If the ECB's Jean-Claude Trichet is right in claiming that Europe was on the brink of a 1930s financial cataclysm a year ago - and I think he is - it is hard see how the threat is any less serious right now.
Fall-out from Greece flattened Portugal and Ireland last week. It is engulfing Spain and Italy, countries with €6.3 trillion of public and private debt between them.
Yields on Italian 10-year bonds hit a post-EMU high of 5.3pc on Friday. This is not just a theoretical price: the Italian treasury has to roll over €69bn (£61bn) in August and September; it must tap the markets for €500bn before the end of 2013. The interest burden on Italy's €1.84 trillion stock of public debt is about to rise very fast.
Spanish yields punched even higher, through the danger line of 5.7pc. The bond markets of both countries are replicating the pattern seen in Greece, Portugal, and Ireland before each spiraled into insolvency. And the virus is moving up the European map. French banks alone have $472bn (£394bn) of exposure to Italy and $175bn to Spain, according to the Bank for International Settlements.
"We believe the European sovereign crisis might be entering a new phase with contagion reaching the larger economies," said Jacques Cailloux, chief Europe economist at RBS.
"It is unclear to us how this latest negative shock to confidence is going to be undone in the absence of a 'shock and awe' policy response."
Italy's premier Silvio Berlusconi has chosen this moment of acute danger to undermine his own finance minister, Giulio Tremonti, the one figure in his cabinet respected by global bond vigilantes. "He's not a team player, and thinks he's genius and that everybody else is a cretin," said Mr Berlusconi.
Meanwhile, Mr Tremonti is living free in the Rome house of a political ally just arrested on corruption charges. Resignation rumours circulate hourly. You can hear the knifes sharpening.
"The government ceased to exist months ago," wrote Massimo Giannini in La Repubblica.
"What other country would allow itself the suicidal luxury of offering cynical markets such a spectacle of political disintegration and institutional decay at a time when Europe is destabilized by Greece's sovereign debt and haunted by contagion? We have a band of poltroons dancing under the volcano, and the volcano is about to erupt."
What can the eurozone now do to trump its last "shock and awe"? More loan packages solve nothing. Pretending that this is just a liquidity crisis will no longer wash.
What it will take is a belated recognition by Germany that this crisis is not a morality tale contrasting virtuous, thrifty Teutons, with feckless Greco-Latins and Guinness-befuddled Celts, but rather a North-South structural crisis caused by the inherent workings of monetary union.
The implications of this are profound. Germany must now be willing either to buy or guarantee Spanish and Italian debt, and in doing so to cross the Rubicon to fiscal and political union, or accept that EMU must break up with calamitous consequences for German foreign policy. Large matters, beyond the intellectual vision of Germany's current leaders.
It will also take a total purge of the ECB's leadership, which clings to its madcap doctrine that monetary policy can be separated from other emergency operations, and which chose last week of all moments to raise interest rates again and kick Spain in the teeth. It did so knowing that the one-year Euribor rate used to price more than 90pc of Spanish mortgages must rise in lock-step. As one Spanish commentator put it, the Eurotower in Frankfurt should be torn down, and salt sown in the ground.
The Telegraph
More:
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8628939/Italy-and-Spain-must-pray-for-a-miracle.html
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