While the euro zone is fighting to contain an escalating debt crisis, low bond yields show Britain has retained the markets' trust thanks to the government's unswerving commitment to erase a budget deficit of more than 10 percent. But Finance minister George Osborne's proud proclamation that he has no 'Plan B' could start to ring hollow if a sharper downturn hits tax returns and forces either more borrowing or even harsher spending cuts.

The stakes could not be higher and debate is heating up. The storm over a phone hacking scandal and politicians' ties to Rupert Murdoch's media empire are buffeting Prime Minister David Cameron now but the government's chances of re-election in 2015 really hinge on its success in balancing the budget while keeping the economy moving.

International organisations like the IMF back Osborne's plan while at home, protesters have taken to the streets and the Labour opposition has demanded a rethink to boost the struggling economy, which may have shrunk in the second quarter after flat lining over the previous six months. "It wouldn't take a very big shock for his plans to go adrift. He has not a lot of money in the bank," said Carl Emmerson, deputy director at the Institute for Fiscal Studies think tank.

The choreography appears to be that euro zone policymakers are waiting for the banks, under the auspices of the IIF, to produce their part of the plan and then frantic work will be done to bash it into a broader political deal (probably by sherpas on Wednesday and through the night).

If you glance back to what was ruled out in the past and is clearly not ruled out now, it's pretty instructive. All of which leads wiser heads than mine to wonder whether this crisis is only over when the bloc's leaders agree to the euro zone bond, something which, for now, remains strictly off limits for the Germans and others. That will not be on Thursday's agenda!

At least Merkel is definitely turning up to the summit now. She clearly needs to begin work on selling this new package to a German public which is anything but supportive. She conspicuously didn't do so in her big set piece interview on German TV over the weekend. The threat of contagion remains the most serious concern for the bloc. Italian and Spanish 10-year yields have leapfrogged six percent and a Spanish T-bill auction today is our latest litmus test of that.

From Texas to the Dakotas, and east to Illinois and Indiana, temperatures and humidity levels soared on Monday and were expected to remain high through at least the end of the week, by which time forecasters say the East Coast will get to share the misery.

Seventeen states issued heat watches, warnings or advisories on Monday, when the heat index easily surpassed 100 degrees in many places, including 126 in Newton, Iowa, and 119 in Madison, Minnesota. Things were heating up on the East Coast on Tuesday, and the National Weather Service said temperatures in New Jersey that were expected be in the lower 90s and could reach 100 degrees by the end of the week. Cooling centers were set up in many cities to offer residents places to escape, and they were expected to remain open during the day until the heat abates.

In Wisconsin, where the heat index was expected to be in the 100s again Tuesday, the Wisconsin Public Service Corp said it didn't expect brownouts or blackouts despite the high usage, but it warned that customers should expect to pay more on their next bills.

The 234-190 vote marked the power of deeply conservative first-term Republicans, and it stood in contrast to calls at the White House and in the Senate for a late stab at bipartisanship to solve the nation's looming debt crisis. President Barack Obama and a startling number of Republican senators lauded a deficit-reduction plan put forward earlier in the day by a bipartisan "Gang of Six" lawmakers that calls for $1 trillion in what sponsors delicately called "additional revenue" and some critics swiftly labeled as higher taxes.

The president said he hoped congressional leaders would "start talking turkey" on a deal to reduce deficits and raise the $14.3 trillion debt limit as soon as Wednesday, using that plan as a roadmap. Wall Street cheered the news of possible compromise as well. The Dow Jones industrials average soared 202 points, the biggest one-day leap this year.

The German committee chairwoman, Doris Pack, accused Ukip MEP Paul Nuttall of grandstanding when he flourished a copy of yesterday's Daily Express and described the EU proposal as "baloney". She said, to applause from some MEPs, that it was just "better not" to speak about the British press. She later added: "In the Lisbon Treaty there is a possibility to leave the EU... I only wanted to say it."

MEPs at the meeting said they understood her comments to mean Britain had the mechanism to leave the EU if it wanted. Mr Nuttall said: "The chairwoman got quite irate and said the good thing about the Lisbon Treaty is that it includes a clause that would let us leave, that would allow we British to leave."

As financial markets target Italy and Spain and amid the first stirrings of mass popular discontent in those countries, there is a realisation among the European political elite that ad hoc bailouts of the type used to shore up Greece, Portugal and Ireland won't work with these much larger economies. A rational response would be to allow all these countries to re-establish their former currencies and let devaluation shrink their debts and kickstart growth.

But there is an iron will among the Eurocrats not to let that happen because if it does then the dream of a federal Europe will be gone for ever. So in Brussels and Berlin and Paris work is already proceeding apace on a plan to solve the failure of partial economic integration (monetary union) by leaping into full integration (fiscal union). Fiscal union will mean centrally imposed public spending controls and, crucially, the acceptance that the treasuries of all eurozone countries will have ultimate liability for each other's debts.

THIS IN EFFECT WILL MAKE MIGHTY GERMANY GUARANTOR OF ALL WEAKER EUROZONE MEMBERS. Under its own terms it will work because speculators will suddenly have little reason to fear a default by any of the southern European countries or Ireland. But the cost in terms of lost democracy would be enormous. Not only will the eurozone countries have lost control of their interest rate, exchange rate and money supply, they will also have ceded permanently the ability to decide on public spending levels, tax rates and budget deficits.

Their democracies will be hollowed out as all important economic decisions will require the consent of unelected officials in Brussels or Frankfurt (where the European Central Bank is based) with no recourse to domestic opinion. Worse still, the old saying that he who pays the piper calls the tune will be borne out. To convince German public opinion to take on this new guarantor duty, GERMANY WILL HAVE TO BECOME THE DOMINANT FORCE behind monetary and fiscal policy throughout the eurozone.

IT WILL, HOWEVER RELUCTANTLY, HAVE GAINED GREATER EUROPEAN DOMINATION THROUGH FINANCIAL MEASURES THAN EVER IT DID BY FORCE OF ARMS. And this "great leap forward" must be made soon or not at all because the speed at which the financial markets sniff out weakness means that Italy and Spain cannot be left in limbo for long or the break-up of the euro will ensue.

Perhaps we could revert to the European Free Trade Association and sign our own trade deal with Brussels. All full EU membership will entitle us to is obligations to make massive net payments to Brussels and to be bound by job-destroying EU regulations. As our political class desperately resists demands for a referendum on departing from the EU, a startling new possibility is emerging: that well before we see Britain leaving Europe, WE ARE GOING TO SEE MUCH OF EUROPE LEAVING BRITAIN.

The veteran detective - known as Yates of the Yard - quit his 181,000 pounds-a-year position hours before allegations about his conduct were referred to the police watchdog. They included claims that he 'inappropriately secured' a role at the force for 27-year-old Amy Wallis, daughter of former News of the World deputy editor Neil Wallis. Mr Wallis, 60, was arrested over phone hacking last week and it later emerged he was paid 1,000 pounds a day as a PR consultant by the Metropolitan Police after he left the paper in 2009.

He has been a friend of Mr Yates for 12 years. Following Mr Yates's departure Assistant Commissioner Cressida Dick, the officer who oversaw the bungled anti-terror operation which resulted in the fatal shooting of Jean Charles de Menezes, was put in temporary charge of the Met's Counter-Terrorism Command. The disclosure comes after the Yard was forced to admit that another ex-News of the World journalist, Neil Wallis, had been employed by the Met as a part-time PR consultant, triggering the resignation of the commissioner, Sir Paul Stephenson.

Another former senior News of the World journalist was carrying out potentially sensitive work for Scotland Yard while employed by the paper, it has been revealed. Alex Marunchak had been employed by the Metropolitan Police as a Ukrainian language interpreter with access to highly sensitive police information. The force acknowledged that his employment 'may cause concern', adding that some professions may be 'incompatible' with such a sensitive job.

It was his explosive claims last autumn that reignited the scandal and ultimately led to the tumultuous events of the past fortnight which have shaken the political, police and media establishments. Police were investigating the possibility that he had killed himself, saying his death was 'not thought to be suspicious'.

It came on a day when:

- The Metropolitan Police was left in turmoil as counter-terrorism officer John Yates was forced to follow Commissioner Sir Paul Stephenson and resign;

- Mr Yates faced investigation over claims that he secured a Scotland Yard job for the daughter of hacking suspect Neil Wallis;

- David Cameron cut short a trip to Africa and said he will fly back to Britain today after agreeing to delay Parliament's summer break to discuss the affair;

- London Mayor Boris Johnson infuriated Number Ten by refusing to say whether the PM should quit over his hiring of Mr Coulson;

- Police recovered a bag containing a computer, phone and paperwork found in a bin near Rebekah Brooks's London home.

The body of Mr Hoare, 47, was discovered by police yesterday morning at his modern first-floor flat in Watford. Until Mr Hoare spoke out in September, pressure had eased on Mr Coulson, recruited by David Cameron as his media chief in 2007 after resigning as editor of the News of the World when royal reporter Clive Goodman and private investigator Glenn Mulcaire were jailed. Last week, Mr Hoare was back in the spotlight with further claims, telling the New York Times that reporters at the News of the World were able to use police technology to locate people using their mobile phone signals in exchange for payments to police officers.

Mr Hoare was sacked from the News of the World over drink and drug problems in 2005, and last year sources at the paper said that his claims should be treated with 'extreme scepticism'. But a friend who saw him more recently described him as 'sober' and wanting to rebuild his career.

The good old bobby in his serge blue jacket and pointy hat summed us up nicely - as, by and large, a pretty safe and orderly nation, where the rule of law prevailed and was properly enforced. So what went wrong? The resignations in quick succession of two of the country's most senior officers, Sir Paul Stephenson, the Scotland Yard commissioner, and his assistant John Yates, have triggered one of those periodic fits of national breast-beating about the state of British policing.

Speaking in South Africa, David Cameron dramatically increased the stakes by saying that there were questions of "police corruption" that needed to be answered and Theresa May, the Home Secretary, announced an inquiry into an allegedly "nepotistic" relationship with the media. The headline in one paper yesterday screamed "Meltdown at the Met"; and Paul McKeever, the chairman of the Police Federation, was sufficiently concerned about the fall-out that he felt obliged to defend his members from any taint of impropriety.

"I must object, on behalf of all police officers across England and Wales, to the grossly offensive and incorrect assumption that the police service suffers from widescale corruption," he said. "The British police service remains the most open, accountable and professional police force in the world and the men and women who work within it are of the utmost integrity and have every reason to be proud."

But is that really true any more?

The Foreign Secretary warned that any mention of an EU military headquarters would trigger a veto after a row marking Britain's most serious rift with Lady Ashton, a Labour peer. "I have made very clear that the United Kingdom will not agree to a permanent operational HQ. We will not agree to it now and we will not agree to it in the future. That is a red line," he said

Secret proposals tabled by Lady Ashton, the EU foreign minister and seen by The Daily Telegraph called for a "permanent civilian-military planning and conduct capability" or "OHQ". "The Treaty of Lisbon offers an enhanced platform for the EU to act," said the document. "This opportunity must be exploited." Mr Hague is concerned that Lady Ashton's attempt to give the EU new security powers will undermine Nato and lead to further Brussels demands for extra cash at a time of national defence cuts.

"We are opposed to this because we think it duplicates Nato structures and permanently disassociates EU planning from Nato planning," he said. "We won't be agreeing to a permanent operational headquarters and therefore we are not able to welcome today's report by Cathy Ashton on this matter." Alain Juppe, the French foreign minister, praised Lady Ashton's "excellent" proposals for an EU HQ but admitted that British opposition had blocked the move.

The Sunday Times reported that EU Foreign Minister Baroness Ashton will challenge UK Government policy today by outlining a proposal for a permanent EU military headquarters that would "command and control" future European civilian and military campaigns.

EU diplomats say one option being considered in order to soften Britain's opposition is to house the headquarters in the UK and claimed that it could initially be staffed by 250 officers and crisis management experts. Open Europe Research Director Stephen Booth was quoted on page two saying, "Creating a new EU headquarters would simply be a distracting attempt to paper over the deep-seated divisions in EU foreign policy, which show no signs of going away. It would potentially threaten Britain's primary military alliance, which remains with the United States via Nato."

Where is the European Central Bank, ask bankers and investors. It's a fair question. The sight of Italian 10-year bond yields at 6% would, you might think, have been a cue for the central bank, the first line of defence against loss of investor confidence, to wade into the market and start buying Italian debt. Italy, saddled with high debts and low growth, cannot prosper if it is obliged permanently to pay such prices to borrow. A bond-buying spree by the ECB would have been taken by investors as a declaration that eurozone institutions will act to stop the rot. In the US, that's how the Federal Reserve would have reacted.

Instead, the ECB, hamstrung by its mandate and rows with politicians over how the design of a permanent solution to the crisis, did nothing. And, presumably, it will continue to do nothing, at least until the summit of eurozone leaders on Thursday. That meeting now looms as the moment when the eurozone, at the very least, has to decide how it wants to tackle Greece's debts; private holders of Greek debt must be told what hit to expect and when.

But the summit needs to deliver a commitment to a pan-eurozone bond in which members guarantee each other's debts, or at least a portion of them. And, if not a rescue fund, then something that will do the same job. Without firm action, investors will conclude that eurozone politicians - specifically the German chancellor Angela Merkel - simply lack the will or electoral authority to fight to save the single currency. It will be Rescue Thursday - or Black Friday.

Berlusconi's Italy is debt-ridden, shouldering a burden worth 1.85 trillion euros, more than twice as much as Greece, Ireland and Portugal combined. In the next 12 months alone, 300 billion euros of that debt will have to be refinanced - more than the 250 billion euros in the euro-zone bailout fund. Last week, confidence in the country seemed to disappear from one day to the next.

Rating agencies, led by Moody's, threatened to downgrade Italy's credit rating. Private investors panicked and sold their Italian investments, US hedge funds bet gigantic sums on the further decline of Italian government securities, and the Milan Stock Index declined for an entire week. It seemed as if Italy, the world's eighth-largest economy and a founding member of the European Union, had become the next Greece.

The Finance Ministry in Rome easily managed to sell additional billions in debt securities last week, but it had to pay almost 25 percent higher interest than before. Had a new vicious cycle of debt been set in motion, this time on the western shore of the Adriatic?

Fund firms contacted by Reuters said rating agency research tended to be backward-looking and superficial, and often encouraged the kind of speculation that has recently dragged down Italy, one of the world's largest government bond issuers. "We have canceled our subscriptions to two of them and they haven't left us alone since. It has been very irritating," the head of sovereign debt investment at one large European bond investor told Reuters on condition of anonymity.

"It would be naive to blame the agencies for everything that went wrong during the financial crisis but anyone who relies on a third party to form their investment opinions is headed for trouble... clients pay us to make those decisions, it would be completely wrong of us to abdicate that responsibility." Investors say they have steadily reduced reliance on external research providers ever since rating agencies slapped high ratings on complex structured financial investment products such as collateralized debt obligations (CDOs) which later turned out to be far riskier than initially assessed.

A broad push for development of proprietary research teams shows credit ratings agencies have never fully regained the trust of some of their most important buy-side clients, some of whom are still counting the costs of belated warnings of a change in the risk profile of debt issuers. Relations have cooled even further in 2011 as the increasing probability of a European sovereign debt default threatens to kick a feeble economic recovery sharply into reverse.

European Commission President Jose Manuel Barroso has said Europe was looking at ways to curb the power of the mainly US based agencies and was weighing possibilities for legal redress after Moody's downgrade of Portugal's debt.

Brown on Thursday signed into law SB 48, which is designed to take effect in January of next year, although the San Francisco Gate notes that the state's fiscal crisis is so deep it will be unable to purchase the new texts until 2015 at the earliest. Pushed as an antidote to gay bullying in schools, the measure mandates textbooks to highlight homosexual persons and their activities in American history.

It simultaneously reinforces a gag on religious doctrine, noting that "any sectarian or denominational doctrine or propaganda contrary to law" is forbidden. The text of the law ends with a warning shot at private schools in California, stating: "It is the intent of the Legislature that alternative and charter schools take notice of the provisions of this act in light of Section 235 of the Education Code, which prohibits discrimination... in any aspect of the operation of alternative and charter schools."

The bill includes no age requirement, meaning the changes could affect even the lowest elementary school grades, notes Baptist Press. The Assembly had approved the measure by a 49-25 vote on July 6, following a heated debate. Republican Assemblyman Tim Donnelly expressed outrage over the bill on the chamber floor. "I think it's one thing to say that we should be tolerant. It is something else altogether to say that my children are going to be taught that this lifestyle is good," said Donnelly, according to the Associated Press. "As a Christian, I am deeply offended."

Meanwhile, family advocates expressed alarm at the new law's obvious implications for the national textbook market. "The reality is that the major textbook manufacturers do not create different textbooks for each state," said Pacific Justice Institute (PJI) president Brad Dacus in a statement July 6. "Instead, they seek to comply with mandates in the largest states, especially California and Texas. As a result, many smaller states are pressured into approving California-focused instructional materials, which must now cater to the gay history mandate."

Randy Thomasson, president of SaveCalifornia.com, a conservative family group, said under the new law parents will have no choice but to take their children out of public school and homeschool them to avoid what he said was "immoral indoctrination." The new law applies only to public schools, not private schools or families who homeschool.

"Jerry Brown has trampled the parental rights of the overwhelming majority of California fathers and mothers who don't want their children to be sexually brainwashed at school," Thomasson said. "This new law will prohibit textbooks and teachers from telling children the facts that homosexuality is neither healthy nor biological."

Spot gold rose as high as $1,600.40 an ounce and was up 0.4 percent at $1,598.76 an ounce at 0845 GMT (09:45 am British time). Gold rose more than 3 percent for a second straight week to Friday, a feat it has not achieved since February 2009. Data from US futures regulator the Commodity Futures Trading Commission showed on Friday that managed money sharply raised bullish bets in US gold futures and options in the week ended July 12 as bullion prices rallied.

"CFTC data shows a surge into gold, so despite the higher levels the professionals have returned to gold with a vengeance," said Saxo Bank analyst Ole Hansen."The stress test result was met with a lukewarm response with focus again switching back to Europe. When that happens gold is often allowed to perform despite the dollar strengthening at the same time."

Sovereign default fears are growing in both Europe and the United States. The United States is struggling with deficit reduction talks ahead of the White House's July 22 deadline on a deal to raise the $14.3 trillion debt ceiling. Stock markets fell in Europe as bank stocks came under pressure after a capital stress test failed to dispel fears about the regional debt crisis, while Bund futures opened higher as uncertainty ahead of a euro zone meeting this week underpinned appetite for safe-haven assets.