They have rearranged the deck chairs, told the band to change their tunes and replaced some of the ship's officers. But the Titanic of the world's currency markets is still holed below the waterline and the passengers are all trapped on board.

The replacement of il cavaliere, as the Italians called their inimitable Prime Minister Silvio Berlusconi, is more symbol that substance, a ritual sacrifice to the stern Teutonic gods.

Berlusconi's last act, the austerity package for which both houses of Italy's Parliament voted over the weekend, isn't impressive. Greek households are taking an average 14 percent cut in income. Italians are taking a cut of just more than 2 percent -- less than either the British or the French are suffering.

Italy's austerity package is intended to raise $38.5 billion -- less than 1-10th of the debt Italy has to roll over next year.

Still, a new Italian government under Mario Monti, a respected former European commissioner, means the European Central Bank could now have some cover if or when it starts buying Italian bonds.

The problem is that everything else is going wrong. The Greeks are now dependent on importing oil from Iran because nobody else will extend them credit. This emerged just as the latest U.N. report says Iran has indeed been developing nuclear weapons, so the international community is gearing up for tough new sanctions against Iran. But Greece's need for Iran's oil may well mean that the European Union cannot take a united stance.

And then Britain's Daily Telegraph reported Saturday that the latest bond sale of the European Financial Stability Facility, initially hailed as a success, had only been fully sold because the EFSF spent as much as $412.5 million buying up its own bonds. The EFSF is Europe's own bailout fund and if it has to buy its own binds it means that it is losing credibility in the markets.

The main reason for the EFSF trouble is that the Chinese and Japanese, who enthusiastically bought earlier EFSF bonds, have decided the bonds are now too risky. The bond in question was a $4.1 billion 10-year security in support of the Irish bailout (and Ireland is economically the best performing of the troubled euro countries) and the Telegraph reported that only $3.7 billion of the bonds could be sold to the markets.

This is serious. The EFSF is the euro's safety belt. But if the markets won't buy it, the euro is in even worse trouble. The reason why was explained in figures released last week by the Banca d'Italia, which assessed the full exposure of the rich European countries to the broke ones. So while Britain had 25 percent of its gross domestic product in exposure to Portugal, Ireland, Greece, Spain, Belgium and Italy, Germany had 30 percent exposure and France more than 60 percent.

That is why France is coming into the target zone. Unless somebody buys the $412 billion in debt that Italy must roll over next year, then the value of those French holdings is going to collapse, which means a banking crisis in France.

It also means a banking crisis for American banks and pension funds that bought French bonds when the euro was weak and have been enjoying their exchange rate gains while it has been strong. The Bank of International Settlements says U.S. banks have close to $300 billion at risk in France. The temptation to dump them must be growing, but that would plunge France into an Italian-style crisis. It would also badly affect the United States.

As University of California Professor Brad DeLong argues, "The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip."

Quite unnecessarily, and because of the cowardice and ignorance of politicians, the euro mess is bringing the global economy to another 1931. They are toppling like dominos, Greece, followed by Ireland and Portugal and now Italy and France is starting to teeter. And if DeLong is right, that will plunge the United States back into recession.

Solving this shouldn't be difficult. There are only three things to be done with sovereign debt. Governments can pay it off, if national GDP grows faster than the interest on the debt, which is what happened in Europe and the U.S. in the post-war boom years when the WWII debts were paid down. Governments can default, which is what Argentina did a decade ago and what Greece is doing with the EU's plan for a 50 percent "haircut" on debts to the private sector. The third option is to inflate the currency, so that the value of the debt to be paid off starts to shrink as the money is worth less and less.

But Germany, with its folk memory of the hyper-inflation of the 1920s, is terrified of inflation and will use all its considerable influence in Europe to prevent this from happening. Germany is also digging in its heels and refusing to let the European Central Bank become a lender of last resort.

So if the debt cannot be inflated away, and if there isn't enough growth that allows it to be paid off, the remaining option is default which is the worst outcome of all. Just ask those who recall the domino defaults of 1931 and what followed. The Titanic of the currency markets sails on and the seawater pours in …