Europe's Brutal Game of Dominoes

Remember Europe’s good old days? You know, June? The Greeks had finally elected a government, and the country’s new ruling coalition was willing to stick with an austerity program. In Brussels, a June 29 summit ended with German chancellor Angela Merkel yielding a little on the need for harsh medicine for any country that applied for rescue funds. The leaders of Spain and Italy claimed victory, and markets momentarily stopped pummeling their bonds.

Now, deeper into summer, Europe is lurching back into full-blown crisis. This time it’s not Greece (though talk of a Greek exit from the euro has been revived). The flash point is Spain, the euro area’s fourth-largest economy, which may need a full-fledged bailout. That in turn would make it much more expensive for Italy to raise money, as investors worry that it will be next to need a rescue Europe may not even be able to afford. What will happen if Europe can’t rescue Italy? No one knows.