Which domino will be the next to fall in the eurozone?

Margareta Pagano, Mark Leftly and Laura Chesters answer all your questions about what the Irish bailout will mean for UK banks and whether the euro could be in danger

(afp/getty images)

In the beginning, in 1951, was the European Coal and Steel Community, which begat the European Economic Community, which begat the European Union, and which led, in 1999, to what seemed at the time the promised land of the eurozone. Here, for the 11 participating countries (five more have been added since then), was an apparent world of centrally subsidised milk and honey, where they would share a single currency, and benefit from the economies of scale. And, lo, the milk and honey flowed.

So great was the appetite for these nourishing products that some countries partook a little too enthusiastically, accruing debt at a hitherto impossible rate in order to consume, reduce tax, grow fat, and retire early. But they began to find there were downsides to being part of a single currency. Gone was the ability to fluctuate or devalue exchange rates, reflate, adjust interest rates, and manage both debt and bondholders as they once could. And so, starting with Greece, fiscal pigeons started coming home to roost. Now Ireland has fallen victim. Who's next, what does it all mean, and could this be the financial nuclear winter that pessimists have been warning about?

Will the bailout and new economic measures save Ireland from bankruptcy?

Patrick Honohan, the governor of the Irish Central Bank, was the first senior official in the country to argue that the bailout would save the nation. He's probably right, given that the problem is the banks rather than public finances. Putting the banks on a sure financial footing has worked elsewhere. The situation in Greece is improving quicker than most observers thought likely.

What might the full cost of the Irish bailout be for Britain?

At present, the Government expects to pay around £7bn, at a cost of nearly £300 to every UK household. The implication is that the UK is paying a lot to help out the neighbours. But the UK has to face this, as Ireland remains our closest trade partner and Irish banks invested vast amounts in the mainland as the Irish economy grew. It is difficult to judge whether much more will be needed, but it is safe to assume that requests for any small increases will be granted.

How exposed are British banks to Irish debt?

The latest estimates put the figure at €112bn (£95bn). This sounds high, but is to be expected, given the close trade relations between the countries. The UK exports nearly 30bn euros a year in goods and services to the Irish Republic.

Will the Portuguese and the Belgians now follow Ireland and Greece?

Reports have suggested that the European Commission is pushing hard for Portugal to follow Ireland and ask for a bailout. Portugal has denied this, but then so did Greece and Ireland. Belgium's problems, however, have taken the markets by surprise, with Citigroup predicting a bailout – along with Italy and Spain – next year.

Who are these jittery "investors" getting out of vulnerable countries?

They are the people who run the big pension funds and insurance companies, such as Legal & General and the Prudential, which have our money to invest from our pension funds. Most of these big funds have money spread across different markets – in equities and in bonds, either corporate or sovereign. It is investors in sovereign funds that are so nervous because they don't think the euro countries can pay off their debts. Then you have the wealthy, private investors who invest in bonds through hedge funds.

In how much danger is Spain of going into serious default?

The situation facing Spain is similar to the one that led to the collapse of the Irish banking system, as international investors are reluctant to buy the country's sovereign bonds, which it needs to keep afloat. Spain's banks have assets three times the size of the economy and the fears are that they will be unable to refinance next year – thus threatening the country's solvency. This would prompt a bailout. Barclays reckons Spain's banks need to raise about 70bn euros in the bond market in the first four months of next year and the question is whether bond investors have the appetite to buy.

I have recently bought a place in Spain as an investment. Should I worry?

If it's a holiday or retirement home, then you should be OK; life in Spain could get a lot cheaper if the euro does crack and national currencies come back. If it was for a quick-flip or a buy-to-let investment, then you're looking at a short-term loss.

If Spain does come under pressure, should I transfer my investments and savings in Santander-owned banks elsewhere?

Savings in UK banks, or foreign banks with UK subsidiaries, such as Santander, are protected by the Financial Services Authority's compensation scheme of up to £50,000 in any one account. This goes up to £100,000 in January. So accounts with Alliance & Leicester and Bradford & Bingley – owned by Santander – are covered. If you have more than £50,000 to invest, then spread it around.

Can a country simply pull out of the euro and revert to its own currency?

Yes. Technically, any country could pull out of the euro and go back to its own currency, but there would be huge dangers to such a move. If Greece were to go back to the drachma in order to devalue, it would also be forced to push interest rates up to attract overseas investors back. More likely is that countries will be expelled – Angela Merkel has asked the EU to look at mechanisms so that the eurozone could throw out rogue countries that don't abide by its rules.

If Spain got into trouble, would this spell the end of the euro?

The fear is that we're in the middle of a game of dominoes: one goes and they all tumble. In this scenario, the markets are betting on Portugal needing a bailout first, then Belgium, then, fatally, Spain. If Spain cracks, then, yes, the bailout required would be so enormous that it's unlikely the German taxpayer would allow Merkel to prop up any more southern spendthrifts.

If the euro collapsed, would that, in effect, be the end of the EU?

Most analysts say it would be too difficult to scrap the euro. There are too many cross-border investments to go back to national currencies.

What else would else would happen if the euro disappeared?

In theory, the pound would be traded freely against the currencies of individual former eurozone countries. According to IHS Global Insight, the pound would spike sharply, higher against the currencies of the weaker, uncompetitive former eurozone currencies such as Italy, Spain, Portugal, Greece and Ireland. But it could also soften against Germany's currency, and any currency that may be formally linked to Germany.

If the eurozone fell apart, what would the impact be on the British economy?

The UK is likely to be seriously hit in the short term. Howard Archer, chief UK and European economist at IHS Global Insight, said: "There would be major global financial turmoil and sell-offs, a major hit to business confidence, and our vital export markets would suffer hugely."

Did anyone foresee that a single currency combined with keeping different tax regimes and banking systems would lead to major trouble?

Economists debate whether monetary or fiscal policy is more important, but few would deny that one can be used to subjugate the other. Either the eurozone has complete control over both fiscal and money supply matters, or it needs to revert to individual currencies.

Are Tony Blair and Gordon Brown heroes for keeping us out of the euro?

Blair wanted to join, but Brown killed off the idea in 2003 by declaring that the Treasury's five tests had not been met. But the dispute then was not about abolishing the pound overnight; it was over preparations for a referendum. In practice, a referendum was never remotely winnable, and the suspicion must be that Blair would have stepped back from holding a vote he was bound to lose.

By the way, how is our economy doing these days?

The UK's economy grew at 0.8 per cent between July and September, suggesting the recovery is faster than expected. It is likely the UK will hold on to its AAA credit rating. Although austerity measures will seriously affect any growth, public sector cuts might not be as huge as first thought and the private sector is still providing new jobs, with 343,000 private-sector jobs created in 2010.

Has sterling suddenly become, almost by default, one of the world's strongest currencies?

Sterling is not strong, but there is a reduced likelihood that the UK will lose its AAA rating and, compared with the eurozone's woes, it is seen as more stable. But there are still serious concerns about the UK's longer-term economic prospects.

Amid all this turmoil, where is the safest place for my money right now?

You can't go wrong with gold or, even, silver. There are also National Savings accounts, backed by the Treasury.

Is there good news for anyone?

The euro is at a two-month low against the dollar, so the Obama administration can tell the US electorate that a holiday over the pond could prove affordable. That is, of course, only for those in America lucky enough to have jobs. Equally, Eurosceptics can point out that it was right to protect the Queen's head on a £10 note.

Are we seeing the end of financial life as we know it?

Not yet.

50,000 protesters march in Dublin, angry at the terms of the bailout

Thousands of protesters took to the streets of Dublin yesterday in protest against the Irish government's austerity measures.

The march coincided with reports that the Republic will be charged 6.7 per cent on its €80bn (£68bn) loan from the European Union and International Monetary Fund – more than the 5.2 per cent charged to Greece.

Ireland's massive deficit – almost a third of its GDP – is the highest in Europe. To slash €15bn over the next four years,Dublin is planning to hike VAT, cut public sector jobs and slash the minimum wage.

Yesterday around 50,000 people marched before a core group broke off and threw fireworks outside the Irish parliament. Masked men burned an election poster of the Taoiseach, Brian Cowen.

"It's difficult to see any justification for what the government proposes to do, and we'll oppose them in every way," said David Begg, general secretary of the Irish Congress of Trade Unions.

Andrew Johnson