For weeks, the eyes of the world have been on Spain. Ever since the European Central Bank announced its Outright Market Transactions program, Madrid has kept the markets guessing over whether it will request aid from the euro zone's bailout funds, paving the way for the ECB to start buying its bonds. The market suspects an ill-tempered standoff between a stubborn Spanish government and its euro-zone partners. Anxiety last week spilled over into the market with Spanish bond yields rising sharply and stock markets selling off. But the reality is more complex. At the heart of the Spanish impasse lies a wider political dispute that goes to the heart of the euro crisis--and the main protagonists in this debate are Germany and Italy. How this disagreement is resolved will shape the future of the single currency.

...

Indeed, the ECB, led by its Italian president, Mario Draghi, has acknowledged its responsibility to fix the transmission mechanism by agreeing to create the OMT. But Rome believes the program is badly flawed. The problem is the requirement that any country first needs to sign up to a euro-zone rescue program with conditions agreed with input from the International Monetary Fund. What this means is that Europe now has its bazooka, says one senior Italian policy maker, "but the ECB has put it in a safe and handed the key to the Bundestag." By effectively allowing the German parliament a veto over a monetary policy instrument, the euro zone has raised doubts over whether this bazooka will ever be fired. From Italy's perspective, it is essential that Spain asks for aid, if only to prove the bazooka works.

...

As far as Rome is concerned, Italy--like Spain--has agreed to all the conditionality necessary to allow the ECB to fulfill its obligations as a central bank. It believes Berlin has a moral obligation not to stand in its way. Spain is now the battleground for two competing visions of how the euro zone should operate. What happens next in the euro crisis depends largely on whether Berlin or Rome blinks first.