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Contagion is back with a vengeance and Italy is bearing the brunt of the fallout from Spain's request for external assistance.

Although a warm-up for tomorrow's bond auction, today's sale underscores the externally driven deterioration in Italy's perceived creditworthiness. The concession is staggering, with Italy now paying almost 4pc to issue 1-year paper.

10.00 Eurozone industrial production figures are out, and show a fall:

Across the region, industrial production was down 0.8pc on the previous month, Eurostat figures show.

09.45 Reuters has seen a draft of the conclusiong for the EU leaders summit on June 28-29, and perhaps unsurprisingly, it says there is a need for "much stronger banking and fiscal integration, underpinned by enhanced eurozone governance."

Recent developments have demonstrated the need to take the EMU (Economic and Monetary Union) to a further stage.

The new stage will build on deeper policy integration and coordination. There is a need for more specific building blocks centred around a much stronger banking and fiscal integration, underpinned by enhanced euro governance.

09.20 Jose Manuel Barroso, president of the European Commission, has been speaking at the parliament in Strabourg today, about the need for further eurozone integration and most pressingly for a banking union (although as Ambrose Evans-Pritchard reports in today Telegraph that plan has already been shot down by Germany).

Financial integration is one area where major progress could quickly be made, even without Treaty changes.

Thus, the creation of a banking union appears as a natural priority.

I see two major steps.

First, we should accelerate the adoption of proposals already on the table. That means adopting the Commission's proposals for a single rulebook - the capital requirements rules - and beyond that, the proposals we have made concerning deposit guarantees and bank resolution, including provisions to introduce solidarity via obligatory mutual lending between national funds.

Second, by autumn the Commission could be ready to come with key proposals to introduce more integrated banking supervision and common deposit guarantee and resolution funds.

He also has a go at defending the EU's own budget and there seem to be a few thinly-veiled criticisms of Britain for carping from the sidelines. On the subject of next week's G20 meeting, he said:

We can expect others in the world to point the finger at the European Union and the euro area as the source of all the world's problems, including their own.

It is always easier to talk about the problems of others, thus distracting from one's own. But in the end, we all have challenges.

09.15 Good news or bad news, depending if you're a driver or an oil company, on the oil price:

09.10 Some serious news from Greece - banks are seeing customers withdraw money at an increasingly rapid pace ahead of Sunday's elections.

Senior bankers told Reuters thay daily deposit outflows from the country's biggest banks have been between €500m and €800m over the past few days, with the pace accelerating yesterday.

09.05 European shares are up this morning, but it's not a resounding rally:

The FTSE 100 is up 0.4pc to 5,494 points, the CAC rose 0.6pc in Paris and the DAX added 0.8pc in Germany.

Spain's IBEX is up 0.9pc and the FTSE MIB climbed 0.4pc in Italy.

Lex van Dam, hedge fund manager at Hampstead Capital, said:

The situation in Europe continues to be close to total melt-down. Interest rates in Spain and Italy have reached unsustainable levels again and Germany is not going to accept eurobonds for many years. Very hard for the market to do well with that backdrop.

08.55 Italy, as we can see from the bond yields below, has been sucked into the investor fears over Spain - despite the country bringing in Mario Monti last year to replace Silvio Berlusconi and get the country's finances back under control.

German finance minister Wolfgang Schaeuble has today given his backing to the country, saying it can ride out the debt crisis if it carries on with its reforms of government spending.

He told the newspaper La Stampa:

If Italy continues on the path Monti has set out on it will not be in danger. Italy has progressed greatly under Monti's government. That is acknowledged throughout Europe and on the markets.

Mr Monti does not seem to be so confident however - he met with the leaders of the parties backing him last night to urge them to give their unified support for the reforms to the country's economy.

08.40 Taking a look at bond yields, Spain and Italy are getting a little bit of relief this morning.

While yields on 10-year Spanish government bonds are still trading at 6.6pc, close to an unsustainable level, they are down 5 percentage points this morning.

Italian yields also fell, slipping 8 percentage points to 6.057pc.

08.15 Spanish PM Mariano Rajoy is addressing the Spanish parliament about country's €100bn banking bailout at the moment - it's cause for celebration, he says:

We should celebrate the fact that our European partners have helped us. All the countries in the European Union have supported their banks.

The bailout is a credit for the banks which the banks will pay.

08.05 London markets are open and trading slightly higher:

The FTSE 100 rose 0.2pc to 5,484 points shortly after opening.

07.55 More from Hector Sants, chief executive of the FSA, who has given an interview to the BBC this morning (see 07.25 post).

Mr Sants says the plans for a banking union for eurozone countries would make the current European oversight of the UK "unworkable":

We support a single European rulebook... But we supervise locally... Of course that rulebook is created by one country one vote, so if you move to an environment where the majority of the countries were inside the eurozone and so have a different agenda in respect to the rulebook, that would seem to become an unworkable model.

[We would be] dependent on a rulebook that effectively we would have lost all control over. At the moment we only have partial control over that rulebook, but potentially we would have lost all control over it. So I think we are at a tipping point whereby the current approach to eurozone regulation for a non-eurozone country could well be unworkable.

07.45 Depite what Mr Tsipras (see previous post) would like to believe, Greece may not be able to hang on to its euro membership adepending on the outcome of Sunday's election, and the European Commission has been planning for such a scenario.

Bruno Waterfield reports from Brussels on the secret plans for a euro exit being drawn up:

Legal advice on capital controls, including limits on withdrawals from Greek bank accounts, and emergency border restrictions, has been provided by the European Commission to eurozone governments drawing up plans for Greece to leave the euro.

Commission officials confirmed on Tuesday that "these elements" of contingency planning for a Greek exit from the single currency have been discussed by the "euro working group" (EWG) of Treasury officials and junior finance ministers over the last six weeks.

Capital restrictions, including limits on cash-machine withdrawals, are legal under Article 65 of Europe's internal market rules allowing emergency measures to preserve "public security" in the event of a Greek exit, said a Commission official.

Eurozone governments have also sought advice on suspending the EU's passport-free travel zone in order to introduce border checks to stop Greeks taking money out of Greece or to limit the numbers of people fleeing political chaos.

The Commission, and other EU officials, have stressed that the discussions do not amount to a master plan or "disaster script" for Greece to leave the euro.

07.40 More from Alexis Tsipras, the Greek left-winger who is causing panic all across Europe.

The leader of the Syriza party, who as we report in the 07.10 post, wants to rip up the terms of Greece's bailout package and bring an end to austerity, has written a piece setting out his stall (£) in this morning's Financial Times.

He said he is "committed" to keeping Greece in the eurozone, and sets out how his party will sort of the Greek tax system so the country actually collects the revenue it needs to pay for its state spending.

It's worth a read - it is an examination of Greece's specific problems rather than a list of complaints about the EU, as you might expect.

I strongly believe we will get a clear democratic mandate from the people of the Hellenic Republic on Sunday. With that mandate we will take immediate action to end Greece’s corrupt and inefficient political and regulatory systems that have ravaged our economy over the past decades.

Syriza is the only political movement in Greece today that can deliver economic, social and political stability for our country. The stabilisation of Greece in the short term will benefit the eurozone at a critical juncture in the evolution of the single currency. If we do not change our path, austerity threatens to force us out of the euro with even greater certainty.

The systemic fiscal problems of Greece are, in large part, a problem of low public revenues. Myriad tax concessions and exemptions granted to special interests by previous administrations, along with a low effective tax rate on personal income as well as capital, explain much of the problem. So too does the highly ineffective method of tax collection.

Under our plan for reconstruction and growth, we are committed to following a programme of pragmatic and socially just fiscal stabilisation.

_{Alexis Tsipras gives a press conference at the in central Athens on Tuesday (Photo: AFP)}

07.30 Asian markets traded slightly higher this morning, and European shares are also set to rise.

The Nikkei added 0.6pc to 8,587.84 points in Japan and the Hang Seng rose 0.5pc.

On the futures market, the FTSE 100 is expected to open up 0.3pc.

07.25 In his blog this morning, BBC business editor Robert Peston has interviewed outgoing FSA chief Hector Sants. And Sants believes the run on Northern Rock could have been avoided, if his own advice had been followed:

I think things would have been different if the government and Bank [of England] had taken my recommendation that they should provide liquidity support to Lloyds to purchase Northern Rock. I think that would have made a difference, it would have avoided the queues and it would have changed the general climate in relation to the old building society sector that had moved into the banking sector. So at that early stage if we had avoided the Northern Rock problem, which we could have done through that action, then I think the tone and people's view of the UK banking sector would have been different.

07.20 A Greek exit from the eurozone may be exactly what's needed in order to convince Germany to step in and save the day, George Osborne suggested yesterday - as this blog reported at the time.

Speaking at an event organised by the Times, the Chancellor said:

I ultimately don't know whether Greece needs to leave the euro in order for the eurozone to do the things necessary to make their currency survive.

I just don't know whether the German government requires Greek exit to explain to their public why they need to do certain things like a banking union, eurobonds and things in common with that.

I would suspect that if you had a eurozone finance minister here, they wouldn't really know the answer to that.

07.10 The fighting talk continues in Greece. Alexis Tsipras, the leader of the leftist Syriza party, insisted that the country's bail-out deal would be "history" after Sunday's vote. He told reporters:

The bailout deal is already in the past. It will be history for good on Monday. A process of peaceful revolution is underway [...] On Monday, the forces of internal corruption and global usury will stop writing (bailout deals) because our people are about to write history.

07.05 Spain's borrowing costs rose to their highest since the birth of the euro yesterday, as bond markets punished eurozone sovereigns amid continuing concerns over Madrid’s bail-out and a Greek exit.

Meanwhile, rating agency Fitch downgraded 18 of the country’s banks. It said the Spanish government would “significantly” miss its targets for cutting its deficit.

07.00 Banking union? What banking union? Germany's central bank shot down EU proposals for a European banking union yesterday, and warned that eurozone liabilities could not be shared without a shift towards fiscal and political union. Ambrose Evans-Pritchard reports:

Andreas Dombret, a key board member of the Bundesbank, said the grand plan by Brussels is premature and unworkable as constructed. "It has to follow a deeper fiscal union as it would imply significantly increased risk sharing amongst countries."

Mr Dombret said a pan-EMU deposit-guarantee scheme and a debt resolution fund would require "a genuine, democratically legitimated fiscal union" and a new treaty.

The Bundebank's vice-president Sabine Lautenschlaeger hammered home the point in what is a clearly co-ordinated push to check the plan. "The result would be a pooling of the governments' liabilities through the back door," she said.

"Whoever is footing the bill must also have a right of control, particularly when it comes to the large sums that are seen in banking crises," she added, alluding to rulings by German courts that unquantifiable EU liabilities breach Germany's constitution.

06.45 Good morning and welcome back to our live coverage of the European debt crisis.

Debt crisis live: archive