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The European Union’s much-touted €200bn fiscal stimulus package is looking more and more like one of those trick cigars I remember from years ago. A trick cigar looks like a cigar. It even feels like a cigar. But when you try to smoke it, nothing happens.

In the case of the EU’s fiscal stimulus - an initiative designed to pull Europe out of its deep recession, and approved by EU leaders at last week’s summit in Brussels - one gets the distinct feeling that someone somewhere is trying to pull wool over the general public’s eyes. The €200bn is there on paper, but there is not much evidence of it in the real world.

This is explained very clearly by David Saha and Jakob von Weizsäcker in a freshly published study for the Bruegel think-tank, “Estimating the Size of the European Stimulus Packages for 2009″. They say only one country in the 15-nation eurozone is genuinely applying the classic Keynesian recipe of increased deficit spending to counter a downturn. That country is Spain.

Particularly startling is their analysis of the measures recently unveiled in Italy by Prime Minister Silvio Berlusconi’s government. Officials in Rome portrayed this as an €80bn stimulus, or roughly 5 per cent of Italian gross domestic product. What nonsense. The Bruegel economists conclude that the Italian measures announced since September add up not to a stimulus, but to the opposite - a small fiscal tightening of €0.3bn!

As it happens, there are very good reasons why it would be imprudent for Italy to embark on a spending spree right now. With a public debt higher than its annual economic output, and with financial markets acutely nervous about traditionally profligate borrowers such as the Italian state, Berlusconi and his colleagues need to show great care in navigating their way out of the recession.

As the Italian example suggests, there is rather more support in private around Europe for Germany’s well-known apprehension about the EU-wide fiscal stimulus than is admitted in public. To name just a few countries - in and outside the eurozone - that share Germany’s wariness, think of Lithuania, the Netherlands, Poland and Sweden. And, of course, the European Central Bank is sympathetic to Germany’s position, too.

The bottom line is that, whatever the severity of the recession, Europe’s leaders are loath to do anything that might imperil the euro and the cohesion of the eurozone. For them, this is the multi-national European project that matters. As far as possible, therefore, they will try to stay within the limits set by the Stability and Growth Pact, the EU’s fiscal rulebook. And this means restricting the scope of a European fiscal stimulus.  

More than six weeks ago, I drew attention to the way that the global financial crisis was testing the eurozone’s stability by widening the yield spreads between German and other government bonds. This topic won’t exactly dominate the two-day European Union summit that starts in Brussels on Thursday, but you know what? Perhaps some leader or other - Angela Merkel, for example - should mention it.

Because the fact is that the problem is more serious today than it was in late October. Back then, the spread between German and Italian 10-year bonds was 95.6 basis points, compared with 72.3 a week earlier, 69.6 a month earlier and 25.8 a year earlier. Today the spread is 129.9 basis points, compared with 122.8 a week earlier, 91.9 a month earlier and 26.9 a year earlier.

The spread with Greek government bonds hit 174 basis points this week, compared with about 120 points when I was blogging in late October. Bond traders will tell you this has little or nothing to do with the urban riots that broke out last weekend and represent the most serious violence in Greece for six decades. I agree - but I would add that the picture of an unpopular government helpless in the face of street battles, arson and looting hardly helps.

In any case, the yield spreads are attracting attention at the European Central Bank’s highest levels. Here is what Jürgen Stark, the German member of the ECB’s executive board, wrote in an article in today’s Wall Street Journal Europe: “Interest rate spreads for government bonds are already very high in some euro area countries. Moreover, the current calls for a particularly loose application of the European Union’s framework of fiscal rules questions the credibility of politicians’ commitment to sound public finances.”

If you are looking for an explanation as to why Merkel’s government will only reluctantly sign up to the EU’s planned €200bn fiscal stimulus to overcome Europe’s recession, here it is in a nutshell - kurz gesagt, as the Germans say. They think the integrity of the EU’s fiscal framework, and hence the very future of the eurozone itself, is being put recklessly at risk.

And who knows? They may be right. Certainly, José Manuel Barroso, the European Commission president, sees the problem. Though a supporter of a well-timed, carefully planned fiscal stimulus, he told me this week: “I sense in the German position the traditional, prudent approach to spending that is very rational, reasonable and wise. We have to respect the way Germany sees the situation and the way they take decisions.”

To get an idea of how the global financial crisis is testing the stability of the eurozone, look at the ever-widening spread between the yields on German and Italian 10-year government bonds: 25.8 basis points one year ago, 69.6 one month ago, 72.3 one week ago and 95.6 today.

With Greece the situation is even more acute: the spread between German and Greek bonds shot above 100 basis points last week for the first time since Greece adopted the euro in 2001. It is now close to 120 basis points. Portuguese, Spanish, Belgian and even Austrian and Dutch yield spreads are also wider than at any time since Europe’s monetary union started in 1999.

A widening spread means that investors judge it riskier to buy the debt of, say, Greece and Italy than the debt of Germany. Accordingly, they demand a higher premium.

For sure, it would be an exaggeration to say that spreads on today’s scale imply serious doubts among investors about the ability of Greece and Italy to honour their debts. But they do imply that investors lack full confidence in Greek and Italian fiscal policies.

They also serve as a reminder about the uncomfortably high levels of Greek and Italian public debt. Finally, they hint at a degree of uncertainty among investors about the cohesion of the 15-nation eurozone itself - namely, whether Greece and Italy are economically strong and fiscally disciplined enough to share the same currency with Germany over the long term.

This would not be an issue, of course, if the eurozone were like the US and had a central fiscal authority to transfer revenues between flourishing states and states suffering an economic shock. But you cannot have a central fiscal authority without a much greater shift in the direction of European political union than most politicians, taxpayers and voters appear ready to contemplate.

Even appeals for closer co-ordination of macroeconomic policies among eurozone governments meet resistance. This was was seen last week in the response to President Nicolas Sarkozy’s call for new and stronger arrangements for joint policymaking in the euro area.

Sarkozy’s proposal had its flaws and, in any case, such appeals coming from France are always liable to be interpreted as an attempt to place the European Central Bank under political control. Nonetheless, Sarkozy put his finger on the problem.

The global financial crisis is beginning to test Europe’s ability to operate a multinational monetary union without closer political and institutional integration. Since 1999, Europe has had its cake and eaten it: the pleasure of a single currency that symbolises European unity, without the pain of a political union unpalatable to so many of its policymakers and citizens.

But as the bond yield spreads show, if the financial crisis gets any worse, Europe will find itself facing some extremely difficult choices.