Spain remains vulnerable,

Spain remains vulnerable, despite Madrid insisting last week that its economy is much healthier than Portugal's and its debts are much more manageable. Spanish banks must roll over debts worth more than 5% of GDP this year, and more than 9% in 2012, in addition to the government's financing needs. A two-point increase in the interest Madrid pays in the bond markets – much of which could come from the ECB, even without a further loss of confidence from bond investors – would, on Fathom's calculations, force Spain into a fiscal crisis.

A string of defaults could shatter the markets' confidence, Gabay argues, resulting in a devaluation of up to 30%, with significant knock-on effects: "What could make the markets lose confidence is watching these countries implode."

With inflation in the 17-member eurozone at 2.6%, ECB president Jean-Claude Trichet said at his regular press conference on Thursday that the rate rise to 1.25% was warranted.

But higher borrowing costs will only widen the schism between the "core" euro countries – which are starting to flourish after the grim years of the credit crunch – and the recession-gripped "periphery".

Much of the debt that has driven the three countries over the brink is owed to banks in the core, and Gabay argues that the insistence on being repaid every penny of that is driving the countries of the single currency apart, instead of holding them together.

"This is a banking crisis, not a sovereign crisis, and the German bankers are in the front line," he says.

It wasn't meant to be like this: joining the euro was meant to give Portugal, Spain, Italy and the other southern countries an incentive to impose economic reform. Instead of devaluing their currencies against the Deutschmark every few years to regain a foothold in international markets, they were supposed to become leaner and meaner – spurring competition, keeping labour costs down and tackling deep-seated problems such as ageing populations and unsustainable social systems. In effect, they were meant to become more German.

Instead, Germany and France themselves broke the strict rules in the "stability and growth pact" about government deficits being kept under control, while low interest rates right across the eurozone led to an unsustainable consumer credit boom, pumping up property prices and sowing the seeds of today's fiscal mess.

The sheer size of the debt burden that many of the recession-scarred countries now face means things could get a lot worse before they get better – and public pressure could persuade some governments that it's worth the risk of leaving the eurozone.

Gerard Lyons, chief economist at Standard Chartered, says the result could be that instead of shaping up, the debt-burdened smaller economies decide to opt out: "I think it's likely that we're heading for a two-speed euro. This is their cleansing operation to get back to where they hoped to be in the first place. The consequence may be that some countries decide to leave."

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