Nathalie Thomas: Italian economy could be facing an eruption to match Vesuvius

MOST of us were taught at one point about the devastation wreaked upon the Roman cities of Pompeii and Herculaneum by the eruption of Mount Vesuvius in AD 79.

Today, Italy is threatened by an eruption of an altogether different kind but one so large that its eye-watering effects would spew well beyond its own borders, dragging not only the eurozone into an unprecedented crisis but other major financial centres as well - the City of London included.

European leaders were yesterday forced to call an emergency meeting to discuss the swelling crisis around Italy ahead of scheduled talks on a second bail-out for Greece.

The likes of European Central Bank (ECB) president Jean-Claude Trichet, European Council president Herman Van Rompuy and European Commission (EC) president Jean-Claude Juncker cannot be faulted for their poker faces in recent days but it's quite clear that beneath the surface they are paddling furiously as they are all too aware of the seismic dangers of the sovereign debt contagion spreading to Italy.

As Douglas McWilliams of the Centre for Economics and Business Research (CEBR) puts it, Greece is now but a "sideshow" as all eyes turn to Italy, Europe's third-biggest economy, which is labouring under €1.84 trillion (1.62trn) of public debt. Now all of a sudden Greece's €340bn burden seems like child's play.

The warning signs first appeared on Friday when the markets witnessed a major sell-off of Italian bonds and banking shares but the weekend did nothing to calm nerves and the cost of insuring Italian debt reached record highs yesterday.

While the EU can shoulder some form of Greek default - an inevitability that is gaining acceptance among European leaders and creditors - Italy would be a whole different matter, and it has been estimated that the EU's rescue fund would have to be doubled to as much as €1.5trn to support Italy.

And, as if the Italian scenario isn't nightmarish enough, economists are also growing increasingly nervous about another major eurozone economy, Spain.

Outside of the Rome-based banks, the French financial system is believed to be most at threat if the Italian domino topples but the UK is far from insulated.

The UK's total exposure to Italy was $100bn (63bn) as of the first quarter of this year. This compares to a $19bn exposure to Greece.

US hedge funds have been blamed for exacerbating Rome's woes by shorting Italian bonds but Italy's government is doing little to incite confidence in its economy.

Italian finance minister Giulio Tremonti - who is widely respected despite the theatrics of other government colleagues - has been fingered in a corruption scandal while Italian Prime Minister Silvio Berlusconi has chosen this moment to turn on the man who is trying to push through much-needed austerity measures.

More optimistic economists believe it's not quite time for panic stations yet but the odds on the euro seeing the dawn of the next decade are widening by the day.Murdoch under fire but he is still better armed than his foes

BY REFERRING News Corporation's bid to take full ownership of BSkyB to the Competition Commission, Culture Secretary Jeremy Hunt has got the Labour attack dogs off his back. But Hunt may discover he has played directly into Rupert Murdoch's hands.

Normally a lengthy competition review can sound the death knell for a deal as impatient investors lose interest and turn their backs on the predator's stock.

In this case it will remove the politics from the hugely controversial bid, helping both sides. However, Murdoch will hope that the delay will help switch the focus back to competition issues on which he is on firmer ground.

Although BSkyB shares continued to fall yesterday, the growing view was that regulators and opponents of the bid won't be able to hold off Murdoch's News Corporation indefinitely. As one lawyer, Cyrus Mehta, head of the EU and competition group at law firm Nabarro, said: "As far as the competition issues are concerned, nothing really has changed."

Murdoch is clearly confident of success and he is now out for everything he can get.

His decision yesterday to renege on a previous offer of spinning off Sky News as a separate company may turn out to be the shrewdest move he has yet played in the UK media market. He would end up with a better deal probably closer to the price he originally proposed.

The government may have bought itself a delay but the battle over the BSkyB bid will be hard-won.

Hunt is riding into battle on horseback while Murdoch is armed with tanks and drones.