What price unity? Eurozone leaders might finally find out. Italy is in crisis, and Greece is likely past the point of no return. In the past year and a half, the eurozone has already approved bailouts for Greece, Ireland, and Portugal. Italy hasn't yet come to the European Central Bank's door with hat in hand, but it's already passed a fiscal tipping point, and its debt load might be enough to break the euro's back.

Uncertainty has a long and well-chronicled past on the European continent. Crises never happen in quite the same way, but they sometimes have certain poetic similarities.

The widening gyre
Bailouts for other eurozone nations came shortly after the 10-year bond yields of troubled nations rose past 7%. Italy remained of lesser importance because its yield remained under 5% until quite recently. However, savvy bond traders could have told you back in mid-August that things were starting to heat up. The threshold was crossed yesterday, sending investors running for the exits. The Dow (INDEX: ^DJI) is coming closer to losing a month of gains as it waits for another shoe to drop.


Current Bond Yield

Yield Passed 7%

Bailout Approved

Greece 27.8% 4/06/2010 5/2/2010*
Ireland 8.2% 11/01/2010 11/28/2010
Portugal 11.6% 1/18/2011 5/17/2011
Italy 7.2% 11/09/2011 N/A

Source: Bloomberg and news reports.
*Eurozone leaders agreed to a second bailout on 7/22/2011.

The center cannot hold
But the response of EU leaders is different this time. After hammering out two separate Greek bailouts, and after engineering the rescue of Ireland and Portugal, France and Germany are now speaking of breaking apart the eurozone as Italy's government runs headfirst into a wall. The European Financial Stability Facility -- or EFSF -- the eurozone's current backstop against default, is woefully unable to support an Italian bailout. Italy's debt load is a Pompeian explosion compared to the tremors of three peripheral eurozone nations, and discharging it could be as difficult as stopping an active volcano.




Bailout as % of Debt

Greece $305 million $436 billion 74%
Ireland $204 billion $196 billion 46%
Portugal $229 billion $213 billion 52%
Italy $2,051 billion $2,441 billion N/A

Source: Trading Economics and author's calculations.

Meanwhile, Greece dithers, Ireland is getting used to the pain, and German chancellor Angela Merkel calls for tighter political union as rumors swirl about two-speed Europe becoming two-part Europe. Her latest response to the crisis has a certain uneasy familiarity to students of history: "It is time for a breakthrough to a new Europe. Because the world is changing so much, we must be prepared to answer the challenges. That will mean more Europe, not less Europe." The end result could be a stronger central bank, the ouster of debt-ridden countries, a unified government, or any combination of several alternatives, none of them pleasant in the near term.

What rough beast, its hour come round at last...
At its current capitalization, the EFSF has the power to lighten burdens to the tune of $595 billion. Proposed additions might push that amount to $1.45 trillion, barely enough to cover an Italian bailout on the same scale as those offered to Greece, Ireland, and Portugal.

But who can bail out the rescuers? Italy is on the hook for 18% of the EFSF's current capitalization requirements, or $79 billion. That's near the cost of the entire Irish bailout, and a heavy cost for a nation whose economy moved at a glacial pace over the past year.

It's hardly the only eurozone country moving at a crawl. Germany's GDP has flattened, as have France's, Belgium's, and the Netherlands'. French bond yields are quickly moving higher than those of German bonds, an alarming sign that even the strongest European economies are viewed with increased skepticism. French banks hold more Greek and Italian debt than other eurozone nations by a wide margin. And the U.K. and the U.S. hold more French debt than any other nations.

A slowdown looms over many multinational companies with major European operations, including Philip Morris International (NYSE: PM), Ford (NYSE: F), and McDonald's (NYSE: MCD), but the potential for global recession leaves very few risk-free. The Chinese rely on Europeans to buy their exports.

...slouches toward Bethlehem to be born?
No easy solution lies ahead for Europe. Implementing a single, unified government -- as many have proposed -- would be a politically chaotic and protracted affair, and its costs would likely dwarf the $1.9 trillion it cost to rebuild a reunified Germany. Removing heavily indebted nations from the eurozone would almost certainly result in recession throughout Europe and the rest of the world. Staying the course is untenable, but there isn't enough money left to take the easy way out. At some point the bailouts will have to stop.

Will the world learn its lessons this time around? Can it afford not to?

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