlands. Even Germany’s coalition is looking shaky,” the Gluskin Sheff economist wrote in his note Monday.

“This is quite a potent brew ”” financial insolvency, economic fragility and political instability.”

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My own view is… [that] the German deflation regime is – in the current circumstances – the greater threat to Greco-Latin societies, and to post-War comity in Europe. Sometimes you have to go through a cathartic trauma to break free.

But it is also true that Germany’s own democracy may turn fractious if policy strays too far from German needs and Grundgesetz. This is EMU’s curse. It destabilizes each nation state in turn, each in different ways – a “negative sum game”.

The worst of all worlds would be a nasty spat between Mr Hollande and Chancellor Angela Merkel that poisoned the atmosphere without bringing about any substantive change to Europe”˜s “asphyxiation compact”.

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Greece’s center-right New Democracy party looks set to get the first chance to form a new government Monday, but party leader Antonis Samaras will have a complicated task after an election where angry voters punished politicians for backing harsh government budget cuts.

No party is likely to have anything approaching a majority, leaving the politically and economically volatile nation even more in flux.

The Greek stock market plunged about 7% Monday morning….

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Much depends on the reaction of investors in debt issued by European nations, said Dimitri Papadimitriou, president of the Levy Economics Institute at Bard College. If they fear that the crisis response is losing momentum, they will likely demand higher interest rates ”” not just from Greece, but from other nations seen as carrying too much debt.

The result would be rising borrowing costs for Greece as well as countries that haven’t received bailouts, like Italy and Spain. Rising borrowing costs sent global stock markets diving last year. Uncertainty about the path forward in Europe may mean a return to extreme market volatility after several months of relative calm.

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Francois Hollande, the former leader of France’s Socialist Party, has been elected president of France, defeating incumbent Nicolas Sarkozy.

Despite being one of France’s best known politicians, the 57-year-old Hollande has never held a position in the national government.

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No new surveys have been allowed to be published for two weeks and pollsters warn the result may be a surprise.

“We voted for them since the 1980s and we feel cheated,” municipal worker Christina Theodorakou, 50, said of the two big parties. She has seen her monthly salary cut by 500 euros since the crisis began.

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The French-led counter-attack and rumblings of revolt through every branch of the EU institutions last week have brought this aberrant phase of the eurozone crisis to an abrupt end.

“It’s not for Germany to decide for the rest of Europe,” said François Hollande, soon to be French leader, unless he trips horribly next week. Strong words even for the hustings.

“If I am elected president, there will be a change in Europe’s construction. We’re not just any country: we can change the situation,” he said.

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A rupture between France and Germany would come at a dangerous time. Until recently, voters in the euro zone seemed to have accepted the idea of austerity and reform. Technocratic prime ministers in Greece and Italy have been popular; voters in Spain, Portugal and Ireland have elected reforming governments. But nearly one in three French voters cast their first-round ballots for Ms Le Pen and Mr Mélenchon, running on anti-euro and anti-globalisation platforms. And now Geert Wilders, a far-right populist, has brought down the Dutch government over budget cuts. Although in principle the Dutch still favour austerity, in practice they have not yet been able to agree on how to do it…. And these revolts are now being echoed in Spain and Italy.

It is conceivable that President Hollande might tip the balance in favour of a little less austerity now. Equally, he may scare the Germans in the opposite direction. Either way one thing seems certain: a French president so hostile to change would undermine Europe’s willingness to pursue the painful reforms it must eventually embrace for the euro to survive. That makes him a rather dangerous man.

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Spain’s sickly economy faces a “crisis of huge proportions”, a minister said on Friday, as unemployment hit its highest level in two decades and Standard and Poor’s weighed in with a two-notch downgrade of the government’s debt.

Spain’s unemployment rate shot up to 24 percent in the first quarter, the highest level since the early 1990s and one of the worst jobless figures in the world. Retail sales slumped for the twenty-first consecutive month.

“The figures are terrible for everyone and terrible for the government … Spain is in a crisis of huge proportions,” Foreign Minister Jose Manuel Garcia-Margallo said in a radio interview.

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With Socialist leader Francois Hollande likely to become the next president of France, Europe’s hot populist anger is about to confront the cold austerity measures required by the euro zone, with a predictable result: a storm that rattles the foundations of the European economic house.

Financial traders and treasury ministers are debating this week just how much damage this political-economic collision will bring. Some argue that it could take down the structure entirely. Others insist that Germany, for all its insistence on austerity, will never let the structure collapse ”” and will make the necessary concessions to keep the common currency intact.

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In a rare concession, the German Chancellor admitted that austerity alone would not solve the crisis but she insisted that the wave of political opposition to fiscal discipline was wrong.

“We’re not saying that saving solves all problems,” Ms Merkel said at a conference in Berlin. “[But] you can’t spend more than you take in. You can’t live your whole life this way. Everybody knows this.”

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