( CNN ) -- The eurozone crisis has truly engulfed Italy -- but is it because the country is insolvent or simply unable to access funds easily in the financial markets ? If Italy is solvent , a distinction can perhaps be drawn between it and the countries surviving on bailout funds from Europe and the International Monetary Fund -- Greece , Portugal and Ireland . The solution , in this case , would be for the European Central Bank to provide cheap liquidity -- loans , effectively -- to the Italian government for a limited period of time . The markets would then be pacified and the crisis would begin to be resolved . If only it were that easy . The distinction between being insolvent and unable to access funds easily in the financial markets might be natural to enterprises but it does not easily fit sovereign states . Italy is certainly finding it difficult to access funds -- the bond markets are gradually turning the tap off by pushing rates on ten year bonds above 7 % . But how can we tell if it is insolvent ? Solvency means that Italy could be reliably expected to service its national debt out of its expanding gross domestic product ( GDP ) . If lenders were confident about growth and sufficient tax revenues , they would continue to meet Italy 's public borrowing needs . If they were not , the country would have a liquidity problem , as is currently happening . Solvency and liquidity are closely connected for sovereign states . Financial markets rightly worry about Italy 's solvency . They have often been wrong during the last several years , but not this time . Since the mid-1990s , Italian growth has been less than 2 % a year ; investment and consumption have been practically flat ; increases in people 's real income have been among the weakest in Europe , worse even than Germany . Italian households , traditionally conservative , have increased their borrowing to 45 % of GDP . Only one word can characterize Italian performance during the years of monetary union : stagnation . The country has systematically lost competitiveness relative to Germany . The result has been one of the highest national debts in Europe , standing at around 120 % of GDP . Critically , as Italian households have come under pressure , national saving has been steadily declining , making it difficult for the country to service its national debt . Lenders are justifiably worried since , in all these respects , Italy looks similar to the struggling smaller economies of the eurozone periphery . It might be a sizeable economy with a large industrial base , but that means little in this case . The European Monetary Union -- which is the system within which the euro operates -- has trapped several countries of diverging competitiveness within a rigid framework of fixed exchange rates , a single monetary policy , tough fiscal discipline , and continuous pressure on labor . The markets realize that Italy 's debt predicament is similar to peripheral countries , and are sensing that the crisis is gradually moving to the core . The response of the European Union has been a testament to its weakness . To placate markets it has demanded the imposition of austerity on Italy . But the economics of austerity makes no sense at all . Italian problems have originated in a stagnant economy , not in a profligate state . Austerity would almost certainly make things worse by pushing the country into recession , thus worsening the burden of debt . Greece is an extreme case , but it shows graphically the dangers . Italy is entering a risky path -- and the markets know it . On top of that , the imposition of austerity has directly transgressed on Italian sovereignty and on the domestic democratic process , as it has done elsewhere in the periphery . The EU appears to be increasingly run by a small cabal of core countries which impose decisions on others , ignore national institutions and practices , and even force elected governments out of office in preference to so-called non-political administrators . As the liquidity crisis gets sharper and Italy threatens to be shut out of the markets , the EU has only one weapon in its armory : the European Central Bank . It must stem the unfolding collapse of the monetary union by allowing the ECB to buy large volumes of Italian debt . But this could only fix the shortage of liquidity -- Italy 's solvency problem will continue and probably become worse through austerity . If , moreover , the ECB started freely to purchase the public debt of the other 16 countries , it would soil its own balance sheet , a dangerous course to adopt as there is no state to back it up . The credibility of the euro would suffer across the world , defeating the purpose of the monetary union for Germany and other countries at the core . With Italy in turmoil , the EMU is coming up against its own contradictions and probably heading for a breakup . The mix of economic malfunctioning and open disregard for national sovereignty and democracy is highly combustible . Peripheral countries , in particular , are steadily forced toward the exit , with Greece under the most intense pressure . This is probably the only way to break out of the trap of monetary union , while restoring sovereignty and reasserting democracy . Should that occur , the implications for the European and the global economy will be very severe . But those who decide EU policy would have only themselves to blame . The opinions expressed in this commentary are solely those of Costas Lapavitsas .
Costas Lapavitsas is the lead author of a new RMF report 'Breaking Up ? A Route Out of the Eurozone Crisis ' He says the EU 's Economic and Monetary Union is probably heading for a break up . Lapavitsas : " The euro, which was supposed to be an economic union with common fiscal rules across Europe, has become more like a political club that can only function if it keeps its members in line.