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This form of government support amounts to a large implicit subsidy for big banks.

What other part of the corporate world has the ability to drive the global economy into recession, as banks did in the fall of 2008?

By contrast, in the case of debt owed to foreigners, higher interest rates lead to a welfare loss for the country as a whole, because the government must transfer resources abroad, which usually requires a combination of exchange-rate depreciation and a reduction in domestic expenditure.

Second, if foreign debt is the real problem, the escalating debate about the Reinhart/Rogoff results is irrelevant for the euro crisis. Countries that have their own currency, like the United Kingdom – and especially the United States, which can borrow from foreigners in dollars – do not face a direct financing constraint.

But the eurozone’s peripheral countries simply did not have a choice: they had to reduce their deficits, because the foreign capital on which their economies were so dependent was no longer available.

The debt-to-GDP ratio is best reduced through sustained nominal GDP growth.

Besides, having been there, no one really wants to unleash inflation anymore. That leaves us with real GDP growth as a necessary condition for bringing the debt-to-GDP down painlessly.

But in today’s world voters are angry at everything that is called Europe and will not back a fiscal union.

In most Eurozone countries, structural reforms are as needed now as they were before the crisis.

Banks are at the heart of a diabolic loop: bank holdings of their national public debts (Brunnermeier et al., 2011).

The long-hoped-for awakening of the ECB has produced several miracles, especially a major relaxation of market anguish.

For that reason, they deleverage, which leads to a credit crunch, which slows growth down.

The ECB is the lender of last resort both to banks and to governments.

Massive forbearance has allowed many banks to not fully account for the losses that they incurred in 2007-8.

Unfortunately, often supervisors in charge of the failing entity in the years of the debt run up were the ones charged with uncovering the problems.

Spain was the leader in the introduction of a dynamic provision – a provisioning tool that forces banks to increase provisions without reference to any specific loan. The intention of this tool was twofold: to mitigate the bad times, and to cool the booms in the good times (Holmstrom and Tirole 1997). Dynamic provisions were endorsed as part of the Basel III standards in December 2010, in part on the strength of Spain’s experience. And indeed the existing evidence (Jiménez et al. 2012) shows that the tool worked as intended, dampening the credit boom and softening somewhat the credit crunch. However, it is clear by now that their level was not nearly enough, as their size – 3% of GDP at their highest point (2004) – was simply not of a magnitude commensurate with the credit losses.

Without the provisions, the reality of the cajas' accounts would have become much faster a concern, and would have imposed itself on the regulator

Had the Banco de España ordered an audit of the system after uncovering numerous irregularities in CCM, it would have not been able to deal with the capital shortfalls uncovered as there was no appropriate resolution regime in Spain at the time

governance played a critical role in the development of the Spanish crisis. In the Spanish case, the supervisor, confronted with powerful and well connected ex-politicians decided to look the other way in the face of obvious building trouble.

More systematic evidence of the role played by these governance issues is provided in a 2009 paper (Cuñat and Garicano 2009b) where we showed that cajas with chief executives who had no previous banking experience (!), no graduate education, and were politically connected did substantially worse in the run up to the crisis (granting more real estate developer loan, up to half of the entire loan book in some instances) and during the crisis (with higher NPLs).

Bank of France Governor Christian Noyer told journalists in Paris last week that “whatever happens in Greece” won’t place any French financial institution in difficulty.

What’s changed is that banks in the so-called core EU countries of Germany, France and the U.K. used funds from the ECB in December and February to insulate their southern European units against losses should one or more country exit the euro. “If you’re a U.K. lender and you’ve lent 10 billion euros to your Spanish subsidiary and Spain exits, you’re suddenly only going to get paid back in 50 percent devalued pesetas and you’re on the hook for 5 billion euros,” said Philippe Bodereau, London-based head of European credit research at Pacific Investment Management Co., the world’s largest bond investor.

One way multinational banking groups are mitigating that risk is by replacing their own funding lines to subsidiaries in the region with ECB loans. Deutsche Bank, Europe’s biggest bank by assets, tapped “a small amount” of ECB cash to help fund corporate and retail business in continental Europe, where it has sizeable operations in Italy and Spain. BNP Paribas, Europe’s third-biggest bank, used the programs to help fund its Italian unit as it reduces intergroup backing.

European banks also have cut their sovereign-debt holdings and exposures to Ireland, Italy, Spain and Portugal.

ermany, France and the U.K. reduced exposure to Greece by more than half in the two years through the end of 2011 to $68.2 billion, BIS data show.

So the private sector as a whole is bent on reducing debt.

Businesses will use depreciation charges and sell off inventories to do so. Households are trying once more to save. Less investment and more saving spell declining incomes.

now that they know how dangerous their leverage of yesteryear was.

Banks can still access emergency funds through the Greek central bank, but at a higher interest rate than normal ECB loans. The credit risk stays on Greece's books and isn't spread throughout the 17-member currency bloc,

The new agreement suggests that in the future, banks will be bailed out by the collective effort of Eurozone countries.

First, this arrangement is to be finalised by the end of the year. This means that, in the end, the Spanish debt will rise by €100 billion (the market participants who enthusiastically celebrated the decision by raising the price of Spanish bonds will eventually understand that). Ditto in the not unlikely case that some Italian or French banks wobble before December.

Third, the arrangement is linked to the establishment of a “single supervisory mechanism involving the ECB”. This could be a single Eurozone supervisor built inside the ECB, which would go a long way to plugging one the worst mistakes in the Maastricht Treaty (lack of a joint regulation and resolution regime for banks).

This is important because a contagious banking crisis that hits several large banks would require much more money than is available in the EFSF-EMS facilities.

Light conditionality, as they requested, is bound to collapse at the foot of the Bundestag, which must approve every single loan.

There was nothing on collapsing Greece, nothing on unsustainable public debts in several countries, and no end in sight to recession in an increasing number of countries.

“These are not easy discussions,” Mr. Alverà said. “Most sellers are reluctant to sit down and give you big discounts. The more they wait the more they increase their profits.”

Still, analysts say it may take decades for Asia to switch from oil linkage to market pricing.

Mr Rogoff said Europe is squandering the "scarce resource" of its youth, badly needed to fortify an ageing society as the demographic crunch sets in.

"If these latent technologies are not realised, Europe will wake up like Rip Van Winkel from a long Japan-like slumber to find itself a much smaller part of the world economy, and a lot less important."

Mr Rogoff said debt write-downs across the EMU periphery "will eventually happen" but the longer leaders let the crisis fester with half-measures, the worse damage this will do to European society in the end.

Sir Martin said the eurozone is pursuing a reverse "Phillips Curve" - the trade off between jobs and inflation - as if it were testing "what level of unemployment it is prepared to tolerate for zero inflation".

Pierre Nanterme, chairman and chief executive officer of Accenture, said Europe is losing the great battle for competitiveness, and risks a perma-slump where debt burdens of 100pc of GDP prevent governments breaking free by investing in skills and technology.

He said Europe is falling further behind as the US basks in cheap energy and pours funds into cutting-edge technology. "A lot is at stake. If in 12 to 24 months no radical steps are taken to break the curse, we might have not just five, ten, but twenty years of a low-growth sluggish situation in Europe," he said.

"People are no longer talking about the euro falling apart but youth unemployment is really horrific. They can't leave this twisting in wind for another five years," he said

It has also delayed new energy investments and is planning to close almost a quarter of its fossil fuel power plants,

European energy companies, struggling to respond to weak demand in a flatlining economy, say they need guaranteed pricing to keep open unprofitable plants or to invest in new ones.

Their revenue is being hit by dwindling demand for electricity and by new wind and solar projects that undercut the price of the energy produced from many fossil fuel plants.

At the same time, record-low prices on carbon emissions trading markets, which were introduced to encourage clean and efficient energy production and use, have perversely become a disincentive to investment.

Many of the Continent’s aging power stations, particularly those that burn highly polluting coal, are earmarked for closure by 2020 to meet stringent local environment regulations.

Without these investments, industrial companies in Europe may face higher energy prices when local economies eventually recover,

“Energy utilities are facing a perfect storm,”

In a bid to generate 20 percent of the European Union’s electricity from renewable sources by 2020, Germany, Spain and other E.U. countries have provided hefty subsidies to wind and solar farms, which now constitute a sizable minority of daily electricity generation, often surpassing the 20 percent target.

Policy makers are debating a system of support payments to keep uneconomic power plants open,

“Without long-term signals of energy prices, investment won’t happen.”

Some analysts also expect domestic regulators to eventually create financial incentives for companies

It should have been obvious that the debtor countries could get into payment difficulties as they were piling up debt made possible by the loans of German banks.

If there is a breakup of the Eurozone, Germany will face the risk that some debtor countries default on their debt. But again this risk is not affected by the size of the TARGET2 claims of Germany.

Since 2009, when the TARGET2 balances started to take off, current account deficits of the peripheral countries as a whole declined from 9.1% of their GDP to 4.5%. These declines were mainly due to deep recessions in these countries.

The main reason why German TARGET2 claims have increased so much since 2010 is capital flows. The flows have taken two forms.

The first one came about when German banks unloaded their loans made to peripheral countries into the balance sheet of the Bundesbank.

Thus in the scenario of a breakup, with or without TARGET2 claims, the risk of large losses for the German taxpayer is very similar.

the Bundesbank can eliminate the risk of such last minute accumulations of TARGET2 balances by converting euros into new German marks only for German residents.

levels of private and public debt, domestic and foreign, are still too high, and continue to rise as a share of GDP, owing to slow or negative output growth. This means that the issue of medium-term sustainability remains unresolved.

At the same time, the loss of competitiveness has been only partly reversed, with most of the improvement in external balances being cyclical rather than structural.

The euro is still too strong, severely limiting the improvement in competitiveness that is needed to boost net exports in the face of weak domestic demand.

a continuing credit crunch, as undercapitalised banks deleverage by selling assets and shrinking their loan portfolios.

The larger problem, of course, is that progress toward banking, fiscal, economic and political union, all of which are essential to the eurozone's long-term viability, has been too slow.

all imply that banks will have to focus on raising capital at the expense of providing the financing needed for economic growth.

Moreover the ECB, in contrast to the Bank of England, is unwilling to be creative in pursuing policies that would ameliorate the credit crunch.

Meanwhile, austerity fatigue is rising in the eurozone periphery.

And bailout fatigue is emerging in the eurozone's core.

But the eurozone's political strains may soon reach a breaking point,

This is sheer nonsense. Does anyone in their right mind think that any country would willingly put itself through what Greece has gone through, just to get a free ride from its creditors? If there is a moral hazard, it is on the part of the lenders – especially in the private sector – who have been bailed out repeatedly.