Implosion of Europe may disturb August vacations

By R.A. | WASHINGTON

CHARLEMAGNE updates us on the situation in Europe, where the latest Greece rescue did nothing to improve the outlook for Spain and Italy:

[T]he spreads of Italy and Spain (right-hand chart), already sickly, have continued to rise, reaching the highest level since the adoption of the euro. Why is the cure not working? One reason is that these two countries have not asked for, and have not been given, the medicine of emergency loans, so they are still struggling on their own. Another is that the measures promised to contain the spread of the disease – giving the euro area's main bail-out fund, the European Financial Stability Facility (EFSF) greater powers to intervene early in a crisis (see my earlier posting here) – have yet to be approved by national parliaments, which are on holiday. Finally, even if the EFSF's drugs are made available, there are not enough supplies in stock to deal with an economy as large and indebted as that of Italy. It may not even be enough for Spain.

The lending power of the EFSF is being increased to its full headline figure of €440 billion. But many think it needs to be bigger still – five times larger, says one leading financial analyst (see here). The bigger the crisis, it seems, the bigger the dose of cash required. But the question is this: as more countries fall ill and are unable to support the EFSF, who will be left to bail out the euro zone? Already questions are being asked about the creditworthiness of France, the AAA-rated country with the highest debt ratio in the EU.

I have to say, it's difficult for me to comprehend the attitude in the euro zone at present. Reuters is currently reporting that European Commission President Jose Manuel Barroso is acknowledging doubts as to the European Union's capacity to solve the debt crisis. And yet we read things like this:

With many policymakers on holiday, there seemed little prospect of early European policy action, although euro zone governments were in telephone contact about the situation.

German Economics Minister Philipp Roesler said Italy and Spain were not even discussed at Berlin's weekly cabinet meeting which he chaired in place of Chancellor Angela Merkel, who is on vacation and did not call in.

A German government spokesman said Berlin saw no reason for alarm over the selloff of Italian stocks and bonds and was focused on implementing the latest euro zone summit decisions.

It's gobsmacking. Germans are coming dangerously close to literally fiddling while Rome burns. I mean, how does one react to this? Short everything Italian, I suppose.