THE European debt crisis, which has been building since late 2007, is finally reaching an inflection point.
All the coverage of Ireland's miseries seems to belong to a distant past in euroland and in world markets. Portugal then Greece followed as the kicking boys of Europe.
However, all this bluster on economies of a "relative" small size (Greece's €300bn) was never going to threaten the greater position of the euro and its combined perceived strength. The European Central Bank, its stability fund and the Germans were all around the corner -- but so was Italy and Spain.
Italy, with its €2tr economy, is a massive pill to support. However, that is only one side of an unpleasing requirement. The other is the world's demand for Italy's debt to be supported (much like Ireland's). Why?
Well Italy, for all its fine wine and southern European welfare demands, is also a significant global exporter. Such a €2tr economy has, however, been built, in large measure, by internationally funded debt into sovereign Italian bonds.
Will la dolce vita be as subservient as a hard-working Irish population?
As in Spain, with 21 per cent unemployment and circa 45 per cent in those under 25, the Italian system protects those of longest-serving years, thus creating massive inefficiency. Will they be as prepared as the Irish to accept the harsh pain that Germany incurred post-unification that has led to its emergence as a powerhouse?
This, together with a 20 per cent black market economy, does not fill the coffers needed to fund the increasing debt costs, now circa seven per cent.
Whilst Mr Berlusconi has stepped aside to permit an orderly transition in the Italian political space, the divide between the southern European countries, with their laid-back attitude to work, archaic restructuring and restrictive legislation, suggests the acceptance is at best remote.
A double-dip recession is now a more likely scenario than a "soft landing".
Industrial production in Germany is abating. Where will the GDP growth come from to support ever-increasing debt? A decade or more of slow or lost growth has arrived. The emerging powers refuse to come to the table. The US may not be as concerned as we may hope.
Lehman Brothers was too big to fail. It failed. A slow and painful recession could lead to an orderly break-up of an ever diverging Europe. The second largest reserve currency is on the edge -- the cost and issuance of credit default swaps on European sovereign bonds rises by the hour -- is Spain going to decide its ultimate fate? Spain is likely to be the catalyst after a number of Italian Band Aids.
Sean Ewing founded Absolute Capital Management. He is chairman of Pinmar and has business interests in Spain and the Gulf