Stark choices for Europe
In Madrid and Milan there was reason to be cheerful. Stocks rebounded on the news that the European Central Bank was "ready to buy" Italian and Spanish bonds. The move should force down borrowing costs for those two countries which had edged dangerously above 6%.
Has stability been found? No. Only temporary relief. For the ECB, buying up Italian bonds is sticking plaster. It is not an answer.
To understand why it is necessary, go back to the European summit on 21 July. It was billed in advance as the meeting that would finally fix the eurozone crisis. A billing shared by many previous summits. But the outcome was marred by confusion. The details as to what had been agreed were opaque. EU officials retreated under a barrage of sceptical questioning.
The problem was not Greece. It had won a second dollop of funding. The confusion lay with the European Financial Stability Facility (EFSF). It is the main rescue, or bail-out, fund. At the summit, the eurozone' s leaders agreed to extend the powers of the fund. It would, in future, be able to act pre-emptively. It could extend credit lines to banks and, most importantly, buy bonds under strict conditions if countries were in difficulty. The size of the fund, at 440bn euros (£380bn) was left untouched.
These new powers have to be approved by national parliaments and that won't happen until September.'Hole in the head'
As is customary with summits, there was momentary relief until analysts got a fix on what had been agreed. There was one glaring omission. The agreement would not save a big economy like Italy. It could not. Italy's debts amount to £1.6 trillion. If Spain needed help at the same time, the facility would have to be increased to 2 trillion euros. The Germans and the French are fearful that if they were to guarantee such a sum it could imperil their own finances.
The markets knew that the wider question remained unanswered, and began focusing down on Italy. It is a country with brilliant design and some world-class companies and yet for almost a decade its growth has been anaemic. Its debt to GDP ratio is 124%. The same question that was asked of Greece has come to be asked of Italy. Where will the growth come from to bring down such a debt mountain? The third largest country in the euro-zone increasingly came to be seen as a risky debt and its borrowing costs jumped higher.
Then, in the middle of last week, Italian Prime Minister Silvio Berlusconi made a disastrous intervention. He addressed parliament after the markets closed. It was a speech riddled with complacency. He rightly pointed to Italy's strengths: The banks are solvent and the level of personal debt is low. But he had almost nothing new to say about bringing down the debt or jump-starting the economy.
At the same time, President of the European Commission Jose Manual Barroso let the cat out of the bag. The bail-out fund needed to be looked at yet again. In his view it wasn't enough. Although he did not call explicitly for an increase in the fund's size it was clear what he meant. It was a damning verdict on the recent summit. Europe's leaders had not done enough.
The Germans - among others - were furious. Norbert Barthle, the chief budget expert for the conservative Christian Democrats (CDU), said: "We need the debate prompted by Barroso like a hole in the head".
But the markets had taken fright, and Mr Berlusconi was forced to make a reappearance. Reforms which had not been deemed necessary on a Wednesday were suddenly embraced on a Friday. The budget would be balanced a year earlier than planned and some austerity measures and reforms would be brought forward.Uncomfortable decade ahead
Herein lies the major dilemma - particularly for Germany. It looks at countries like Greece, Italy and, to a lesser extent, Spain, and asks: If it is to guarantee their debt, how could it ensure that the old practices - the failure to collect tax, the excessive regulation, the resistance to change - would not just prove a drain on the German economy?
It would prove difficult to persuade the Germans to stand behind the debts of nations who still cannot collect their taxes effectively”
It is certainly true that Europe's leaders have failed to tell their electorates the scale of the change that will be required. The public sector will have to be slashed. Spending on a whole range of desirable projects will be cut. The old Europe, so attached to its social welfare programmes, faces an uncomfortable decade. To bring in such unsettling change requires credibility - and many leaders like Berlusconi don't have it.
In the end Europe faces a stark choice: to force some of the weaker countries out of the eurozone or for the stronger countries to assume responsibility for the bloc's debts as a whole.
From the sidelines, many voices say that the answer to all of this is to launch a eurobond that would essentially turn national debts into common European debt. Borrowing costs for weaker nations would come down because their debt would have countries like Germany behind it.
Phillip Souta of the research group Business for New Europe says: "Germany and other creditor eurozone members can break this vicious cycle by agreeing to the joint and several guarantee of a eurobond." The German Institute for Economic Research reckons a eurobond would cost Germany 15 billion euros a year.
In order to get close to selling this idea to the German public, the weaker countries would have to agree to a massive loss of sovereignty. Germany, France, Austria, Finland etc (the creditor countries) would essentially want to manage the tax and spending of countries like Greece and Italy.
We are not at that point, but the history of this crisis is the speed at which the unimaginable comes to be accepted.
The key is Germany. Its citizens shouldered the cost of reunification. They are still paying a solidarity tax. Most believe it was a necessary sacrifice. But a solidarity tax for Greece, Portugal, Italy etc? They may baulk at that. The Germans are proud of their economy - particularly their manufacturing sector - but there will be limits to their generosity. Even German local authorities are struggling with debt. Germans will wonder why it has taken so long for these other countries to start putting reforms in place.
There is not just a massive economic gap in Europe. There is a cultural divide. It would prove very difficult to persuade the Germans to stand behind the debts of nations who still cannot collect their taxes effectively.
In my previous blog I had said that I would try and take a break over August. I am still hoping.