There's a scene in the film Shakespeare in Love where Queen Bess has to cross a muddy puddle. In a spoof of the Sir Walter Raleigh legend, she waits for a courtier to whip off his cloak. It takes an age for the young men to realise what they are supposed to do, so with a angry mutter of "too late, too late", the Queen gets her feet muddy.
"Too late, too late" may well prove to be the epitaph on the tombstone of Europe's single currency if the almighty crisis now brewing ends in catastrophe. That is entirely plausible, because while attention in Britain has been focused for the past week on Rupert Murdoch's phone hacking scandal, for monetary union the crisis has deepened.
It has been a familiar pattern. Financial markets have turned on one of the weaker members of the single currency, pushing up the cost of financing its debts. The difference is that the country in the firing line this time has been Italy, which accounts for 20% of the eurozone's output, as opposed to Greece's 3%. Italy went into monetary union with high levels of national debt and has struggled to live with the disciplines of the club. Over the past decade it has lost competitiveness to Germany and can no longer respond by devaluing the lira, which it did regularly when it had its own currency. As a result, Italy is the latest country to prepare a package of austerity measures in the hope that it can cut its way out of trouble.
Faced with this worrying new development, Europe's policymakers are, as usual, fighting the last war. They have announced that some form of debt restructuring – default to give it its proper name – will be needed to help Greece cope with its unpayable debts. This is something that should have been considered months ago, but instead has surfaced as the European Union prepares to announce the results today of stress tests on its banks. These are designed to show how resilient the financial sector would be to problems.
Last year the tests were made so easy that all but a handful of banks passed. It was like putting the field for this week's Open golf championship on a pitch-and-putt course. This year the challenge has been made more demanding and lots more banks – 25% or more according to the latest rumours – will fail. Europe has a spreading sovereign debt problem that is making life more difficult for its banks and dithering politicians who have proved to be not up to the job.
At this perilous juncture, there's not much to be gained from saying that monetary union was always a daft idea. Nor is it helpful to bemoan the fact that the architects of the single currency left the edifice half-finished when they provided Europe with a central bank but not a finance ministry. The question is whether Europe's policymakers can cope with the powers and institutions they currently have. To have even a fighting chance, policymakers need to realise that they are involved in a life or death struggle. Once they have done that, they can perhaps rally round a collective solution that offers for the first time the prospect of getting ahead of the game.
What would this collective solution consist of? The European Central Bank should be openly active in the financial market, buying up the debts of those countries under pressure. That would suggest that policymakers were prepared to do something about the problem rather than simply talk about doing something about the problem. Confidence is crucial, and at present it is rapidly draining away.
The next step would be to allow individual countries to convert some of their national debt into EU bonds. This would reduce the costs to countries like Greece, Portugal and Italy of financing their debts, although it would mean higher borrowing costs for those countries – such as Germany – where interest rates are currently below the euro area average. It would also mean losses for bond holders, although not as big as the losses they would face if the single currency went belly up.
Politically, this may be tough to sell, partly because the German public may not wear it and partly because it sounds like a backdoor route to a European state. Stuart Holland, the economist and former Labour MP, ( Cynical: ο Βαρουφάκης πού είναι;) has come up with a plan that would get round these objections: he says the EU bonds need not be traded, with the interest rate decided upon by eurozone ministers, rather than by the markets. Separately, he says the European Investment Fund should issue new tradeable bonds to pay for growth-boosting infrastructure projects across the single-currency zone.
Even assuming that these ideas are greeted as workable, Europe may not be ready for such radical suggestions. A collective solution will be costly: some estimates put the price tag at €2tn. Policymakers may balk at the cost. They may prefer to stick to the current mantra of austerity, austerity and still more austerity. But they are dicing with disaster if they do so. Privately, some senior bankers are saying that Europe has a matter of days to get its act together before an implosion of the single currency triggers a second phase to the global financial crisis.
Be clear: were that to happen it would make the recession of 2008-09 seem mild by comparison.