"We are heading towards fiscal union or break-up," said David Bloom, currency chief at HSBC. "Talk is no longer enough as the fire threatens to leap over the firebreak into Spain and Italy.
"What the market is worried about is Germany's long-term committment to the euro project. If we see unreserved and absolute backing from the political establishment of Germany, that will be a soothing balm."
Chancellor Angela Merkel seemed in little hurry on Tuesday to convey such a message. There will be no "spectacular step" at the Justus Lipsius building on Thursday; just a "controlled process of gradual steps and measures", she said with unflappable calm. Given the simmering wrath from top to bottom of German society, it may be impossible for her to do much more.
Jens Weidmann, the Bundesbank's president, has made her task that much harder by telling the eurosceptic Bild Zeitung that "nothing would destroy the incentives for a solid budget policy more quickly and more permanently than joint liability for national debts. European and especially German taxpayers would have to answer for the entire state debt of Greece. That would be a step toward a transfer union."
Days earlier he shot down proposals for issuance of eurobonds or use of Europe's rescue fund to buy Spanish and Italian bonds on the open market, crucial steps to prevent Italy and Spain being drawn into the maelstrom. "It has a high cost, limited use, and dangerous secondary effects," he said, departing radically from the script of the European Central Bank.
Such scathing words from the Bundesbank tie Dr Merkel's hands, just as she is tied by a Bundestag motion five weeks ago that imposed strict limits on further bailouts. Above her head hangs a Sword of Damocles, a ruling by her consitutional court in September that may curb or even block German participation in the EU's rescue machinery. The further she goes on Thursday – the further she breaches the "no bailout" clause of the Lisbon Treaty – the greater the risk of a negative ruling.
In essence, this is a soul-searching drama within Germany over its own national destiny and place in Europe, echoed in the Netherlands, Finland and even France. Europe's confusion reflects the schizophrenia of its ancient tribal nations, each faced with the fateful choice of crossing the Rubicon to an EU Treasury and joint government or letting the EU project unravel after half a century.
EU leaders would like to confine their summit to the details of debt buy-backs or "selective defaults" for Greece, or cuts in the penal rate on rescue packages, but the crisis is once again a step ahead of politicians. Fear that Italy and Spain may be tipping into double-dip recessions as global growth falters has changed the landscape, threatening the debt dynamics of both countries.
The International Monetary Fund said there is now "serious risk" of eurozone contagion with "large" potential knock-on effects worldwide. "Market participants remain unconvinced that a sustainable solution is at hand," it said.
Suki Mann from Societe Generale caught the mood in a note to clients, asking whether it is "all over". "Eurozone politicians don't – or don't want to – understand that the eurozone as we know it is on the precipice. Greece appears beyond repair, Italy is on the brink, and the chances are that the euro might be no more very soon," he said.
RBS fears that Europe is on the cusp of "system-wide convulsion" after yields on Spanish 10-year bonds reached post-EMU records of 6.34pc this week, and Italian yields topped 6pc. "We believe that Spain has entered the danger zone for yield levels," said Harvender Sian, the bank's credit strategist, who fears the "point-of-no-return" may be 6.5pc. "Given that Spain [and likely soon Italy] has entered this territory, there is a growing risk that a large systemic risk event is plausible in the near term and if not then in a matter of weeks."
The bank has called for a bail-out fund with €2 trillion of full lending power to stabilise the system, even if this risks pushing German debt levels above 110pc of GDP and causing apoplexy in the Bundestag.
The bond fund Pimco has its own idea: throwing Greece, Ireland and Portugal to the wolves, and concentrating €1 trillion in "overwhelming force" to defend Spain and Italy. That major players should utter such thoughts shows how fast events are moving.
For 18 months the EU has treated the serial crises on the EMU margins as liquidity headaches. It hoped that time would slowly lift the distressed debtors off the reefs, while the penal terms of "Ultima Ratio" attached to bailout loans would deter other EMU states from seeking help. "Shock and Awe" rhetoric would do the rest.
The strategy has failed because it did not acknowledge that the deeper crisis is a North-South structural gap that has left half the eurozone with variants of 1930s debt-deflation, a condition that cannot be solved by austerity measures or by any one country alone.
"We are approaching the endgame for this part of the European sovereign crises: the number of cans that now need kicking down the road would challenge the left foot of Lionel Messi," said Gary Jenkins from Evolution Securities. "The chances are that the EU will only take the step of fiscal union or common bond issuance at one minute to midnight on a weekend when it is clear that the system is close to collapse."
The EU has a long history of muddling through existential crises – though none quite as threatening as this – so it may find some way to fudge fiscal union with a formula that assuages German hawks and lawyers. If all else fails, it can still cajole or order the ECB to undertake mass bond purchases and usher in fiscal union by the back door.
But there is a larger question: does Germany really want to pay the costs of monetary union any longer?
