How much longer will the ECB refuse to come to the rescue? One of the most astute and articulate observers of the eurozone crisis is the Belgium economist Paul De Grauwe, now with the London School of Economics. The first thing that needs to happen, in his view, is for the European Central Bank to start behaving and acting like a proper central bank, and to provide the liquidity to sovereign bond markets which markets are denying. With Germany implacably opposed to anything that smacks of sovereign debt monetisation, the ECB has been forced into undertaking this function in a bizarrely roundabout, contorted and, in the final analysis, ineffectual manner. The ECB could quite easily have taken all sovereign debt risk off the table, in the same way as the Bank of England has in the UK, by mopping up bonds without limit. Professor De Grauwe suggests that the ECB should commit to limiting sovereign spreads to no more than, say, 300 basis points above German bunds. This would give investors the reassurance they need to start buying again. But the ECB has instead drawn a strict distinction between acting as lender of last resort to governments - a definite no, no - and providing lender of last resort facilities to banks, which is apparently fine. Banks have thus been provided with virtually unlimited cheap liquidity through the LTRO programme so as to enable them to keep lending. But, rather than using these funds to support the real economy, banks have tended either to buy sovereign bonds or simply deposited the money back with the ECB. Through the back door, the ECB has thus played some sort of role in doing what it said it wouldn't - supporting sovereign bond markets. These actions are now creating severe complications. Many banks in Italy and Spain are already severely underwater on their sovereign bond purchases, thus compounding the solvency problem at the heart of the banking system. As a result, they've lost their appetite for bond-buying. We see this in a dramatically flattening yield curve in both Italy and Spain. Until quite recently, cheap loans from the ECB had enabled Spanish and Italian banks at least to keep the short end of the yield curve relatively low, which in turn has allowed the two governments to continue funding themselves at affordable cost. In recent days, yields on these shorter-dated maturities have risen markedly, as worries about the solvency of the banking system gain renewed momentum and the banks therefore cease their bond buying. The epicentre of the crisis has this week moved back to Spain, where the Government simply doesn't have the money to recapitalise the banks in a manner that would halt the flight of deposits. It seems only a matter of weeks before Spain is forced to join Portugal, Ireland and Greece on eurozone/IMF life support. No asset manager outside these countries will invest in Spanish and Italian bonds any longer, leaving domestic banks as the only purchasers left of sovereign debt. Bizarrely, Spanish banks will therefore be expected to buy the bonds the Spanish government needs to issue to raise the money to bail them out. Curiouser and curiouser, cried Alice. An alternative, equally surreal plan, under which the Spanish government would inject bonds into Bankia, which would then be swapped for cash with the ECB, has already been slapped down by the ECB as unacceptable, though frankly it's hard to see the difference. Either way we seem to have arrived slap bang in the middle of the Mad Hatter's tea party. Yet even if the ECB were to defy the Bundesbank, and the niceties of its own, highly restrictive remit, and wade directly into sovereign bond markets, it would only temporarily dowse the flames. The wider socio-political question of what to do with a monetary union which seems to condemn its regions to permanent depression would still go unanswered. Prof De Grauwe has an answer for this one too - that Germany accepts a rather higher level of inflation so as to ease the challenge of relative internal devaluation faced by the periphery. And pigs might fly. Such a notion is as unacceptable to Germans as use of the ECB printing presses . There isn't much that Germany has in common with Greece but in one regard they are actually quite similar - both say they want the euro but neither is prepared to do the things necessary to keep it. Unless something gives soon, there is really only one way this can end - in an almighty pile up.