Well I promised the Crikey editor that today I would not write about Greece and Italy. That decision has been rescinded, by Greece and Italy. For the first time since the European debt crisis began last year, the prospect of a break-up of the euro became a very real and present possibility today. The main cause was the sudden spike in the Italian new bond rate, to 7.5%, as m’colleague Jo McKenna notes, but across the sea, Greece outdid its Mediterranean cousin in bringing da chaos.

Last night, in Athens, there was still no new prime minister or cabinet, despite talks and negotiations going all day. Indeed, there is now no clear front runner for the job. Previous candidate Lucas Papademos, former ECB wonk, has faded from the running, and all talk is now of Filippos Petsalnikos, currently the parliamentary speaker, and a Pasok member. New Democracy leader Antonis Samaras was quoted as saying that he had “no problem” with Petsalnikos as leader, or anyone else George Papandreou could come up with.

The issue was deferred to a meeting at 6pm, Athens time, with the expectation that it would end with the naming of a PM and cabinet. However, leader of the New Orthodoxy party, Giorgos Karatzaferis, left the meeting an hour after it began, accusing Papandreou and Samaras of “playing politics” — the horror! The meeting broke up, with no resolution and the gob-smacking announcement that it would reconvene at 10am tomorrow (about 7pm today Australian time). Since the meeting was preceded by a lachrymose farewell speech by Papandreou, saying that he was leaving to show that Greeks can “all work together”, the sense of absurdity was complete.

The demise of Papademos as a likely candidate was said to be a response to the demands he was making of both parties — chiefly, a longer period of “caretaker” government than the three months set down, and a sideways move for Evangelos Venizelos, the finance minister, deputy PM and de facto leader of Greece. Venizelos is reputed to have vetoed Papademos, but other Pasok MPs are said to be objecting to the selection of Petsalnikos as PM.

A half-dozen other names had been suggested throughout the day, prompting one blogger to note that the news agencies were being used by the numerous factions of the major parties to run their own agendas, a measure of the degree to which a process originally intended to be a response to crisis, has become bogged down in politics as usual. Indeed, the crisis now has a decidedly vertiginous aspect — since Papandreou has now officially resigned, and Greece tonight may or may not have a prime minister.

Italy remains the linchpin, the only major economy with a 7% interest rate danger bailout threshold, due to its high borrowings. But the concern now, at the higher end, is “contagion”, with the bond rates for Spain and France creeping up, north of 4%. No one supposes that they will be in a default zone, but the problem is that the situation will tie up all of southern Europe, Ireland and France — a pretty major chunk of Europe — in a debt trap, pitching the continent into a decade of stagnation.

The exception is, of course, Germany, whose borrowing costs are falling, and the gap between northern and southern Europe widening. That in itself is damages the euro further, since one monetary policy must now cover radically different demands. Germany’s continued refusal to allow for direct intervention by the ECB, to guarantee the supply of money is a mild version of the tension that might later result.

That’s at the big end. At the narrow end, it is surely the capacity of national politics, a la Greece, to drift away from any sense of present emergency, and back into party politics, that would add to the sense that, impossible as it may seem, there may come a point where the euro is simply irrecoverable. As Paul Krugman has noted:

“I still find it hard to believe that the euro will fail; but it seems equally hard to believe that Europe will do what’s needed to avoid that failure. Irresistible force, meet immovable object — and watch the explosion.”