It's up to Germany to bail out the rest of Europe.

That's the accepted wisdom. Whether by issuing joint bonds, or sanctioning money printing, the German taxpayer will bear the brunt of keeping the eurozone together.

That's all very well. But then yesterday, Germany failed to borrow anywhere near as much money as it wanted on the market.

So the question arises: if Germany's meant to bail out everyone else, who'll bail out Germany?

Germany's big fat bund auction fail

The big news rattling markets yesterday was that an auction of German government bonds (bunds) had failed. The Germans went out hoping to borrow €6bn from the market over ten years. They only managed to raise €3.64bn, paying 1.98% a year for the privilege.

Now, it's important to remember that bund auctions fail all the time. Indeed, this is the ninth 'failure' this year. It's just the way they're designed. All that happens is that German's debt agency (the department that issues the debt), hangs on to the leftover bunds and sells them later.

However, while it might not be quite as bad as the 'bund fail' headlines make out, this can't be dismissed as a technicality. It was the worst auction seen in the euro era, and the amount retained by the debt agency was far higher than usual. The fact is that people just weren't queuing up to lend to Germany.

So what does it mean?

Some have argued that bunds now pay such a low interest rate ('yield') that there simply weren't enough interested buyers at those levels. But that doesn't ring true, as Societe Generale pointed out.

The US managed to raise billions at even lower yields shortly after the German auction failed. And the gap (or 'spread') between the yield on UK gilts and German bunds shrank too. If investors were only worried about low yields, that wouldn't have happened. What it does suggest is that they no longer see Germany as a 'safe haven', whereas the UK and the US are still attracting nervy investors.

It's not Germany that's toxic - it's the euro

It's not that investors are getting worried that Germany won't pay them back. That might well become an issue eventually, but it's probably too early to worry about that. The real problem is the euro. Who wants to buy a government bond that's denominated in a currency that will either fall apart, or be colossally devalued in the name of continental unity?

So the big worry is that investors are starting to avoid Europe as a whole, rather than just discriminating against the 'periphery' (although that term now includes virtually every country but Germany).

This isn't just theoretical. I was talking to the managers of some Europe funds the other day. One of the most telling comments made was about the deteriorating faith of US money managers in Europe's ability to hold together. The gist is that they are finally waking up and looking at the antics of someone like Berlusconi, and thinking: "What on earth am I doing investing in this place?"

Sure, the American perspective on events in Britain and Europe can be quite skew-whiff sometimes. We have different cultural values. What they may see as unbelievable chaos, immorality or government interventionism gone mad is often simply business as usual to us. And we often get it just as wrong about them.

But in this case, perception matters. American and Asian investors (and eurosceptics over here) might be underestimating the political will that exists to hold the euro together. But if they decide that they can't take that chance with their clients' money, then that means a big chunk of demand for European government debt will just fall away.

The Financial Times quotes a 'senior trader at a US bank' as saying: "We are now seeing funds and clients wanting to get out of anything that is denominated in euros and that includes bunds, because they don't know what will happen to monetary union".

And I'm just reading UBS chief executive Sergio Ermotti on Bloomberg, saying that "he wouldn't consider any bonds of any euro-area country as free from risk".

So how can you profit from all this?

The most obvious way to play a general flight from the euro is to buy dollars. In the world of paper currencies, the US still reigns supreme. James Ferguson looked at ways to profit from the rise in the dollar a couple of weeks ago in MoneyWeek magazine: The toxic fallout from Europe's banking crisis

But I'd stick with gold too. A rising US dollar is often tricky for gold. But if you're a sterling buyer, that's not such a big issue. And if the dollar gets too strong, Ben Bernanke will be itching to print more money. Also, gold isn't far off the 144-day moving average level that it has tended to bounce off in recent years. If you don't have much exposure to gold, now might be a good time to buy.

This article is authored by MoneyWeek, the UKs best selling financial magazine. MoneyWeek offers intelligent, easy-to-read analysis of the financial news, with practical investment advice.

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