All the bail-out systems under the sun cannot make the eurozone work Yet even continued gifts under some sort of fiscal union would not bring prosperity, as we see clearly in Italy. Italian unification in 1861 married the Germanic north with the Latin south. The consequent misalignment continues to this day. If the euro holds together, this would leave the southern peripheral countries as a giant version of the Mezzogiorno. The currently popular solution is euro bonds. This is fiscal union-lite. Northern countries would effectively share the burden of the south's debt. Without controls on the south's spending and borrowing, however, this would be an invitation for southerners to go on spending at the north's expense - or for everyone to go on spending in the belief that they will only pick up a fraction of the bill. It would be a bit like one of those dinners when twenty people agree to share the bill equally. There is an incentive for everyone to order expensive digestifs. How could the northerners' objective of getting their money back - and not having to keep doling out more of it - be met? The only hope is for the borrowers to return to prosperity. But how? Their costs are 30-40pc out of line with Germany's. It is a fantasy to believe that such a gap can be closed by "reform." Whereas money values can move up with dazzling speed, the real economy can be improved only slowly. Consequently, when nominal values get out of line, the problem can only be solved by a price or exchange rate adjustment. Theoretically, this could be through internal deflation but that would increase the real value of debt and depress aggregate demand still more. Deflation is the road to catastrophe. As some of the founders of the euro-zone recognised, if you are going to set up a monetary union, you need to stop nominal values getting out of line. That is why they placed such emphasis on achieving convergence before the union began, and on financial restraint afterwards in the shape of the Stability and Growth Pact. But they botched it. Countries were let in which were manifestly not converged, and the Stability and Growth Pact was both deeply flawed and not enforced. Throwing yet more money at the vulnerable countries and calling this by a fancy name is not an answer. Just as with the Gold Standard and with Bretton Woods, the system has to break. But doubtless the participants at this week's summit will smother themselves in every sort of illusion in order to avoid facing up to that uncomfortable reality. In the end, market processes will overwhelm them. The bond markets are currently the most obvious threat. But I suspect that the irresistible pressure will come as depositors move more euro deposits out of the vulnerable countries and into German banks. Under the current set-up, the money is pretty much automatically recycled via the ECB to the weak banks. The result is that Greek depositors are already protecting themselves against the consequences of a Greek default and euro exit by shifting the risk onto European taxpayers. When the country in question is Spain or Italy the amounts involved will be so huge that the ECB would have to stop its recycling activities pretty quickly. And that would send these countries into a banking crisis from which the only escape would be euro exit. I don't suppose that Götterdämmerung is imminent. In Wagner's Ring cycle, we have to go through three previous music-dramas to get to the Twilight of the Gods. We are surely past Das Rheingold but the Valkyries are still riding. There will be more summits and bail-outs, more fudge and mudge, and more money poured into a black hole. But the end is approaching inexorably. Roger Bootle is managing director of Capital Economics. roger.bootle@capitaleconomics.com