Italian Prime Minister Silvio Berlusconi has not asked for a bailout – yet. But Italian bond yields have surged above 6 percent, which is just a bit lower than the levels that sent Greece to a bailout.

­Raoul Ruparel, an economist with the independent think tank Open Europe, says it is highly unlikely that Italy will ask for or receive a bailout package, since the EU’s current anti-crisis mechanisms are not constructed to deal with such a large economy.

“I don’t think the bailout will be forthcoming in the near future, simply because Italy is far too large to be bailed out by the current mechanisms in place in the euro zone,” he said. “If you look at the size of the euro zone financial stability facility, it tops 440 billion [euros]. The current debt mark for Italy alone is 1.6 trillion euros.”

Ruparel believes that once the bond market turns against the Italy’s economy – which it looks set to do – it will only be a matter of time before the debt becomes unsustainable.

“I think that Italy can survive rising borrowing costs for the short term, maybe six months to a year, given the size of its economy,” he predicted. “But in the long term, it will make its debt unsustainable. And more importantly, it will undo the savings that it is making with its new austerity budget.”

Ruparel says that most of the fear about the situation in Italy comes from the general European experience, and particularly from problems with Greece, Portugal and Ireland. 

“It really comes down to finding a long-term solution to the rest of the euro zone crisis, which will involve some debt restructuring, because there is no other way to return these countries to sovereignty and then some really strong reforms to enhance their competitiveness,” he said.

The analyst, meanwhile, says Spain is now facing even bigger difficulties than the sinking Italy.

“Unfortunately we have a race to the bottom here, with who gets there fast to some extent,” he declared. “Spain does have very large borrowing costs as well, and a large amount of refinancing coming up over the next year. And the borrowing costs are increasing slightly quicker than in Italy. The biggest problem with Spain is that it also has a significantly undercapitalized and underwhelming banking sector to some extent at the moment. But also it has bigger internal problems.”

Meanwhile, Deutsche Bank has reduced its Italian bond holdings, cutting its exposure in the country by 88 percent in the first half of 2011.

Economics journalist Daniel Knowles from the UK's Telegraph.co.uk believes there is no space in the euro zone for two divergent economies like those in Germany and Italy, and says that Germany should eventually leave the euro in order to solve European crisis.

“I think the problem is, in the long run, that it is just impossible to have an economy like Italy and an economy like Germany in the same monetary system,” he said. “It is a vice on Italy, while creating inflation in Germany. And it’s very difficult for countries and the debtors to leave the euro. It will take several years, I think, but it would be possible for Germany to leave the euro potentially in a way that would not destroy everything, in quite a sense that Italy leaving euro would.”