Europe has a zombie bank problem that the rest of the world should watch out for, according to Daniel Gros, former economist at the International Monetary Fund. The problem is not that Europe's bank sector is too big to fail, but that it is too big to save.

Gros, director of the Brussels-based Center for European Policy Studies, said total liabilities in the European banking sector now amount to more than 250 percent of the eurozone's gross domestic product (GDP).

"What is wrong with Europe's banks?" he asked in a piece for Project Syndicate. "The short answer is that the sector is too large, has too little capital and contains too many players that lack a viable long-term business model."

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Given the sprawling size of European banks' debt, Gros predicted any fresh major problem could overwhelm the ability of governments to bail them out.

"In short, the banking sector in Europe might be too big to be saved."

The banks' problems differ from country to country in Europe, according to Gros.

In Spain, many banks can stay afloat only because they are able to refinance their mortgage holdings through the European Central Bank (ECB). In Italy, banks continue lending to domestic companies, while GDP has stagnated. And in Germany, banks earn close to zero on hundreds of billions of excess euros they have deposited at the ECB, even though their funding costs are more than zero, he explained.

"A bank without a viable business model does not shrink gradually and then disappear. Its share price might decline toward zero, but its retail customers will be blissfully unaware of its difficulties."

Gros predicted that when the ECB takes over European bank supervision as scheduled in 2014, it will still be unable to review the banks' longer-term viability. "Current owners will resist to the end any dilution of their control; and no national authority is likely to admit that their national 'champions' lack a plausible path to financial stability."

Gros suggested the answer to the European zombie bank problem is for the sector to be recapitalized and for those banks without a viable business model to be restructured.

The Telegraph bleakly reported that the "wheels are coming off the whole of southern Europe."

"Europe's debt-crisis strategy is near collapse. The long-awaited recovery has failed to take wing. ... Political consent for extreme austerity is breaking down in almost every EMU [European Monetary Union] crisis state," the newspaper said.

The Telegraph noted a leaked report from the European Commission confirmed that Greece will fail to meet austerity targets again by a large margin, and that Standard & Poor's downgraded Italy's debt to a near-junk BBB rating. Further, the Telegraph said Spain is now immersed in a government payoff scandal and Portugal is "slipping away" into a new downward spiral.

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