When the European Union began its drive to create the euro in the 1990s, opponents of the single currency embraced the idea of a multispeed Europe, a departure from the bloc’s traditional practice of having every member adopt each of the group’s policies. For euro-skeptic Britons in particular, this differentiated union would enable the U.K. to stay outside the euro area but remain an EU member in good standing, with full access to the bloc’s single market for goods and services.

Today this multispeed Europe is more of a reality than ever, but with a twist. The great distinction is not between the countries that are in or out of the single currency but between the euro area members themselves. Europe’s debt crisis has made sovereign risk the paramount driver of the region’s bond market and has sent yield spreads soaring to levels far above those that prevailed in the days of national currencies. For borrowers with large funding programs, the challenge of securing financing at an acceptable price is greater than ever.

The recent worsening of the crisis, including Portugal’s decision last month to accept a E78 billion ($110 billion) bailout package from the EU and the International Monetary Fund, and mounting speculation about a rescheduling of Greece’s debt just one year after it received E110 billion in assistance, has raised the risks for borrowers and investors alike. The brief respite earlier this year, when spreads narrowed and European policymakers talked as if they had resolved the crisis by agreeing to set up a permanent bailout facility, the European Stability Mechanism, now appears to have been a false, or at least premature, dawn. There are signs of increasing tension in the euro area; comments by German Chancellor Angela Merkel and European Central Bank officials ruling out any Greek debt restructuring sent yields on ten-year Greek government bonds spiking by more than 60 basis points on May

....