Some in Brussels fear euro zone crisis moment approaching

The problem with both arguments is that the worsening situation in the euro zone still threatens to sweep Ireland’s recovery drastically off course.

The return to private debt markets is still not assured. Thanks to troubles in Athens, notional Irish borrowing costs have risen again. Any move to cut Greece loose from the single currency – reluctant though EU leaders are to do that deed – would only intensify the pressure.

In the backdrop is the Spanish-led clamour for the ESM bailout to be given the power to directly recapitalise banks. This has powerful advocates, among them new French president François Hollande, Italian technocrat leader Mario Monti and economics commissioner Olli Rehn.

But the stance of German chancellor Angela Merkel mirrors her rejection of eurobonds. Simply put, the idea is anathema. Indeed, some German critics of direct ESM banking aid see the idea as opening the door to a crazed, amoral free-for-all in which national banking debts are yoked onto the backs of all Europeans and German backs particularly. Not for this did they enter the single currency.

Against that is the argument that the single currency and the EU now face peril. The Greek election on Sunday week threatens chaos, and Spain is too big for a full-blown bailout. The objective remains to keep Madrid in regular bond markets for day-to-day expenditure while using rescue aid to recapitalise its banks. The snag is that the increasing debt Spain accrued from regular bailout loans would still curtail its capacity to borrow on the open market.

This explains support for the idea of the ESM recapitalising the banks directly, with Spain free of the debt. Notwithstanding Merkel’s public position, German reports suggest discreet talks are already under way on this front.

This remains something of a gigantic leap to take but it may be the only way of preventing Spain from overwhelming the fragile edifice set up when Europe first rescued Greece. It is obvious that any move in this direction could create an opening for the Taoiseach – and that he can point to the referendum as evidence of Ireland’s goodwill and commitment to fiscal discipline.

For Europe the alternative may well be catastrophe, with explosions in Spain or Greece setting off a vicious chain reaction. How big is the risk? Suffice to say that some around Brussels speak of a possible Cuban Missile crisis moment in which the entire European construct comes under threat.

The coming weeks will be crucial. Hold on tight.