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By Steven Vass, deputy business editor
It faces the prospect of the entire common currency project coming apart with not only Greece but also other struggling economies such as Spain, Portugal, Ireland and Italy leaving too.
Stock markets have plummeted, along with the euro and the sovereign bonds of Greece, Spain and Italy. Talk has turned to bank runs as Greeks withdrew €3 billion in just 10 days as citizens feared a return of the drachma. These withdrawals alone threaten to make a Greek euro departure a reality.
Rumours of a bank run also haunted the Spanish economy with a reported €1bn withdrawn by savers at Bankia – although officials disputed the figure. Nevertheless, credit ratings agency Moody's has downgraded the credit worthiness of four Spanish regions and 16 Spanish banks, and a further 26 Italian banks suffered the same treatment. This pushes up borrowing costs and makes it harder for them to balance their books.
The markets tanked throughout the week. The FTSE100 in London ended down 8% by Friday, wiping billions off company stock valuations and the values of people's pensions.
What better time then for Angela Merkel, France's new president Francois Hollande and Italy's Mario Monti to be meeting Barack Obama at the G8 meeting at Camp David. Here we look at the big questions and the fall-out for Scotland, the UK, the eurozone and Greece.
What happens to Greece?
THE current austerity deal is the package Greece agreed earlier this year in exchange for a second bailout, worth €130bn. It includes €3.3bn in cuts for this year from the €108bn national budget plus more for future years. The highlights include hefty job cuts, liberalised labour laws and a 20% cut to the minimum wage. So far, this has only made the situation worse. The country is now entering its fourth year of recession and the national debt is still increasing. Unemployment is over 20%.
Alexis Tsipras, head of the Syriza party, says this medicine will send the country "directly to hell". His party favour staying in the eurozone but on more favourable terms, which means making the northern Europeans, particularly the Germans, shoulder even more of Greece's debts.
"The austerity is untenable politically and it's untenable in an economy that's in freefall," says Nicholas Spiro of Spiro Strategy, the sovereign credit risk consultancy.
Yet few would suggest that Greece returning to the drachma would be an easy ride. The new currency would plunge in value by between 30% and 50%. This would make imports unaffordable and lead to hyperinflation and even rationing.
Some suggest, however, that the cheaper currency would help Greece become competitive again and lead to a quicker economic revival similar to events in Argentina a decade ago.
However, the rhetoric from European leaders is that the bailout tranche due next month will be cut off if Greece doesn't stick to austerity, effectively forcing them from the euro. The key question for the Greeks is which option is worst.
Impact on Scotland and the UK
LAST week Bank of England Governor Mervyn King cut the year's growth forecast by one-third and said that inflation was not falling as quickly as he had hoped. "We are navigating through turbulent waters, with the risk of a storm heading our way from the Continent," he said.
This is what economists call "contagion". Professor David Bell, an economist at Stirling University, believes the risk to the UK of a Greek eurozone exit is in UK banks being faced with losses, or by how a Greek exit might affect other struggling economies like Spain, Portugal or Italy.
Any further bailouts or eurozone exits would mean losses for banks that held their sovereign bonds. "This would mean our banks would take another knock," says Bell. "It would make it even more difficult to get a loan out of them."
Professor Brian Ashcroft of Glasgow University says contagion would raise the risk of another credit crunch, where the banks stop lending to one another because they don't have confidence in each other's solvency to believe they will get their money back. Once the credit crunch sets in, as was seen in 2008, it can bring banks down unless governments step in to provide liquidity.
The ECB already had to make around €1 trillion available to European banks last year to keep them afloat, and might yet have to dig deeper. The UK Government would arguably struggle to afford another round of rescues. More broadly, the spectre of a worldwide slump is rising.
If this all sounds deeply troubling, there are a couple of small consolations in the meantime. The British cost of borrowing is at incredibly low levels – roughly quarter that of Spain and Italy.
The rest of the eurozone
ON one side stand the so-called peripheral countries – Portugal, Ireland, Spain and Italy. Portugal and Ireland have already been bailed out are undergoing severe austerity and both countries may well need a second bailout regardless of events in Greece.
But the bigger question is what happens with Spain and Italy. Fears are now centering on Spain, with investors worried about hidden property losses in its banking system and the fact that its federal regions are breaking spending targets.
"This must never get to Italy," says Gary Jenkins at Swordfish Research. "It's got such large debts that it would then become a game-ending problem. It probably means the end of the eurozone."
The other side of the equation is Germany, by far Europe's strongest nation. Everyone is putting pressure on them to loosen the conditions of Greece's bailout, but this might mean that Portugal and Ireland might demand better terms. Or the many other eurozone countries undergoing austerity might insist on an easing – to the possible detriment of the whole single currency. This could end up bringing it down regardless.
Ashcroft believes Germany will shift its ground, arguing that ultimately they will have more to lose from a euro break-up than Greece. This prospect has arguably increased with Hollande's election.
It all boils down to the ultimate Mexican stand-off: everyone will be calculating what everyone else will do next ... but who will blink first?.
