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The Nobel-prize winning economist and Keynesian supporter Paul Krugman, has weighed in on the Irish referendum over the EU fiscal compact, saying he would vote no. Speaking on the Today Program on Radio 4, Krugman argued that Ireland could send a "helpful message" to Brussels by rejecting the proposal for closer fiscal ties across the eurozone, when they vote tomorrow. Last night, Krugnam criticized George Osborne's approach to the crisis, arguing that the Britsh government should become play the role of 'spender of last resort'. In a speech at the London School of Economics, Krugman said increased government spending and 'exotic' monetary policy was the best way to rise out the crisis: If you want to worry about debt and deficits, fine, but this is the time, to quote St. Augustine, to say 'Oh Lord, make me chaste and continent, but not yet."

The ECB told Madrid that a proper capital injection was needed for Bankia and its plans were in danger of breaching an EU ban on "monetary financing," or central bank funding of governments, according to two European officials. But where else can Spain get the money from? The capital markets aren't exactly desperate to lend to the country, with bond yields already close to the 'danger zone....."This is like a game of poker now," one government adviser told the FT, "and I don't think Spain is bluffing". The ban on monetary finance is a cornerstone of conventional central bank thinking -- governments rescue banks, not the other way around. But the sovereign debt crisis now so severe that some economists, such as Robin Bew of The Economist Intelligence Unit, believe "monetisation" of national debts may soon be the only way forward. The ECB bought up billions of euros of Spanish and Italian sovereign bonds through its Securities Market Programme (SMP) a few months back, so you could argue that its already pushing the bounds of non-monetisation.

The report card for the eurozone as a whole is gloomy. The EU says that over the last year the crisis in the euro area went through its most acute phase to date.Brussels has released its financial reports on eurozone countries.

Euro has spiked on that release, FTSE 100 claws back losses to trade down 1.3pc, IBEX doing better at 0.6pc down. EU adds that the 17 countries that use the euro should consider setting up a “banking union” that allows them to share the burden of bank failures.

To further stop expensive bank bailouts from pulling down governments’ own finances, allowing the eurozone’s new rescue fund to directly boost the capital of banks “might be envisaged,” the European Commission said. Spain called for this measure earlier in the week. The European Commission also highlights “structural challenges” for the UK:
• Private debt levels are still too high.
• The economy has too many people with low skills
• There is a lack of high-quality and affordable childcare
• There is a significant shortage of housing and house prices remain too high
• A persistently negative net export position has hit competitiveness.
Other highlights from the EU's report:
SPAIN In 2012, Spain's economic activity is expected to contract by 1.8pc, and by 0.3pc in 2013. Unemployment is foreseen to increase further to 25.1pc in 2013, also for the young.
FRANCE In 2012, France's economic activity is expected to grow by 0.5pc, before regaining momentum in 2013 to reach 1.3pc. Unemployment is foreseen to increase further to 10.2pc.
GERMANY In 2012, Germany's economic activity is expected to significantly slow down as compared to 2011. Real GDP is projected to increase by 0.7pc. Unemployment is foreseen to further drop to 5.5pc.
GREECE The recovery previously announced for next year will be further delayed with, at best, a stagnation of activity in 2013. It is only in 2014 that positive annual growth rates are expected to return.
IRELAND Ireland’s economy returned to modest, export-driven growth of 0.7pc in 2011. While employment contracted by 2.1pc in 2011 as a whole, it grew by a seasonally adjusted 0.6pc in the final quarter of 2011. Unemployment is expected to reach 14.3pc in 2012.
ITALY In 2012, Italy's economic activity is expected to contract by 1.4pc, and gradually recover in 2013. The unemployment rate is foreseen to increase further to 9.5pc this year and 9.7pc in 2013.SPAIN: In 2012, Spain's economic activity is expected to contract by 1.8pc, and by 0.3pc in 2013. Unemployment is foreseen to increase further to 25.1pc in 2013, also for the young.

In the UK this year, economic activity is expected to remain subdued, with growth of 0.5pc, before regaining momentum in 2013. Unemployment is forecast to reach 8.5pc.
At its centre was a dangerous feedback loop between sovereigns, the banking system and the deteriorating economic outlook. As banks in Europe hold large amounts of domestic sovereign debt, concerns about the sustainability of sovereign debt spilled over to the banking sector. In turn, banks’ limited capacity to absorb losses added to the sovereign risk as governments were perceived as ultimate backstops for ailing financial institutions. Finally, feeble growth prospects – weakened further by private and public deleveraging – increased the concerns about debt sustainability and banks' profitability, led to higher debt refinancing costs and endangered debt sustainability in a self-fulfilling way.
The report highlights the spread of contagion to vulnerable euro states that has revealed or compounding various home-grown problems.
Markets remain exceptionally tense and vigilant and confidence is still weak, it said, stressing the need to continue with reform efforts to address the medium- and longer-term challenges of the euro area, in particular to:
• revive growth and increase growth potential
• reduce the high debt burden in the public and private sector in a well-coordinated manner across countries in a way that does not excessively constrain economic growth
• continue financial repair in particular to ensure a sound banking sector, able to provide healthy financing to the economy.
However, the report concludes more steps will be necessary in the medium term.
Citigroup says €800bn+ ECB support required in event of contagion.