As EU meets, euro hangs in the balance

Photo by Oli Scarff/Getty Images

A poster depicting euro notes is seen through a broken window in a money transfer shop in Athens, Greece. European leaders meet Thursday to try prevent the shattering of their common currency.

By John W. Schoen, Senior Producer

BRUSSELS, Belgium -- Here in the heart of the bureaucracy overseeing the eurozone, officials publicly concede the future of the common currency is at a crossroads.

Privately, some are acknowledging that the plan to bind Europe even closer together may be nearing the end of the road.

On Thursday, European Union leaders will gather for two days in another last-ditch effort to head off Greece's departure from the monetary union, an outcome all sides insist would spell?economic?and?financial?chaos?for Greece, threaten the rest of the eurozone and perhaps pressure the rest of the global economy.

But any hoped-for resolution of the crisis will have to wait. Greece's newly-elected prime minister, Antonis Samaras, has been sidelined from the meeting for health reasons. EU officials have delayed an audit of Greece's progress on economic reforms that must be completed before the next installment of financial aid is transferred to Athens.

The crisis entered a new, more worrisome chapter Monday following Spain's formal request for?rescue loans to backstop banks laden with bad debts due to a housing collapse. Some market economists believe the rescue appeal could represent the early stages of a wider request for a full bailout for the Spanish government, which saw its borrowing costs soar above 7 percent early last week.

The cost of such a Spanish rescue would be an order of magnitude bigger than the Greek bailout and raise the prospect that Italy, Europe's third largest economy, could soon follow suit, stretching the monetary union to the breaking point.

The European experiment may have been doomed from the start.?The massive debt burden now crushing southern economies followed the creation of a common currency that allowed them to borrow cheaply with no central European government to control taxation and spending.

Now, after two years of unsuccessful efforts to convince 17 sovereign nations to cede control of their budgets to Eurocrats in a distant capital, the financial markets are revoking that cheap credit line. Euro zone officials here insist they can still create the political union that will solve the problem ?- a task roughly equivalent to laying a foundation under a house that?s already been built and occupied.

?There is an undermining of trust among the main players in the process of European integration that is very difficult to mend,? one senior adviser at the European Commission told a group of American reporters in?a background briefing last week. ?There is a sense of an unease spreading. And there is a risk as everyone is searching for scapegoats. The economies are not improving."

The immediate concern centers on the latest round of brinksmanship over tough austerity measures imposed on Greece in return for continued financial help from the rest of the euro zone.

More than two years and 20 summit meetings after first grappling with the unfolding economic crisis, the latest standoff between Greece and the rest of Europe is shaping up as a last-ditch effort.

"We are doing everything to give the euroa future,? German Chancellor Angela Merkel told reporters after a meeting with other leaders in Rome Friday. "We are fighting for the euro."

Deepening divide
But with discord among Europe's leaders deepening, time may have finally run out.

The latest crisis has widened already-deep divisions. Officials from the European Commission, European Central Bank and International Monetary Fund ?- the so-called troika ?- were to have reviewed Athens? progress this week on a list of bailout conditions before EU ministers assemble here for the summit to decide whether to write the Greeks another check. That review has been postponed indefinitely.

The newly-elected Greek government, which will burn through its latest bailout check in a matter of weeks, is widely regarded as too fragile to endure, let alone uphold the harsh measures that have driven the Greek economy to the brink of collapse.

With unemployment soaring and their economy in a deep depression, Greek officials said Saturday they will seek to repeal some taxes, halt layoffs and extend by two years the deadlines for tough austerity measures imposed under its international bailout agreement.

?In those two days in Brussels, we will carry out a major battle for revision of the loan and negotiate a framework that will boost recovery and the fight against unemployment,? said Evangelos Venizelos, head of the socialist PASOK party.

German officials are in no mood to let Greece off the hook. Merkel has said there can be no "rebates" on bailout terms for Greece. Finance Minister Wolfgang?Sch?uble has insisted that Athens must live up to the promises made when it agreed to accept the eurozone?s financial lifeline.

"(Samaras must) enact the program agreed upon quickly and without further delay instead of asking how much more others can do for Greece," Sch?uble told Reuters Sunday.

Tensions rising
The rising tensions among Europe?s leaders are also spreading among voters from Berlin to Brussels to Athens.

Having so far dodged the recession sweeping across the continent, Germans have been ?crisis winners,? according to economist Friedrich Heinemann at the Centre for European Economic Research in Mannheim. As capital has fled debt-ravaged southern Europe to the safe haven of Frankfurt, falling interest rates have sparked a building and housing boom, kept a lid on inflation and helped boost German wages for the first time in over a decade.

Germany has become the de facto backstop for the faltering economies. It has contributed the bulk of the 890 billion euros ($1.1 trillion) in loan guarantees and bailout funds for Ireland, Portugal, Greece and now Spain -- the latter by far the largest economy to date to ask for help.

But Germany?s export-reliant economy, which depends heavily on continued strong demand from its troubled southern neighbors, is now slowing.

For their part, German voters are growing weary of their role?as financial backstop and are losing patience with bailouts that appear to have no end in sight.

?We are a European community and we belong to each other," said Reinhard Schniel, a project coordinator at the?Institute of Physics and Technology in Braunschweig. "We depend on others economically and in many other senses -- you can?t abandon your partners, your family. But we don?t see the political and economic mechanisms to make these countries change.?

Germans are deeply ambivalent about their new role. Memories are still fresh of the two world wars that resulted from the ambitions of past German leaders. But as Europe?s largest benefactor, Germans aren't eager to cede decisions to Brussels.

?Itsbasically the same kind of issue as back in the good old Boston Tea Party days -- ?No taxation without representation,?? said Timo Klein, an economist with IHS Global based in Frankfurt.?

For their part, Greek voters have little patience with what they see as Berlin?s relentless scolding over a crisis that was many years in the making and has helped boost the standard of living for the average German worker.

Mary Linos, anGreek IT student studying in Brussels, saw Germany defeat Greece last Friday in the?Euro 2012 soccer match. Linos, wrapped in the blue and white stripes?of Greece's flag, watched the game?with her friends at the Ethnic Caf?, just off the city's Grand Place.

?It?s not just the money,? she said, as the crowd booed when the big screen flashed a shot of Merkel sitting in the stands. ?We need help with experts to fix the problems. Germany has seen this happening for years now and has done nothing. Germany has also made a lot of money from Greece?s problems.?

Under construction
Europe?s fledgling central government -- still under construction after 22 years -? has been unwilling or unable to impose solutions.

In Brussels, a sprawling cluster of gleaming new buildings is dotted with construction sites that bristle with cranes still busy expanding the office space needed for more bureaucrats, lobbyists and journalists. They are trying to create a political culture here familiar to any American living within the Washington Beltway. But much like the vast Brussels headquarters complex, the architects of the grand vision to unify a continent of more than two dozen cultures, languages and sovereignties embarked on the plan with long time horizon. Europe's weaker economies can't wait that long.

Just as the American political system has lost its capacity to find compromise, the European experiment with the euro is faltering after repeated efforts to forge consensus. Despite repeated calls for tighter political union, the eurozone remains a loose collection of?states with a history of conflict that stretches back centuries.

Even as some here blame Athens for dragging its feet, for example, the European Commission itself continues to resist implementing a long list of reforms.

Member states still make their own tax and spending policies, borrowing to make up shortfalls without regard for the wider financial impact on the eurozone. Labor laws and social programs are set for each country by individual governments, producing economic imbalances that are exerting mounting pressure on the currency binding the group together.

Unlike their U.S. counterparts, European bank regulators have no authority to shut banks that are bleeding money, creating the risk that bailouts of so-called ?zombie? banks are simply throwing good money after bad.

The obstacles to these reforms date at least to the formation of the monetary union. Some are much more deeply-rooted. The creation of a common political system has been heavily impeded by the nationalism reflected in the distinct cultures and languages of European states.

As finance ministers hastily assembled to consider the latest backstop for Greece last week, for example, the top item on the agenda was a recent poll showing that the number of Europeans who know a?language other than their own has dropped slightly in a decade, from 56 percent?to 54 percent. The most common second language is English, although England is not a member of the monetary union.

EC officials acknowledge the scope and depth of what is being demanded of Athens.

?The changes we're expecting overnight are changes that are usually made over a generation,? said Ioana Diaconescu, an EC economic analyst.?

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