Later this year, when German taxpayers are likely to be asked to put their money on the line to support bailouts for neighbours that have spent the past 10 years growing rich on debt, the cracks in the euro could be forced wider apart.

“The first 10 years [of the euro] were plain sailing and relatively straightforward. But for the EU creators and celebrators, who get carried away by that, a harsher reality has now set in,” said Jim O’Neill, chief economist at Goldman Sachs. “Will the bigger and historically wealthier countries want to carry the additional tax burden of problems elsewhere, at the fringe?”

Derek Scott, former economic adviser to Tony Blair, now with Vestra Wealth, said that, although a short-term rescue for weaker members of the euro was on the cards, the longer-term problems would remain. “The chances are that they will cobble something together but the danger is that this will only be a short-term fix,” he said.

Even among senior bankers, questions are being asked. “Is Germany prepared to support the restructuring of the whole of the European community?” said Mike Geoghegan, chief executive of HSBC. “They did it for East Germany, but will they do it for eastern Europe?”

ASKING questions about the circumstances in which the euro could crumble used to be an intellectual parlour game. Now it is a genuine concern for serious investors all over the world.

On a recent marketing trip to Asia, the UBS economics team found that 80% of the people they met asked whether they thought a break-up would happen. Other economists claim about half of top American investors already consider the break-up of the euro to be a “done deal”.

Central banks in Asia and the Middle East are slashing their exposure to the euro, according to debt and foreign-exchange traders, though this has not stopped the single currency rising in value, notably against the pound.

Figures from the European Central Bank (ECB) support the claims, showing a collapse of investment from foreign buyers into euro-denominated assets that began in mid-2007. Although there was a huge spike in the issue of euro-denominated bonds late last year, hardly any of the debt was bought by investors from outside the eurozone.

“The euro is still strong, but it is weakening,” said Stephane Deo, head of European economic research at UBS. “The inflow into the foreign-exchange market shows that you have much fewer foreigners buying European assets than you would have had a year or two ago.”

Within the euro area itself, tensions are rising. “This is the first recession the euro has had to go through — and it’s a very, very big one,” said Credit Suisse economist Neville Hill.

“A lot of the issues that are now arising are the reasons people gave against its creation back in 1997 and 1998. It’s about the problem of having one central bank and 16 individual policy-setting regimes. Nobody ever resolved those issues, but they were gradually forgotten about over time."

Since the creation of the euro, the fortunes of Germany’s export-led economy have differed wildly from those of Ireland and Spain, where low interest rates fuelled a property bubble. While Germany and the Netherlands amassed large current-account surpluses, Spain, Ireland and Italy ran up deficits. The ECB’s prediction is for a 2.7% drop in eurozone GDP this year and even that figure may be revised to a bigger one.

For some members this means huge budget deficits, which is why Ireland, heading for double-figure government borrowing as a percentage of GDP, has been under pressure.

THE real difficulty, however, is that euro members do not have the flexibility to set their own interest rates or depreciate their currencies. The analogy is with Britain’s recession of the early 1990s, when it was locked into the European exchange-rate mechanism.

Individual countries are constrained from adopting unconventional monetary policy measures such as the quantitative easing, through government bond purchases, which the Bank of England began to implement last week. So, it appears, is the ECB. Not only would it need authorisation from EU finance ministers, which could be seen as compromising its independence, but the ECB would face the tricky task of deciding which of the 16 members’ bonds to buy and in what proportion.

Even so, something unconventional is expected from the EU authorities in response to individual countries’ difficulties. That response could include International Monetary Fund-style bailouts but co-ordinated within Europe.

Julian Callow, an economist with Barclays Capital, expects a “case-by-case” bailout in eastern Europe. The bigger challenge, however, is what to do about western Europe.

Options include loans structured through the European Investment Bank or EU bonds, with proceeds directed to countries that most need them.

Alternatively, European banks could be persuaded to buy debt from the struggling countries on the condition that they can then place the assets immediately with the ECB in exchange for liquidity. Other structures could see the creation of a European bailout fund co-ordinated by the ECB.

The principle, however, is the same across the board: strong economies cough up for the weaker ones. Despite the tensions within the eurozone, most economists see only a small risk of an early break-up.

Dan McLaughlin, chief economist at Bank of Ireland, said neither the crisis in the Irish economy nor the tensions in the eurozone made the case for Ireland to leave the euro.

“We have a big fiscal problem here, but if we weren’t in the euro we would have a currency crisis as well,” he said. “In that sense membership is clearly of benefit to Ireland.”

The eurozone’s 16 members, he said, included only seven that are Triple-A rated by the rating agencies, but the biggest fiscal problems are in the smallest economies, which should make the crisis more manageable at European level.

One of those rating agencies, Moody’s, issued a report last week in response to questions from investors about the threat of a break-up of the euro. It came down firmly against it.

“The risk of a break-up of the European Monetary Union is extremely low as exiting the eurozone during the current turbulent crisis would have extremely severe financial, economic and political consequences,” its report said.

The report, by Arnaud Mares, a senior vice-president at Moody’s, identified four reasons why the euro would not break up:

- The ECB already has low interest rates so the potential to secure much lower ones outside does not exist;
- Countries that leave would suffer the penalty of higher long-term interest rates;
- The euro has offered protection from speculators to smaller economies;
- There is no mechanism for countries to leave.

“Adopting the euro is simple, whereas withdrawing from it would be extremely complex and likely to result in severely negative consequences, the magnitude of which would deter any government from contemplating such a policy option,” wrote Mares.

Even if the euro survives the present crisis, however, the strains will not go away.

David Marsh, chairman of London and Oxford Capital Markets and author of a new book on the single currency, The Euro: The Politics of the New Global Currency, argues that the strains on it will be even greater when recovery comes to the Continent.

“The Germans will probably do better than most of the others when the upturn comes and the European Central Bank will raise interest rates quickly in response. That is when the real problems will emerge.”

He believes that widening spreads on government bonds are manageable for most euro member states at a time when interests rates are generally low, but will hurt much more as rates rise.

“Anybody who thinks the unravelling of the euro will happen overnight is mistaken,” he said. “It’s like a play with many acts and we haven’t even got to the half-time interval.”

Who could fail first?

ONE way of measuring tensions in the eurozone is by looking at the cost of insuring the sovereign debt of member countries.

As recently as last October there were no discernible signs of strain within the eurozone and the spreads on so-called credit- default swaps were narrow.

The near-meltdown of the global banking system in the autumn, however, coupled with the particular problems it exposed in member states such as Ireland, changed all that.

Market prices on credit-default swaps suggest that Ireland is four times more likely to default on its debt than Germany, based on figures from the data firm CMA Vision. On the same basis, Greece is considered three times more likely than Finland to default.

Compared with last year, default insurance premiums have risen for most euro members, including Germany. This is thought to reflect the risk that, if one of the weaker members were to default, “contagion” would spread even to the strong.

“If a credit event happens in one country, the problem is you can have a domino effect,” said Stephane Deo of the UBS investment bank. “Imagine a country defaults, then the market will turn on the next weakest country, which will go down — and so on.

“Some talk about Italy leaving the euro and then defaulting on its debt. It is important to remember that the German banking system is de facto a large creditor to Italy, France as well. So that would be a very dramatic event for Germany and France also.”