The financial markets don't know which way to look. On either side of the Atlantic we have a debt disaster that would on its own be a recipe for short fingernails or worse. But despite the focus on the nailbiting US debt ceiling talks, it is Europe that presents the far greater risk to the global economy.
While what is happening in Washington has now descended into political farce, it is the euro zone that has moved into a far more critical phase.
The deal done in Brussels on July 21 was initially seen as having the potential to put Greece on a more sustainable path and to prevent contagion. With the benefit of a few short days of hindsight it is clear that this assessment was badly wrong. Peripheral bonds yields have widened against Germany and the euro has started to fall again.
One of the most obvious reasons for this is that politicians themselves don't seem to understand the deal that they produced or can't communicate it to everybody else.
The result is that Europe has not taken one step forward but instead one step back. It's now clear that the day of reckoning for Greece has only been delayed and a hard restructuring is still the most likely end game. More worrying though is that by taking Greece out of the limelight for the time being the focus on Spain and Italy has become more laser like.
Developments surrounding both nations are worrying. However, while the Spanish 10-year is once again yielding over 6 percent, it is Italy that could provide the greatest shock in the near term and once again it is politics that will be causing the ripples.
While the elections in Spain in Novemberwill likely put a more fiscally responsible government in place, the situation in Rome could quickly become chaotic if Finance Minister Guilio Tremonti were to resign and bring to end the reign of Silvio Berlusconi. In such a scenario Italian BTP yields would rise rapidly and could quickly become unsustainable.
Italy's stock of debt dwarfs Germany's. Helping Italy in the way that Greece, Ireland and Portugal have been rescued is not possible. If Italy needs help it's game over for the euro .
To make matters worse it is not clear that the global economy is now slowing rapidly. Central bankers in Frankfurt could have seriously misjudged the situation by raising rates twice already. Fifty basis points does not represent a substantial increase in the cost of borrowing but it could be significant for countries such as Italy which are struggling to remain competitive. Jean Claude Trichet has a lot to think about as he comes to the end of his time at the top of euro towers.