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Eurobonds and a solidarity fund could promote growth and stabilize the interest rates faced by governments in crisis. Lower interest rates, for example, would free up money so that even countries with tight budget constraints could spend more on growth-enhancing investments.

Even well-managed banking systems would face problems in an economic downturn of Greek and Spanish magnitude; with the collapse of Spain’s real-estate bubble, its banks are even more at risk.

If these countries made a mistake, it was only that, like Germany today, they were overly credulous of markets, so they (like the United States and so many others) allowed an asset bubble to grow unchecked.

Moreover, Germany is on the hook in either case: if the euro or the economies on the periphery collapse, the costs to Germany will be high.

While structural problems have weakened competitiveness and GDP growth in particular countries, they did not bring about the crisis, and addressing them will not resolve it.CommentsView/Create comment on this paragraph

At the end of this week, WestLB, once Germany's third-largest landesbank, will provide a rare example of an ailing bank that is being broken up. Under pressure from EU competition authorities, the bank's toxic assets have been moved into a so-called bad bank, another part of the business has been sold and the remainder will continue to operate under the brand name Portigon.

Despite the international standing of Deutsche Bank, Germany’s banking system is fragile. Several German banks required government support during the financial crisis. Highly fragmented (in part due to heavy government involvement) and with low profitability, German banks, especially the German Länder (state) owned Landsbanks, face problems. They have large exposures to European sovereign debt, real estate and structured securities.

Prior to 2005, the Landesbanken were able to borrow cheaply, relying on the guarantee of the state governments. The EU ruled these guarantees amounted to subsidies. Before the abolition of the guarantees, the Landesbanks issued large amounts of state-guaranteed loans which mature by December 2015.

While it insists on other countries reducing public debt, German debt levels are high—around 81% of GDP. The Bundesbank, Germany’s central bank, has stated that public debt levels will remain above 60% (the level stipulated by European treaties) for many years.

Germany’s greatest vulnerability is its financial exposures from the current crisis. German exposure to Europe, especially the troubled peripheral economies, is large.

German banks had exposures of around US$500 billion to the debt issues of peripheral nations. While the levels have been reduced, it remains substantial, especially when direct exposures to banks in these countries and indirect exposures via the global financial system are considered. The reduction in risk held by private banks has been offset by the increase in exposure of the German state, which assumed some of this exposure.

For example, the exposure of the ECB to Greece, Portugal, Ireland, Spain and Italy is euro 918 billion as of April 2012. This exposure is also rising rapidly, especially driven by capital flight out of these countries.

Germany is now caught in a trap. Irrespective of the resolution of the debt crisis, Germany will suffer significant losses on its exposure – it will be the biggest loser.

Once the artificial boom ends, voters will discover they were betrayed by Germany’s pro-European political elite. There will be an electoral revolt and, as in the rest of Europe, a strong challenge from radical political forces with unpredictable consequences.

In late May 2012, French President Francois Hollande provided a curious argument in support of eurozone bonds: “Is it acceptable that some sovereigns can borrow at 6% and others at zero in the same monetary union?”

Political will for integration

In the peripheral economies, continued withdrawal of deposits from national banks (a rational choice given currency and confiscation risk) may necessitate either a Europe wide deposit guarantee system or further funding of banks.

A credible deposit insurance scheme would have to cover household deposits (say up to euro 100,000), which is around 72% of all deposits, in the peripheral countries. This would entail an insurance scheme for around euro 1.3 trillion of deposits.

Given that the Spanish Economy Ministry reports that euro 184 billion in loans to developers are “problematic,” the additional recapitalization needs of Spain’s banks may be as high as euro 200-300 billion in additional funds (20-30% of GDP)

A Greek default would result in losses to Germany of up to around euro 90 billion. Germany’s potential losses increase rapidly as more countries default or leave the eurozone.

Austerity or default will force many European economies into recession for a prolonged period. German exports will be affected given Europe is around 60% of its market, including around 40% within the eurozone. In case of a break-up of the euro, estimates of German growth range from -1% to below -10%. It is worth remembering that the German economy fell in size by around 5% in 2008, the worst result since the Second World War, mainly on the back of declining exports.

For example, Greece owes about euro 400 billion to private bondholders but increasingly to public bodies, such as the IMF and ECB, mainly due to the bailouts. If Greece walks away as some political parties have threatened, then the fallout for the lenders, such as Germany, are potentially calamitous.

But the largest single direct German exposure is the Bundesbank’s over euro 700 billion current exposure under the TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) to other central banks in the Eurozone.

by Satyajit Das

Taxpayers will bear the cost, but they may never find out how much. The bad bank, known as FMS Wertmanagement, has no plans to release financial statements, according to Soffin, the German government organization that oversees bank rescues.

The latest figures from the Bank for International Settlements put total European bank exposure to Portugal and Spain at $853 billion, with Germany, France and Britain the biggest creditors.

That worst-case forecast highlights another potential hidden risk. Credit-default swaps are typically sold over the counter by investment banks, with little information available publicly about the financial strength of the sellers. “Only then will we know for sure if the institutions that wrote the credit-default swaps have the liquidity and the financial strength to perform as contracted,” Mr. Weinberg wrote in a note last week.

But disaster does not wait.

The eurozone could face a major crisis at short notice if either country experiences serious trouble selling government paper, which both must do in large volume and on a continuing basis.

The avoidance of default on the core sovereign debt, the debt undertaken without duress by the Irish State, is a legitimate objective of national policy.

It had become clear, early in 2010, that the blanket bank guarantee would bankrupt the Irish State, and the Government finally began to acknowledge that haircuts for senior, but unsecured, bank bondholders had become unavoidable.

Maybe Draghi’s policies can buy time for deeper “structural changes” in the periphery, although quite what those are and what difference they would make in the near term remains elusive

More likely, a shift in ECB policies would make the European situation uglier. For one, Draghi would essentially be conceding fiscal dominance, demonstrating that if governments run budget deficits, they can count on the central bank to finance them.

Perhaps Draghi is planning the same game with fiscal authorities that the Banca d’Italia used to play with Italian politicians in the 1980s and early 1990s -- keep interest rates low enough to prevent fiscal collapse, yet high enough to keep fiscal prudence as a priority. Make no mistake about it, inflation or not, this is a strategy of high real interest rates.

Faced with Greece's increasingly bleak prospects, Crédit Agricole SA is making contingency plans to abandon its troubled Greek bank in the event of Greece leaving the euro zone, according to a person with direct knowledge of the plans, in the first concrete sign of a foreign company signaling it could walk away from its Greek assets.

According to the senior banker, the current rate of deposit outflows--of €1 billion or less per day–remains "manageable" since the banks keep large cash buffers on hand to deal with the withdrawals.

Banks like Goldman Sachs and Morgan Stanley are also looking into the severe legal challenges that would arise if a country exited the euro. Contracts that govern loans, bonds and derivatives in Europe rarely take into account such a situation.

The banks are also trying to protect their balance sheets if they do get stuck with large amounts of assets denominated in a new, weaker currency.

By doing so, they can better match their assets (the loans) within a specific country with their liabilities (the deposits). Then if a country left the euro zone, the value of the loan might fall in euros, but the banks wouldn’t owe as much to depositors in euros.

“Sixteen hundred jobs a week were being lost before we took office; we’re now in a position where 1,200 jobs a week are being created, and our consumer confidence numbers have been steadily growing.”

For the euro zone at large, though, a step back often follows each step forward. France and Italy, the bloc’s second- and third-largest economies, are increasingly seen as the latest sick men of the Continent. Even Germany, the bloc’s powerhouse, grew only feebly last year, by 0.4 percent.

In Ireland, more than 80 percent of the investment came from abroad, with banks and pension funds making up 37 percent of the offering and fund managers about half.

Mr. Kirkegaard cited “the hunt for yield.”

“There has been a significant reduction in demand over four or five years, and we don’t see robust demand in the future.”

raise its postage prices to help cover costs.

Gazprom, the huge Russian gas company, finds its traditional business model in trouble. Under the pressure of a market in which gas is being supplied from more places, Gazprom has had to renegotiate gas contracts with European countries, costing it $6 billion, Mr. Varro said.

“Gazprom is not against shale gas,” Mr. Stevens said, “it’s just against everyone else having it.”

As Europe becomes a more “contestable market” with more integrated pipelines, more liquefied natural gas and more shale gas, behavior will change. “If people can come in easily, the threat of coming in will make the monopolist behave differently,”

He dryly notes that Germany couldn’t even force its own savings banks to join its national deposit-insurance scheme.

Each country in the euro has its own bankruptcy code

Putting the European Central Bank (ECB) in charge of the region’s biggest banks should end the cosy relationship between banks and regulators that allowed Irish and Spanish banks to keep lending during property bubbles and the likes of Deutsche Bank to run with so little capital. If the ECB proves itself an effective supervisor

without ready access to a pot of money to fill these holes, the ECB could be reluctant to force banks to come clean. “It is madness to expose capital shortfalls if you don’t know where new capital is going to come from,” says one bank supervisor.

“If you wanted to challenge a decision, where would you go to court?” asks the head of a European bank regulator.

Daimler’s stripped-down vans travel by cargo ship to Ladson, S.C., where a token portion of assembly occurs to avoid a costly American tariff.

It was first imposed on European light trucks during the 1960s in retaliation for German and French trade restrictions on American chickens.

The importance of European-American auto production, meanwhile, was highlighted by Volkswagen’s announcement on Monday that it would open a new production line in Chattanooga, Tenn., to make sport utility vehicles.

In Europe, discussion about the economic benefits of an agreement has been overshadowed by fears that more open trade would expose the Continent to what are widely perceived as less stringent safety and environmental standards in the United States. (And once again, chickens play a big role.)

Trucks, cars and other transportation equipment such as airplanes make up the second-biggest category of merchandise traded between the United States and Europe, just behind chemicals.

n the first three months of 2014 alone, the United States exported $2.6 billion in motor vehicles and parts to the European Union, and imported $12.3 billion worth.

The engines and other components used in Freightliner heavy trucks made in Portland, Ore., are similar to those installed in Mercedes-Benz heavy trucks made in Wörth, Germany. But Daimler must design and engineer many parts twice — and submit them for regulatory certification twice — to meet different United States and European rules.

The reason that Daimler goes to the trouble of finishing assembly in Germany in the first place is that the vehicles must be test-driven before they leave the factory. It would be too costly to set up a separate testing operation in the United States, the company said.

Industries like chemicals and pharmaceuticals are even trickier, and food is a particularly emotional issue in Europe.

there is a fixation on American chickens disinfected with chlorine, which local consumers find repellent