WHEN in January 2002 Helmut Kohl watched the first Germans exchange euro notes and coins at the tills, he could not have been prouder. The former German Chancellor had been one of the strongest supporters of the single European currency, voting in favour of it as early as 1992 during the dramatic negotiations around the controversial Maastricht Treaty.
So when, overnight, around 320 million Europeans starting jingling shiny new euro coins in their pockets, Kohl couldn't help indulging in a little self congratulation. "The introduction of the euro is not only an important decision for the European Union; it is an important turning point in European history," he boasted on 14 January 2002, a fortnight after the euro entered circulation.
"The single European currency has made European integration irreversible."
Now Germany's current leader, the steely Angela Merkel, is in danger of being forced to eat her predecessor's words as the Eurozone and the European Union as a whole face - for the second time this year - a sovereign debt crisis that threatens their survival.
Government economists and bond traders around the continent will be early to their desks tomorrow morning, waiting for the next stage in the mounting debt crisis to unfold.
Concerns at the start of this month around the faltering Irish economy have spread through the rest of the Eurozone like wildfire, with everyone asking: 'Who's next?' And, more importantly: 'Where will this end?' For the first time in its near nine-year history, the Eurozone is being forced to fight off mounting speculation of a break-up.
Last Sunday the eyes of the world were on Dublin, when the Irish Prime Minister Brian Cowen's government - whose days, according to political analysts, appear to be numbered - began three days of painful negotiations on a 15 billion (12.7bn) austerity plan which will allow it access to a 80bn-90bn bail-out from the International Monetary Fund and the European Union. But even before Cowen's Cabinet had time to put ink to the agreed measures on Wednesday, over in the sunny streets of Madrid, there were signs that the Celtic tiger was not the only economy on the brink of Armageddon. An auction of Spanish government debt on Tuesday was met with a poor reception, rendering Spain's interest on three-month borrowings more expensive than repayments on German five-year bonds.
But if Prime Minister Jose Luis Rodriguez Zapatero's government felt hard done by, he only had to look across the border to Portugal for comfort. Lisbon is widely expected to be the next government to go to the EU/IMF with begging bowl in hand, while Belgium, which has been without a government since April, and Italy are also on the hit list of investors who are turning their backs on European government bonds like rats fleeing a sinking ship.
Slovakian finance minister Ivan Miklos, whose country is now paying the price for joining the European single currency last year, became on Thursday the latest European leader to put the swelling panic into words, warning that "the risk of a Eurozone break-up is very real".
His words echo those of EU President Herman Van Rompuy, who recently admitted the union was in a "survival crisis".
While lawyers and the Eurozone's fiercest supporters argue that a dissolution of the single European currency would lead to political and legal chaos, Jeremy Batstone-Carr, head of research at Charles Stanley, warns that what once seemed "irreversible" to Kohl now "cannot be ruled out". "Just because Europeans are saying a break-up of the Eurozone would be too complex and expensive, does not mean it won't happen. Ultimately, you cannot rule it out," he says.
The EU/IMF are due to unveil details of Ireland's rescue package today, but if European leaders hope the bail-out will calm market nerves, they are likely to be disappointed. Since Cowen's government unveiled its 15bn austerity plan on Wednesday, the cost of borrowing for the Eurozone's more troubled economies has soared, not decreased as hoped.
On Thursday, yields on Irish, Spanish and Portuguese bonds jumped to their highest level since the euro's launch as speculation mounted that at least one more government would soon be holding out the begging bowl.
While some analysts believe the EU could withstand a Portuguese bail-out, estimated at around 100bn, it is believed Spain may be "too big to fail" with liabilities of 3,464bn compared with Ireland's 1,658bn.
The cost of a rescue package for Spain has been estimated by the respected London-based think-tank Capital Economics at 420bn - almost two-thirds of the 750bn bail-out fund set up by European leaders after they were forced to rush to the aid of Greece earlier this year with a 110bn loan. The largest part of the fund, the European Financial Stability Facility, only stretches to 440bn and Axel Weber, head of Germany's central bank, already fears it may have to be doubled.
There is a growing sense in the City and around the rest of the EU that while smaller "peripheral" states could be supported, Spain is the one domino that would trigger a financial tsunami to come crashing over the Eurozone, with catastrophic consequences - including for Britain and Scotland.Arturo de Frias, head of banks research at Evolution Securities, warns that the failure of the Eurozone would trigger another major banking crisis, which could potentially make the troubles of 2007-2009 look like child's play.
"If the euro goes, the whole European banking system - including the banking systems of the core nations - would be nearly bust," he said in a research note.
"If … we go back to the peseta, lira, escudo, drachma, etc, devaluations would follow immediately. And devaluations mean write-offs of loans and investments - of a size that would render the whole European banking system completely insolvent."
De Frias has calculated that in the case of a 30 per cent devaluation, Britain's banks alone would lose 120bn against their exposures to Spain, Italy, Portugal, Greece and Ireland. "That is nearly half of the equity of Barclays, Royal Bank of Scotland and Lloyds," De Frias added.
Dougie Adams, senior economic adviser to the Ernst & Young Scottish Item Club, agrees that the effects of a Eurozone failure are unthinkable.
"It would mean a huge disruption to the world economy and it would probably mean the European banking system is close to dissolution," he said.
Although Adams believes many European governments are too heavily invested, politically, to allow a Eurozone collapse, he says leaders have to seize the initiative and thrash out a potential solution before the contagion spreads too far.
"Policymakers have got to get ahead of the problem," he cautions.
Another option suggested by economists is an agreed devaluation of the euro, but political analysts point out that this would be highly unpopular with the stronger economies, such as Germany, whose leader Merkel is already having to dampen disquiet among her electorate about coming to the aid of fiscally reckless neighbours. "How long is Germany going to be on the hook for other people's troubles?" Adams says.
Batstone-Carr of Charles Stanley suggests the answer lies in history. He points to Latin America, and particularly the Mexican crisis of the 1980s, as a potential blueprint for the Eurozone's woes. The bond market will continue to prey on various European countries until a major European debt restructuring deal is agreed, he says. More bail-outs would only add to the problem.
"You do not solve the debt problem by merely pouring more debt into the mix," Batstone-Carr says. "It's very simple, a blueprint is there staring everyone in the face. It happened in Latin America and Mexico in the late 1980s."
Although he acknowledges that such a restructuring would require the goodwill of creditors, including the European Central Bank, Batstone-Carr and a number of other analysts are increasingly turning to the "Brady bonds" of the 1980s as a way of avoiding economic chaos in Europe.
The bonds, named after US Treasury Secretary Nicholas Brady, were drawn up after a number of Latin American countries defaulted on their debt repayments.
Commercial banks with interests in those countries were able to exchange their claims for tradeable Brady bonds, which were dollar-denominated and came with several guarantees.
Although agreeing a similar system in Europe would be a complex and protracted affair, Batstone-Carr believes it is preferable to a two-tier euro, which would separate the wealthier European states ,such as Germany, Finland and Luxembourg, from those in crisis.
"(A two-tier euro] would be very, very difficult," he says. "It also raises another issue: how would Britain fare in that situation? Would it be more or less well off against a core European bloc? Where would France stand in this?"
As the world waits with bated breath to see which domino is the next to fall, European leaders will be acutely aware that they are engaged in a high-stakes game.
The cost of failure? "It's not impossible that you could see another global financial crisis," says Batstone-Carr.