Analysis: Powerless Britain looks on aghast as rampant eurozone contagion spreads

It provoked a second plea from the floor of the Commons by Mr Cameron in three days for the eurozone leaders to sort out their problems before the crisis takes down the world economy.

But the message from the bond markets was loud and clear: the Greek crisis has now become a contagion which is spreading across Europe.

It was also clear that the markets would not accept half-hearted political gestures and the rise in Italy’s interest payments was a direct result of prime minister Silvio Berlusconi putting off stepping down until he had got reforms through.

While there are serious concerns that order is yet to be re-established in Greece, in Italy, a much bigger player on the world stage, the crisis appeared to be even worse.

It was unclear how European leaders could rescue Italy without committing far more funds to an economic firewall.

Its problems are different to other countries because it does not have as high a proportion of debt as those which have needed to be bailed out. However, its government spending far exceeds its ability to raise revenues. In addition its historic political instability has contributed to a ruling class not willing to bring in necessary economic reforms. The job now in Berlin, Brussels and Paris is not to worry about Greece, which is all but lost, or even bailed-out Dublin and Lisbon.

Instead it is to stop Italy, the world’s eighth-largest economy from bringing down France and the eurozone as a whole. Italy’s plight means two things. The first is that, beyond face-saving, Greece no longer matters much to the eurozone. As a tiny economy, it never was that big a deal numerically. The main reason for all the attention it has received was the fear of contagion.

French president Nicolas Sarkozy has even laid out a vision of Europe in which eurozone countries accelerate and deepen their integration, while a wider and expanding group outside the currency bloc stays more loosely connected.

The second impact of contagion gripping Italy is that eurozone leaders are suddenly going to have to deal with one of its pillars collapsing rather than just the crumbling garden ornaments outside.

There is now severe pressure on Germany to end its resistance to the European Central Bank being given a much more active role, not least in printing new money in quantitative easing.

Germany has blocked this move because of its historic crises with hyper-inflation, not least in the failure of the Weimar Republic which led to the rise of the Nazis. If the ECB is allowed to become the lender of last resort then it could potentially provide the firewall needed to prevent Italy’s collapse and that of Spain.

Politicians in Britain looked on aghast but powerless yesterday to stop a crisis which will drag down Britain even though it is not part of the eurozone because so much of Italy’s debt is held by British banks and a large proportion of UK trade is with the EU.