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You sense that the battle over the future of the eurozone has shifted to Spain. It is where the key engagements are likely to be fought over the weeks ahead.

The country is caught in a vicious cycle. Watching it is like trying to unlock a puzzle or a cube. Every twist locks you further into the puzzle.

The country was encouraged to reduce its deficit. Even the US president found time to place a call to the reluctant Spanish prime minister, urging him to show some spine and
get cutting. Shortly after that , designed to reduce spending by 15bn euros (£13bn; $18bn) over the next two years. The plan is that by 2011 Spain's deficit should be down to 6% of GDP.

For a few days it brought some relief. Civil servants' wages are to be cut by 5%. Ministers have taken a 15% pay cut. State investment is to be slashed. The package still has some admirers. Only this weekend the head of the IMF, Dominque Strauss-Kahn, described the package as "strong and moving in the right direction".

Then investors looked again at the Spanish economy. It has an unemployment rate of 20%. That figure stretches above 40% for those in the 16-24 age bracket. Almost a quarter of the economy was dependent on the property sector. That has crashed, with real estate companies owing $300bn.

So how will the economy grow in order not just to get people back to work but to attract investors to finance national debt? It did not help that last week the Spanish government trimmed its own projections for growth. So last Friday, after the European markets had closed, the rating agency Fitch downgraded Spanish sovereign debt. Why? Because of the country's sluggish growth prospects.

In the midst of all this a question gnaws away at officials. Is the prescribed medicine - spending cuts - making the patient worse? Plenty of economists fear that Europe's age of austerity will stifle the fragile recovery and strangle growth. Others argue that reducing the public sector in the Baltic states freed up the private sector and the countries began growing again.

Now twist the puzzle again. The IMF and others say that one of the keys to getting Spain more dynamic and competitive is to reform its labour market. They want to make it easier to hire and fire. The cost of firing Spanish workers is among the highest in the OECD. So the Spanish government, the unions and business are discussing changes. They were supposed to have reached a deal this weekend. They didn't.

Although the unions represent less than 20% of the workforce they are threatening a general strike over the reforms. A day of protests against the austerity measures is already planned for 8 June. There are doubts whether the government can implement its plans. It has seen its standing in the polls decline and there are calls for an early election. There is just the first tremor of political instability.

There is yet another factor. Many of Spain's community banks - cajas - are in trouble. There is a restructuring plan under way, but that will need financing and, of course, as investors examine the Spanish puzzle they become less willing to put their money in. So the price of financing the country's debts increases.

To an extent Spain's problem is Europe's problem. For a decade many of the eurozone countries used the cover of the single currency to borrow and expand their welfare states. In fact they were living way beyond their means. Putting that right is not just a financial dilemma - it challenges what many Europeans see as their way of life.

The eurozone crisis has a way to run.

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• - What's this?

I have just been in Rome to witness the latest launching of another of Europe's austerity packages.

We are getting to the point when almost every country has to have one. The Italian Prime Minister, Silvio Berlusconi, said that the sacrifices were necessary to save the euro.

Later, in a further attempt to justify the cut-backs, he spoke of "an international speculative attack on the euro."

Confronting speculators always makes for good politics. It is also an attempt to define the narrative of this crisis.

What Europe's leaders are beginning to understand is that, over the weeks and months ahead, they will have to win the battle of ideas.

In Italy, Prime Minister Berlusconi had scarcely finished speaking before the country's largest union had called for a general strike.

In Spain, protests are planned against . There is debate there, too, about a general strike.

In France to what is being billed as the "mother of all reforms", the raising of the retirement age.

The unions say it is "non-negotiable". Some Greek unions are trying to organise a Europe-wide day of protests against the era of austerity.

Europe's leaders will have to explain why "austerity" is necessary.

Among all this, fundamental doubts have been raised about the future of the euro and even the European project itself.

So it is interesting to get inside the minds of the eurocrats, the keepers of the flame.

It so happened that this week the European Commission President, Jose Manuel Barroso, gave a . With the EU facing what is possibly the greatest crisis in its history here are some of his arguments.

• First, the big defence against those who argue the European idea is losing its appeal:

"Europe", Mr Barroso said, "is the greatest, and most successful, experiment and political integration in the world".

• Second, don't blame the EU, blame national politicians.

The real problem, he said, was not to be found at the European level or its institutions.

"It comes very often from narrow-minded, nationalistic, chauvinistic political leaders at the national level."

Some saw this as a scarcely-veiled attack on German Chancellor Angela Merkel who is seen by many in Brussels as having put "national interest" above "solidarity".

It is interesting how leaders who are sensitive to national politics are described as "nationalistic" and "chauvinistic".

• Third, a choice. "If the EU does not go further, it may be going back forever." Europe's officials have long clung to the idea that unless they are expanding, or integrating further, the whole project will lose momentum. In their view Europe has only one gear, and it is forwards on its journey to "ever-closer union".

• Fourth, every crisis is an opportunity. Like other officials, Mr Barroso believes the current crisis makes the case for greater integration. "We cannot have a monetary union without an economic union," he says. In his view the crisis has revealed how interdependent Europe's economies are and that the Lisbon Treaty should be used to strengthen the co-ordination and surveillance of budgetary discipline.

• Fifth, paint the critics as mainly from the English speaking world. The critics he describes as "professional pessimists". In an earlier speech he had spoken of "the intellectual glamour of pessimism". Here he said "the world is full of Cassandras. Sometimes I see in the English-speaking literature on the euro what I would call 'wishful thinking' because they expect the euro to fail."

• Finally, the nightmare the EU stands in the way of. Mr Barroso often warns of the danger of "populism". In this speech he said "there are sometimes occasions when we see populism, xenophobia, chauvinism in Europe" - raising what he sees as the spectre of chauvinism for a second time.

So in the middle of daily fire-fighting to defend the euro, there is a recognition, as Mr Barroso admits, that "we will need to win the battle of ideas".

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• - What's this?

Austerity is the new contagion, spreading across Europe. Today it enveloped Italy, with the government there telling the people to expect "heavy sacrifices".

Italians thought they had escaped the crises elsewhere, but today one of their papers told them "the fairy tale is over". The Italian government is expected to announce 24bn euros (£21bn; $30bn) of spending cuts between now and 2012.

Some of these measures are now familiar. A pay freeze for most public sector workers.Government ministries will have to reduce expenses and ministers' salaries will be cut by 10%. Some higher earners will face higher taxes. Yet again there will be an attempt to squeeze out tax evasion. There may even be trims in the much-treasured health sector.

All of this follows similar hair-shirted moves first by Ireland, but then by Greece, Spain and Portugal.

Spain only got serious after a phone call from President Obama. Public sector wages there are to be cut by 7%. Ministers are taking a 15% pay cut. Pensions will be frozen, with cost of living increases eliminated.

Germany will announce $3.75bn of cuts and there are strong hints that even unemployment benefits will be reduced. France is raising the retirement age and planning to reform its pensions.

All of this cutting, slashing, trimming is aimed at persuading the financial markets that Europe can reduce its debts and so avoid the near-bankruptcy of Greece.

What is being forced on Europe is a cultural revolution. It marks an end to an ever-expanding welfare state that some defined as the European way of life. Few European leaders accept - at least openly - that they were on the wrong track. Some officials, however, are starting to say that such generous benefits are no longer sustainable. The President of the European Council, Herman Van Rompuy, said that people would have to work harder and longer.

But in all the talk of "pain" and "sacrifice" a number of questions arise. Will all these measures be implemented thoroughly? We shall see.

What will all these packages do to growth? Growth is expected to be 0.2% this year and to climb slightly next, but will these cuts reduce demand and so make cutting deficits even harder? There is a risk here.

Will the unions and the public sector workers accept these changes? In the weeks ahead there will be tests on the streets of Lisbon and Madrid.

And will France accept its way of life needs to change? After recent elections there the successful Socialist leader Martine Aubry expressed a yearning for the old social model. "We want," she said, "to be reunited with a society that is caring, fair, and where people can live together".

In the short term Europe is being forced to demonstrate to investors it can manage its deficits. But longer-term it will have to show a political will to increase productivity. That will mean tearing up some of the labour laws that make hiring and firing difficult.

More than any discussion about EU rules and institutional change Europe has to get its economies growing again. That is the real challenge.

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• - What's this?

Having stepped away for a week I am struck by how quickly sentiment can unravel. Sometimes the crisis with the euro appears like a raging torrent tearing away at certainty.

Over the past few months I and others have explored the flaws in the single currency, but who would have imagined a

Or that a majority of Germans now, apparently, want the Deutsche Mark back. Or the , that "the whole world is watching... and is losing confidence in Europe". Or and discovered the "sinkhole that is the eurozone", forseeing a "lashing out at remote masters". And the countless others who say the European idea has lost its potency. It is, surely, Europe's age of angst.

But to catch breath for a moment: How sick is the patient and why has the medicine failed so far?

Firstly, Greece is not in danger of defaulting. For now. No one believes, however, that this bail-out is anything but a short-term measure. Countless economists have looked at the figures and reached the same conclusion. They cannot see how Greece can grow its economy to the point where it can pay down its debts, let alone pay back the loans from the other eurozone countries. The Greek crisis will come around again.

Secondly, the massive one-trillion-dollar fund of loans and guarantees to help out others in the eurozone. The figures are eye-watering. For a brief moment the world was convinced. But this was a hastily put together package to satisfy the Monday morning markets. What the fund did not do was to address the underlying problems. Even Chancellor Merkel said "we've done no more than buy time for ourselves".

So what are the fundamental problems? Europe has low growth and future prospects are not much better. Yet within the monetary union they have to slash their deficits. There are mounting fears that as Europe embraces austerity it will lead to a further fall in growth. In a nutshell, Europe could be locked into a deflationary cycle, with years of stagnation.

The great pruning of the public sector has begun. Spain is cutting public sector wages by 5%. Some infrastructure projects are being frozen. In Greece wages in the public sector will be cut by 16%. Pensions will be frozen for three years. Portugal is cutting 5% from the salaries of some civil servants. Italy is considering a wage freeze. The UK is about to administer the pain.

For parts of Europe this will be a cultural revolution. The public sector delivered what people referred to as the European way of life. An axe is now being taken to it. We know how the Greeks reacted to it; the rest of the continent is just waking up to this new world and there could yet be protest and unrest.

Probably the biggest underlying fault-line is that the economies of Germany and say Greece or Portugal are so different, and yet they inhabit the same monetary union. Many economists doubt whether such vastly different economies can be harnessed together. How do you reduce these differences and make the southern European economies competitive?

The fear in Germany is that . As Chancellor Merkel said, "joining the eurozone isn't about creating a financial transfer union".

There are doubts that the one-trillion-dollar mechanism will be enough, but if Germany is asked to put its hand in its pocket again there could well be resistance. Hans-Werner Sinn from the German Institute for Economic Research (Ifo) is quoted as saying that Merkel, in agreeing to support these potential bail-outs, has committed one of "the gravest mistakes in the history of the Federal Republic". Germany is likely to refuse to become Europe's paymaster, and the more others like the French insist, the more the German people will question the entire European project.

So what is the way out?

Most members of the eurozone accept there will have to be greater discipline in the future, with surveillance of budgets and sanctions for offenders. But that does not address the problem of low growth and a lack of competitiveness.

As to the future, visions differ. Germany would like to see the eurozone cast in its own image. In that case it might support deeper integration, but it would want the reforms backed by a new EU treaty. That will not be popular. The EU recently spent eight years haggling over the Lisbon Treaty. And in the case of the UK, any further transfer of power to Brussels would trigger a referendum - if the changes applied to all 27 EU members.

The French are toying with new powerful structures that would essentially set up a European economic government for the eurozone. This would be a giant step towards political union. It would trigger, once again, profound arguments and there would be wide calls for such changes to be put to the people. How the French would vote for such changes is far from clear.

So the old arguments will be had again between those who want ever deeper union and those who want a less ambitious Europe that delivers in the face of competition from the rest of the world.

These are just a few of the known unknowns, but it means that Europe is in for a time of turbulence.

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• - What's this?

After long months of turbulence in Europe there is a pause. The euro is no longer under daily attack. The massive bail-outs and loan guarantees have bought time.

The crisis, when Europe nearly saw the sinking of its currency, has left the EU uncertain, wounded and divided.

There are signs that belatedly leaders are understanding that the core of Europe's problem is debt and low growth. Quite simply most European countries are living beyond their means. The reckoning has arrived.

The new realism can be seen in the way that . Civil servants are to see their wages reduced by 5%. A subsidy for new parents - a so-called "baby cheque" worth 2,500 euros (£2,135) - has been scrapped. Portugal, too, is increasing wages and cutting wages. France has announced a freeze in government spending and will almost certainly have to do more. Germany has backed off a second instalment of tax cuts.

Here lies the challenge. Big cuts will be demanded in Europe's welfare state. The era of austerity will challenge and threaten Europe's social model. Protesters in Greece have gone to the streets. Protests are now being planned in Spain for early June to oppose what the unions call "unjust" measures. Europeans will be called on to work harder, to face the fact that they are competing globally. None of Europe's leaders are yet spelling out the cultural revolution that is to come.

The pain can be diluted, but only by growth. There are signs that growth in Europe is picking up, but it is not strong enough to reduce deficits and to finance a way of life that people have become accustomed to. There is also a risk that as Europe cuts it diminishes growth and falls into a vicious spiral.

Some European officials see very clearly that the priority for Europe will have to be growth, jobs, reducing deficits.

Within the EU there is tension, and at its heart is the role of Germany. The Germans never wanted to join the euro if it meant it would have to bankroll the weaker countries. That is what has happened. For Germany the single currency has become not so much a monetary union but a transfer union. It raises the unresolved question of the great divide in economic cultures between the North and southern Europe. In the long term that cannot be resolved by Germany bailing out the rest.

In the past the engine for decision-making was the Franco-German alliance. It drove the EU forwards. That can no longer be taken for granted. President Sarkozy and Chancellor Merkel have clashed too often. There is a report in the Spanish paper El Pais, sourced to the Spanish prime minister, that President Sarkozy threatened to pull France out of the euro if Germany wouldn't help Greece.

So to the future. The push is on. Some want to go further with economic integration or economic government. Tensions will resurface. If the changes are far-reaching Germany will want treaty changes. That will open up arguments that have scarcely subsided since the Lisbon Treaty was ratified.

Lying behind this is an old argument. When do Europe's people get a voice as to whether they want their national budgets scrutinised by the EU before their national parliaments? Potentially there could be the most significant expansion in economic governance since 1999.

An American observer, . "A united Europe no longer captures the imagination of many of its residents," he said.

In the past few months, apart from in France, I have discovered a begrudging acceptance of the EU, but little enthusiasm.

What will play out is a struggle between "integrationists", who see the answers in greater integration, and others who care less for the dream or institutional changes and more for delivering on jobs and growth.

For the moment the turbulence has subsided, but it is only a pause.

And I am taking a few days off, so will fall silent for a week.

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• - What's this?

Europe's leaders have phoned in their congratulations to the new Conservative prime minister. The French Prime Minister, Francois Fillon, spoke of the "special partnership" that exists between France and the UK. President Sarkozy sent his "warm congratulations". All of this is to be expected.

But Europe will be curious and wary. Curious, because Europe is the issue that divides the new Conservative-Liberal Democrat coalition more than any other. The Conservatives have deep, ingrained doubts about the European project; the Liberal Democrats are enthusiastic.

During the election the Lib Dems accused the Tories of being isolated in Europe. Nick Clegg said that David Cameron had in effect allied himself in the European Parliament with crazies. He said the Tories had abandoned the mainstream alliance of parties supported by President Sarkozy and Chancellor Merkel.

But that was in the heat of the campaign. Today is the reality of power-sharing. When it came to negotiating over the new coalition "Europe" was one of David Cameron's red lines. He would not compromise on his commitment to hold a referendum if Brussels seeks to increase its powers. The new government will not seek to join the euro and the Liberal Democrats accept that. There is no appetite to join the single currency in the UK and that has only increased after the euro's recent turmoil.

Today the new foreign secretary, William Hague, said he hoped there would be no "difficulties" over Europe. "We have written into this agreement that we agree there should be no transfer of sovereignty or powers over the course of the next Parliament, and that was not a difficult item to agree with the Liberal Democrats."

What is less clear is whether the Tories will try and reclaim some powers from Brussels in the field of employment or social policy. Any attempt to do that will meet with fierce resistance among other European leaders. It is not clear what view the Liberal Democrats take of that.

During the election campaign, William Hague stressed that he was not looking for confrontation in Europe and the expectation is that the new British government will be pragmatic in its dealings with Brussels.

It will be interesting to see whether the Conservatives's grouping in the European Parliament survives or whether the new government might be tempted back into joining the larger European People's Party. The initial impression I get is of no change, with one Tory MEP saying that they wanted to be "friendly neighbours, not awkward tenants" with the EPP.

You can sense Europe's wariness in the comments of the President of the European Commission, Jose Manuel Barroso. He said that "many of the challenges ahead... are common across the EU and require a common response". Europe's leaders are feeling defensive; their much-vaunted currency has been revealed as vulnerable and their inclination is to push for greater integration. Most of that will relate to those countries in the eurozone, but the UK can be expected to resist any suggestion from the Commission that looks like a fresh power grab.

President Sarkozy said he hoped the UK would "continue to make its contribution to progress regarding European construction in the spirit of trust and friendship which inspires them". It is the French hope that the new British government will prove to be "constructive Europeans".

Even with Labour in power some in Europe felt the UK was still an outsider. There has been some criticism of Britain's refusal to back loan guarantees to the eurozone countries. This was the attitude of Jean-Pierre Jouyet, the chairman of France's financial services authority. "There is not a two-speed Europe," he said, "but a three-speed Europe. You have the Europe of the euro, Europe of the countries that understand the euro... and you have the English." That was even before David Cameron became prime minister.

David Cameron arrives at a time of great uncertainty in Europe. The euro's reputation has been battered. The wall of money that has been thrown at rescuing the eurozone at the weekend . Many of Europe's leaders have not faced up to the core of the crisis - that the continent's generous social model will have to be pared back. In a nutshell, Europe has been living beyond its means. Europe has to change and there will be opportunities for the Conservatives to contribute to this.

The most interesting relationship will be between Chancellor Merkel and David Cameron. They may even become surprising allies. It is only just sinking in in Germany that the EU has become the means of transferring hard-earned German money to weaker economies. This was precisely what was not supposed to happen when the euro was set up. It was why the rules of the Stability and Growth Pact were set up. The growing doubts in Germany as regards what kind of union they belong to may well chime with David Cameron's view that the EU is over-regulated and that the biggest challenge is to strengthen the single market and get Europe's economies growing again.

Already there are calls for much closer economic integration. A new battle for what kind of European Union is wanted lies ahead, and that may test the new ties that bind the Conservatives and Liberal Democrats to power.

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• - What's this?

In a series of late-night moves, European finance ministers, the European Central Bank, and the IMF threw everything at defending the euro.

This was unveiling the nuclear option and more. A truly staggering $1 trillion has been deployed in an effort to stabilise world markets. In a short space of time this was no longer about the debts of Greece or Spain; it was a race to save global economic recovery.

Banks once more could have faced liquidity problems. President Obama was working the phones with Europe's leaders. In the desperate race to have a plan in place before the Asian markets awoke, doubts were swept aside. The rule book was forgotten in a matter of hours. The European Central Bank decided to buy eurozone government bonds; a policy it had only recently fiercely resisted.

Some believe that the massive 500bn euro package to guarantee loans to eurozone countries should have required a new treaty, yet it was almost nodded through. The Commission has based the arrangement on a narrow interpretation of the Lisbon Treaty, which refers to "exceptional circumstances".

The European Commission, which is after all a civil service, could now find itself borrowing on the markets to lend to any state in difficulty. "This truly is overwhelming force," said Marco Annunziata, from Unicredit. This firepower is all aimed at steadying the markets, or as the Swedish finance minister put it, stopping the "wolf-pack behaviour" of the speculators.

EU Monetary Affairs Commissioner Ollie Rehn said "it proves we shall defend the euro whatever it takes". In the short-term the bond markets should settle and the cost of borrowing should fall for countries like Portugal and Spain. Now it may be that much of this rescue package will never be called on, but even though the immediate blaze may have been put out there will be long-term consequences.

If countries get into difficulty and cannot re-pay their loans other eurozone countries will have to foot the bill. It remains unclear how the money will be deployed and on what terms. Some of those countries are already struggling with crippling deficits and will have difficulty finding the money. In the end Germany will have to bank-roll this. On paper it is committed to paying 123bn euros.

The German voters in North Rhine Westphalia clearly did not appreciate bailing-out Greece. Germany could potentially end up as the Paymaster General for much of the Euro Group. If that happens one of the likely consequences of this crisis will be that the most important country in the European Union will become progressively more Eurosceptic.

With these vast funds available there will be a temptation for countries to draw back from the austerity programmes. Spain, for one, has shown itself reluctant to pursue further cuts. Even the Greek government besieged by rioters might decide it can back off. After all, what sanctions would be employed against it? The message that emanates from all this is that rather than a country being forced out of the euro, money will always be found if a country gets into difficulty.

The fundamental problem for Europe is a lack of growth, inflexible labour markets and expensive public sectors. The challenge for politicians will be explaining that the old social model can no longer be sustained. Benefits will have to be frozen. Entitlements withdrawn.

It is an open question whether Europe's leaders will embrace what will be a revolution, or will they fudge the challenge and keep dipping into this well of money? On Monday, the President of the European Council, Herman Van Rompuy, said leaders had to show courage. Europeans would have to work harder and for longer. It is a message that politicians have so far shied away from.

Peter Morici, a professor at the University of Maryland, almost immediately fired a warning shot. "By establishing a 750bn euro-fund," he said, "Germany and other strong European states are chasing a dream - a single Euro currency and broader European unity - that may have no place in reality."

Certainly the flaws that brought Europe to this point have not been addressed. They have monetary union without fiscal union. Already there are EU Commissioners calling for fiscal powers to be pooled. President Van Rompuy said: "We can't have a monetary union at the end without some form of economic and political union, and that is our big task for the coming weeks and the coming months."

The rules governing the euro were flouted. They will have to be tightened in the future. But will serial offenders be excluded from the euro, or will they always be accommodated? Beyond that is the problem of sharply different countries sharing the same monetary union. Anyone who has recently spent time in both Greece and Germany knows they are light years apart economically.

The problem for the weaker countries is that being inside the euro they do not have the means to become competitive through devaluation. These fundamental questions have not been addressed. Here, too, the pressure will grow for further integration. The President of the Commission, Jose Manuel Barrosso, said: "We need a stronger union in economic policy, a stronger compliance by member states."

So the battle lines are being drawn up. There will be another push for further integration. Some governments and some voters may resist.

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• - What's this?

It is instructive to look back over the past few months. Time and again I, like others, have reported that a deal has been reached to help Greece. Within days the much-touted agreement fails to hold the line and the eurozone leaders fall back, looking for another place to make their stand. Only a few weeks ago we were trumpeting a 40bn euro bail-out. Within days that had become a 110bn-euro rescue.

When the details were announced last week-end, along with Greek austerity moves, it appeared that the immediate crisis was over. But within days the eurozone countries were looking for a new line of defence. The Australian Prime Minister Kevin Rudd said "markets have judged those arrangements to be inadequate". So in less than seven days the largest sovereign bail-out in financial history is being openly questioned.

One obvious observation is that events and financial markets have driven these events; politicians have only reacted to them. Europe's leaders have not been able to get ahead of the story. They have been playing catch-up. And you can sense their frustration in their rage towards the financial markets.

As always there is speculation, but are there are reasons for the markets to be sceptical.

They cannot see how an economy like Greece, that is contracting by 4% this year and will contract further next year, will find the growth to either reduce its debt or pay back the loans from the IMF and the EU. And the expected shrinking of the economy does not take into account the deflationary impact of the austerity measures.

Peter Boone and Simon Johnson, two economists, have that "since most Greek debt is held abroad, roughly 80% of the budget savings the Greek government makes go straight to Germans, the French and other foreign debt holders (mostly banks)." Put at its simplest, many economists cannot see how Greece will find the growth to reduce its debts.

So the markets believe that sooner or later the problem will surface again; Greece will either be bankrupt or have to restructure its debt. That is the calculation.

I spoke yesterday in Athens to the Greek Culture Minister, Pavlos Yeroulanos. He stressed to me the importance of the measures not just to reduce the budget but to transform the Greek economy. In his view they were as important as the savings and cuts. Some have described this part as the "cultural revolution". It is surely right that the Greek economy has to be made competitive but the changes, even if they are implemented, will not happen overnight.

And if Greece cannot escape its debts investors will fear the same might occur in Spain or Portugal, which is why the cost of servicing their deficits has been rising there. No European leader has addressed what actually would happen if those countries needed rescuing. Who would provide the funds? Some eurozone countries have struggled to help Greece.

Some leading economists are expressing doubts that the eurozone will continue. The Nobel laureate Joseph Stiglitz said "the very survival of the euro is at stake". And the US economist Nouriel Roubini warned that the eurozone could "break up".

The core of the problem is not just debt; it is that some countries just cannot compete with other eurozone countries, let alone internationally.

In Portugal the government has been candid about its problems. It talks about competitiveness. Productivity is weak and the government is set on making the economy more flexible. None of this will be easy. Reducing debt often involves dismantling social programmes that people depend on. The Portuguese government wants to reduce some unemployment benefits. The unions won't have it. The Spanish, too, seem reluctant to embrace radical cuts and a wholesale reform of the economy.

Europe's leaders are groping for solutions. How can eurozone countries inhabit a monetary union together when they are so different? For instance, industrial production in Germany rose an impressive 4% in March, while Spain is just emerging from recession.

It may prove easier to police the eurozone in the future. to keep the public finances of each member of the eurozone in check. There is likely to be a new "robust framework" for policing public financing. Statistical reporting is to be improved. There is talk of sanctions for those who break the rules. Financial assistance could be stopped, although the problem with sanctions is that they could damage further a weak economy. Slovakia and Slovenia favour expulsion as the ultimate sanction.

As the markets fluctuate the biggest challenge for Europe's leaders is to kick-start the European economy, to return to a sustainable level of growth. Everything depends on that. The German Finance Minister, Wolfgang Schaeuble, said: "the European project is not much supported by the public. We have to convince people that European unification is in the interests of Europe. I am very worried about Euroscepticism." For the voters out there, bewildered by the storm battering the euro, my guess is that what they will judge Europe by is delivery, not dreams.

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• - What's this?

Like engineers off the Louisiana coast, Europe's leaders are scrambling to stop the Greek slick from spreading. The signs of acute anxiety are everywhere.

The German Chancellor, Angela Merkel, said the rescue plan must succeed or other European countries may suffer the same fate, threatening the bloc's future. "We're at a fork in the road," she told the Bundestag, "this is about nothing less than the future of Europe and with it the fate of Germany in Europe". This dramatic assessment was, of course, intended for German voters who remain hostile to the billions they'll be loaning Greece.

The leader of the German opposition Social Democrats (SPD), Frank-Walter Steinmeier, said "it is the biggest test of European integration since the Treaty of Rome".

The fear that haunts Europe's leaders is contagion. Axel Weber, a member of the European Central Bank's governing council, said today there is a serious threat of Greece's problems spilling over and spreading to other parts of the eurozone. The head of the IMF, Dominique Strauss-Kahn, also indicated there was a risk of the crisis spreading. In early trading the euro was down again.

So what are the dangers in the days and weeks ahead?

Firstly, although Greece now has enough funds to stave off default, fears remain that further down the road it will have to restructure its debt.

The bigger question is whether the Greek government will fully implement the austerity measures it has agreed in exchange for being bailed out.

Despite the sound and fury on the streets of Athens it is unclear what a majority of Greeks feel. A couple of days ago I spoke to the head of the civil service union, Adedy, which is striking today. The union's argument was not with the bail-out; it was with the terms of the rescue. The unions are aggrieved they were not consulted and what they are after is a reworking of the terms and conditions.

The Greek government, however, has very little room for manoeuvre. Any indication that it was retreating from the deal it has signed would set off alarm signals, particularly in Germany. Austerity is the price for the German billions being loaned.

Judging support for will be important. Support for previous strikes has been lukewarm. So today will be seen as a trial of strength. If the Greek government appears vulnerable or the protests are particularly violent then the rescue deal may be in jeopardy but, so far, the violence has mainly come from the anarchist fringe.

Even if the bail-out package is implemented there are longer term risks. The Greek economy is expected to contract by 3% this year and could well be still shrinking in 2011. As it implements cuts of 30bn euros over three years where will growth come from? It might turn out that Greece will need further help or be unable to repay its huge loans.

The more immediate concern is of the crisis spreading. Already investors are fleeing to the safe havens of gold and the dollar. The Spanish strategy at the moment is to fight the rumours and to castigate the speculators. There are no plans for new austerity measures. There are indications that the Spanish economy has started to grow again and that industrial production is up.

The Spanish Economy Minister, Elena Salgado, said "in terms of the economic data we are receiving, we have positive data and we are better off than a year ago". Its debt level as a share of the overall economy is half that of Greece.

But what makes Spain vulnerable is that its private sector has huge debts.The spending cuts announced so far are judged as modest - only 2.5% of GDP. The government drew back from increasing the retirement age. Unemployment is at 21% and rising, and so far it has not embraced labour market reforms that could deliver a more flexible economy.

The risk, like with Portugal, whose deficit is set to rise to 8.5% this year, is that it becomes increasingly difficult to borrow money at affordable levels.

If that happens it is very unclear whether the eurozone countries have the appetite for further rescues. It was clearly stated at the weekend that the Greek bail-out plan was not a blueprint for others. Already we have countries like Ireland, that is struggling to reduce its own deficit, having to lend money to Greece. It is most unlikely that such generosity would extend to others. And if other countries ran into difficulty, how would Germany and its people react? One bail-out has proved a very tough sell. Further rescues may weaken the European ties that bind.

And adding to these difficulties is a European economy that remains fragile. Consumer demand is weak. The eurozone economy is set to grow by only 0.9% in 2010. Growth could stave off many of the dangers but it remains elusive.

, said "the fear that yoking together such diverse countries would increase tension, rather than reduce it, has been vindicated: look at the surge of anti-European sentiment inside Germany".

In these days of angst some very fundamental questions are being asked of Europe and its leaders.

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ATHENS Two leaders. They do not know each other well. They find themselves locked in a high-stakes game. They sit on opposite sides of the table. The outcome of the game is so important that the US president calls. The IMF and EU are involved, but some of the key moves will be made by George and Angela. One is George Papandreou, the Prime Minister of Greece. The other is Angela Merkel, the German Chancellor.

George has power in his blood. It's the family business. Angela has earned nothing by right. She is the analyser. She is unemotional. She watches, she listens and then decides. She is cautious by nature, unimpressed by the peacockery of male leaders. She does not like cheats.

At the outset George was open about the Greek accounts. The books had been cooked. Angela liked his candour. George began a little belt-tightening. Public sector wages were cut. He promised that this year the deficit would be reduced by 4%. It convinced a few EU officials, but not the financial markets and certainly not Angela. She wanted much more. In her corner she had the German people; they had not joined the euro to bail out cheats.

So round after round they eyed each other. As the cost of borrowing increased for Greece George played his club card. They were all in the European family together. He waved the flag of European solidarity, guessing correctly that others , particularly EU officials, would come to his side. He was after a big loan that would persuade the financial markers to back off. Angela didn't buy into this. Greece had to do more.

George grew impatient and threatened to go to the IMF. He gambled that European officials would panic; they hated the idea of outsiders being called in to put out the fires within. Angela called his bluff. Go right ahead, she said, call in the IMF.

Sometimes George played defence. His hands were tied. He pointed to unrest on the streets. The Greeks couldn't take any more austerity. The anarchists were at the gates of the finance ministry.

But Angela had her crowd too: 65% of her people would prefer Greece to leave the club altogether. Show them the door. They broke the rules.

So the two leaders stared each other down and the financial markets sniffed a stalemate. All the time the cost of financing Greek debt was rising. George was begging to be rescued. This time other eurozone countries were with him. Angela was stony-faced. The outsiders were putting the squeeze on her. Sometimes EU officials would announce deal done. Angela refused to unlock the funds and the deal evaporated.

"If you think we're going to play paymaster you're wrong" was Angela's line. She hinted at new rules, even treaty changes. The serial offenders would be kicked out. The euro officials gasped. Angela was playing the Iron Lady. A new Germany was emerging that put national interest above being "good Europeans".

This was not just the biggest crisis to have faced the euro, it hinted at deeper, more fundamental crises within the EU.

Angela just didn't buy into George's world. She suspected that once the pressure was off the Greeks would be back to their old ways. The phoney receipts. The tax evasion. The black economy. The pay-offs. The back-handers . Time and again George insisted he could not do more. The people would not accept it. Angela did not blink. She wanted a convincing programme of reform. She had grown up in former communist East Germany and knew about nations paying a price.

George, however, understood the end game was close. Greece was effectively shut out of the bond market. The moment of default was approaching. The debt could not be serviced in May. He sensed his moment. This crisis was not about Greece. It was about the euro, the single currency, the European dream. Europe feared contagion, that the debt crisis would spread. It all strengthened George's hand. The Greek economy made up only 2.6% of the eurozone's GDP, but in effect Greece was too big to fail. George had the best cards. The worse it got the greater the pressure on Angela. She had resisted a bail-out. Then her ground shifted. If Greece was to be helped then it would have to be at commercial rates. She had drawn her line, but she was in retreat.

Then a wild card put the game George's way. A ratings agency downgraded Greece's credit to junk. The Greek debt crisis had become a full-blown financial hurricane. It risked the stability of the euro and Angela's bluff was called. She had to defend the currency that Germany used. Initially Germany, as the biggest contributor, was going to lend Greece 8bn euros (£7bn). Within days Germany was in for more than 20bn euros.

The game, however, was not quite over. Angela had wanted the IMF involved. She guessed that they would insist on harsher terms in exchange for a massive rescue package. She was right. The loans will be made every quarter and Greece's books will be examined. Any back-sliding on reducing the deficit and Greece could face sanctions. Contained in the deal is an attempt to restructure the Greek economy. If Greece is to compete in the future it has to change and become more competitive. .

So the package is harsh - harsh enough for Angela to defend it to her people. George might have got the money, he might have staved off bankruptcy, but he has to extract £26bn worth of cuts in three years. His battles will now be fought out on the streets. The IMF negotiator casually mentioned yesterday that "the need for deeper cuts could not be ruled out".

For Angela, she got the best deal she could. She has made it clear this rescue plan is not a blueprint for helping other countries that get into difficulty. Around her are people who suspect Greece won't be able to pay the money back. Despite the bail-out, it is hard to see how the Greek economy will grow. So down the road . The more the Germans are asked to bail-out others, the more they will question the club they belong to. So George won the first round. Angela and most European officials know a breathing space has been bought. That is all.

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ATHENS Greek cabinet ministers turned up for a Sunday cabinet meeting to learn the terms of their salvation. They have agreed to a rescue package of around £120bn. The country now, in effect, is a protectorate of the European Union and the International Monetary Fund. The Greek Finance Minister, George Papaconstantinou, said "the choice was between collapse and salvation".

The IMF and EU have set a hard bargain. In exchange for bailing Greece out they are demanding £30bn of new budget cuts over three years. This is on top of cuts already announced and this is a country already in severe recession. The economy will shrink by 4% this year.

This unprecedented rescue package is intended not just to save Greece but to prevent other eurozone countries, with large deficits, from facing similar crises.

The road to economic health will be long and rocky. It was revealed today that debt would soar to 150% of GDP. It would only start falling in 2014.

In order to reduce its deficit to 3% of GDP by 2014 Greece will have to implement deep spending cuts and tax increases. Salaries and pensions in the public sector will be frozen for three years. Annual holiday bonuses - so important for Greek income - will be capped. For higher earners they will be scrapped. There will be a 10% hike in fuel, alcohol and tobacco taxes. VAT will rise to 23%. Illegal construction will be taxed. Defence spending slashed.

The Greek Prime Minister, George Papandreou, said: "I want to tell Greeks very honestly that we have a big trial ahead of us."

The first test of these measures will be with Greek public opinion. A general strike is planned for Wednesday. Mr Papaconstantinou said: "The vast majority of the population is behind us because they understand that we don't want to tell people lies."

However, many public sector workers have already seen their take-home pay fall by 20%. The government has a big task in persuading the people that the choice is pain or bankruptcy.

The second big doubt is what this will do to Greek growth. The economy is already shrinking and the risk will be that these cuts will only reduce demand further, making it even more difficult for Greece to escape recession.

The funds are loaned to Greece for three years. Some will question whether the country will be able to pay back what it borrows. Some in Germany suspect the money will eventually have to be written off.

This package is not just about a financial bail-out. It is aimed at changing the Greek economy to make it more competitive. In the future it will be easier to hire and fire. Proper accounting methods will be adopted. This wholesale restructuring of the Greek economy is necessary otherwise Greece will be in the same position again in three years time. But make no mistake, it will be hard to change a culture where corruption and backhanders are rife.

One of the biggest questions relates to the European Union. This is a day of humiliation. It was never envisaged that a eurozone country would need bailing out. Today the EU had to launch one of the biggest financial rescues ever attempted. What the plan does do is to buy time and to shelter Greece from the fierce winds of the markets. What it doesn't do is to answer the questions of whether economies so fundamentally different as Greece and say Germany can be part of the same monetary union.

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