What is of most concern is the crisis has spread to Italy and Spain, and even the French banks have trouble funding themselves. This isn’t just the European periphery. It’s the heart of the European banking system and the whole European experiment.

Judging by the financial market's renewed unease about Italy and Spain over the past week it would seem that all that the European Central Bank's €1 trillion liquidity injection in the European banking system bought was around four months of relative market calm.

A potential European banking crisis would spill over to the US financial system, which has very close links to the European banking system.

These days, billions of dollars is spoken of as pocket change. A by-product of massive government debt burdens and decades of cheap cash from central banks is the notion that, while solvency might be important, liquidity should be easy to find. Particularly for financial institutions, the official state position appears...

Instead of placing undue reliance on all-too-fallible bank supervisors and regulators, should we not now be considering doing something serious about the perverse incentives to overly risky bank lending, as well as to the ‘too big to fail’ problem in the US and global banking systems.

There are many reasons to fear that 2012 will be a highly challenging year for the US economy. This is not only because the economic recovery will face considerable headwinds and could be hit by a European financial shock, but also because the US appears to have run out of fiscal and monetary policy space to counter any renewed economic downturn with an additional stimulus.

European policymakers are clinging to the forlorn hope that the eurozone crisis can readily be defused by putting in place national unity governments in Greece and Italy. The sad truth is that whatever complexion European governments might take, Europe’s periphery will be unable to avoid a deepening of its economic recession.

Over the past few months, there has been a marked intensification of the Eurozone debt crisis that could have major implications for the United States economy in 2012.