“It's the worst news that Spain could have received just now.” Blunt words indeed, spoken yesterday by a member of the government referring to the impact that the Italian political crisis may have on Spain. The government of Mariano Rajoy is not hiding its concern. The uncertainty unleashed by the departure of Mario Monti and, above all, the uncertainty over who can replace him and with what economic programme, has undermined confidence that the markets had begun to place in the European periphery and is jeopardising the plans of the Spanish president to wriggle out from accepting European Union aid.

Until now, the chief executive has succeeded in avoiding the so-called “soft” or “second generation” rescue, thanks to the confidence injected by the European Central Bank (ECB) in September, when it came out with its programme for buying government debt. Rajoy had hoped that the mere existence of this mechanism would continue to frighten away speculators and serve to keep a lid on the risk premium until reforms and adjustments had come into force.

However, the possibility that Silvio Berlusconi may return to power and the sudden exit of the Italian Prime Minister have blown away the calm that had set in among investors.

The political earthquake in Italy opens the door to a scenario in which the new government that forms could step off the path of adjustments and reforms, and so lose the ability to fund itself on the markets. The numbers are there. Berlusconi left the risk premium at 575 basis points, and now, with the European Union having great difficulty coming to decisions and with very little room for manoeuvre, any result at all seems possible.

Return to risk premiums?

A return to the risk premiums of some months back is a distinct possibility. Such premiums would be too high to achieve stable economic growth and so would be unsustainable over the medium term. In short, they would furnish an excuse for speculators to seek their fortunes once more by betting on a collapse of the euro.

Under these circumstances, the chief executive will try to wring the most out of the next European Council, which will be held in Brussels on Thursday and Friday. “Spain is the same today as it was on Friday. However, the market is going to see it differently because of what happened in Italy. It's obvious that the problem is European and has to be resolved in Brussels,” says one member of the government.

Although the prospects of the Spanish delegation are not exactly optimistic, given the fast-approaching German elections in November 2013, some of the prime minister's believe that the Italian crisis is just the thing that can make European partners sit up and notice the risk, prompting them to decide to take more decisive steps towards banking integration. Not surprisingly, as proved by earlier Council meetings, the European Union and especially the German chancellor, Angela Merkel, make greater headway when they are up against the ropes.

Rajoy will demand an agreement from his partners that will let them dispel the doubts that the Italian crisis has stirred up in the markets and insist on the need to have a common firewall to protect some countries from the crises that others are in. In his view, a substantial advance towards the banking union that EU finance ministers are currently negotiating would send the markets the message that the partners will stick together and that the euro is irreversible.

Threat of Berlusconi's return

The president will argue for the agreement to launch the banking union to be signed as soon as possible, with a specific timetable for steps towards implementation. Here he faces opposition from the UK and Germany, the most reluctant to enter any such union, together with the Nordic countries, which think that a banking union is not the solution to the crisis and does not need to be brought in with any urgency. Seeing that Mario Monti will be attending the European Council in a weaker position now that he is on the way out as Italian prime minister, Rajoy will not have the usual backing.

Both the European Commission and the governments fear the consequences of a problem that seemed to have been contained. European Commission President Jose Manuel Barroso called on Italians not to exploit the upcoming elections “as an excuse to doubt the indispensability of the measures taken by the Monti government.” The President of the European Parliament, Martin Schulz, meanwhile, warned that the possible return of Berlusconi “poses a threat” to the stability of Italy and of the EU as a whole.

And more important than Spain having to end up asking for help are the consequences that the open-ended crisis may have on the euro. Senior EU officials acknowledge the reluctance of Germany to allow unlimited bond purchases by the ECB, out of fears that such a move will trigger inflation, and if Berlin decides to put a “stop” on it there will not be enough money to support an economy such as the Italian or Spanish.

The danger for the euro, they recognise, would arise if it became necessary to ask for more contributions from the eurozone countries. “They may not all agree,” they stress.