Europe's four big dilemmas

By Laurence Knight Business reporter, BBC News
Coin being tossed at the Madrid tennis open Decision time for the euro is fast approaching
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In October, Europe's leaders reached yet another wide-ranging deal to prevent economic problems from causing financial meltdown in the eurozone.

For many onlookers, the issues they face may seem complicated and interconnected.

But essentially they boil down to four big dilemmas.

How these dilemmas are resolved will decide whether the eurozone stays together, or ultimately unravels despite the latest agreement.
Borrowers vs Lenders
Bloomberg graph showing the price of a one-year Greek government bond What the market thinks of Greek government debt

Like the US and UK, Europe faces an enormous overhang of accumulated government and private-sector debt, much of which is now not repayable.

So the question is, how much gets written off, and who picks up the tab?

For the eurozone as a whole, the debt problem is comparable with that of the US, and potentially manageable.

The problem is that some eurozone countries are much more heavily indebted than others.

In October's deal some private sectors lenders have already agreed to write down the value of Greek debt by half.

Investors also think the Portuguese, Irish, and even the Spanish and Italian governments, may eventually follow suit.

But when bad debts get written off, someone has to take a loss.

While some of those debts are held in the US, UK or elsewhere overseas, most of it is held by the European banks, and increasingly by the European Central Bank (ECB).
Angela Merkel Germany may end up footing much of the bill

This is the primary reason for the recent loss of confidence in the European banking system.

But while Germany can afford to rescue its banks, as the Irish Republic has already demonstrated, other countries may not be able to rescue theirs.

The October package calls for banks to invest more than 100bn euros building up their capital, but it is not yet clear if they will be able to do so without intervention from governments.

If other European countries join Greece in writing off their debts, banks may need even more money.

Ultimately Germany and other less-indebted countries may have to bear much of the cost of rescuing the eurozone's banks as well as its weaker governments.

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