Over the weekend German Chancellor Angela Merkel showed she will not be pushed into accepting demands for Germany to underwrite a so-called euro bond in an interview with public broadcaster ZDF.

"Euro bonds are exactly the wrong answer to the current crisis. They lead us to a debt union and not to a stability union," said the Chancellor to the disappointment of Italy, Belgium and even the UK finance minister.

Merkel's stance has however softened a little, from "no way" to "not now". But "not now" though does not help calm nerves when European banking stocks were falling by 10 percent in a single session as many did on Thursday.

“It has been clear for months that markets no longer have confidence in its stability, and the vicious circle between sovereign debt and the European financial system has gotten much worse,” wrote O’Neill over the weekend.

“At the core of the European problem—which may be the only true global economic dilemma currently—is that the EMU (European Monetary Union) as constructed doesn’t work,” he said.

He is not alone in thinking that, but O’Neill is worried about the sharp fall in German growth and in particular, domestic German demand, plus the recent selloff in German stocks.

“The German stock market has continued to fall by more than most. The DAX has gone from being an outperformer—a sort of developed market BRIC (Brazil, Russia, India, China) index if you will—to being a notable underperformer” said O’Neill.

This makes it harder for Germany to sell and for others like Greece to accept fiscal restraint according to O’Neill, especially given the lack of German demand which is badly needed by the weaker members of the euro.

“All countries in the world cannot export at the same time,” O'Neill said.

“Germany needs to start opining quickly as to what kind of EMU it wants and will support, rather than simply opining on the EMU that it won’t support,” he said. “Worried by the lack of economic policy leadership, many market dislocations have occurred. If the leadership comes, the opportunities created by this crisis will be snapped up by investors.”