Greek Fire, Part 45

We've come a long way from February 2010 when I first mentioned that the Greek Fire had been lit, unquenchable, unstoppable, and immolating all in its path.  I warned then that all of Europe was at risk, and the ECB has doen everything imaginable to make the situation worse.  It's done just that for the last 19 months, laying waste to Ireland, then to Portugal, then Spain, and now we've completed the PIIGS set with the meltdown of the Italian bond market.

Political and economic crisis in Italy spurred fears of a split in the euro zone with borrowing costs for Europe's third biggest economy at unsustainable levels and the bloc unable to afford a bailout.

EU sources told Reuters that French and German officials had held discussions on a two-speed Europe with a smaller, more tightly integrated euro zone and a looser outer circle.

The discussions among senior policymakers, still in the realms of the theoretical, have focused on how to protect the euro zone from breaking up via tighter common policies which some members may by unable or unwilling to live with.

A German government spokesman said on Thursday that Berlin was not pursuing the idea of a smaller euro zone.

Asian shares fell more than 3 percent after similar falls on Wall Street and in Europe as investors took fright at the accelerating sovereign debt crisis and at buck-passing among European leaders and institutions.

The risk premium on all southern European government bonds over safe-haven German Bunds continued to rise at the opening on Thursday ahead of an Italian treasury bill sale seen as a major test of the country's ability to fund itself.

The problem is that the Greek Fire has burned through all the firewalls the IMF, ECB, and EU have set up.  It's slagged them like a plasma torch through ice cream.  Italy is the last bulkhead between the eurozone and oblivion, and the EU knows it.

They also know that there's nothing they can do at this point that wouldn't mean the end of the EU as we know it.

German Chancellor Angela Merkel said on Wednesday that Europe's plight was now so "unpleasant" that deep structural reforms were needed quickly, warning the rest of the world would not wait. "That will mean more Europe, not less Europe," she told a conference in Berlin.

She called for changes in EU treaties after French President Nicolas Sarkozy advocated a two-speed Europe in which euro zone countries accelerate and deepen integration while an expanding group outside the currency bloc stays more loosely connected -- a signal that some members may have to quit the euro.

At this point, there are no more firewalls left.  The only question now is whether or not the EU and its leaders have the political will to do the right thing.  But at every turn they have implemented austerity and cut off the engine trying to coast up the hill on an empty tank, instead of giving it more gas.  More worried about the tank being empty than getting up the hill, they're about to fail at both.

Now the EU is talking about throwing the PIIGS away and pretending they were never part of the eurozone, while continuing to subject hundreds of million of Europeans to austerity...the same approach Republicans want to use here.

Things are going to move fast now.