PARIS — What began with worries about the solvency of Greece in the face of high deficits, fake budget figures and low growth has quickly become the most severe test of the 16-nation euro zone in its 11-year history
Anxiety about the health of the euro, which has spread from Greece to Portugal, Spain and Italy, is not simply a crisis of debts, rating agencies and volatile markets. The issue has at its heart elements of a political crisis, because it goes to the central dilemma of the European Union: the continuing grip of individual states over economic and fiscal policy, which makes it difficult for the union as a whole to exercise the political leadership needed to deal effectively with a crisis.
A policy of muddling through may be comfortable in political terms, but experts warn it can have dire economic consequences. Jean-Paul Fitoussi, professor of economics at the Institute of Political Studies in Paris, said that European leaders had “handled this crisis very badly,” feeding market speculation and greed.
Greece’s ratio of public debt to gross domestic product is no higher than Germany’s, and Greece has not defaulted, he said, but European leaders have done too little to calm the markets and rating agencies.
While no one expects that the European Union will allow Greece or the others to default or the euro zone to collapse, European leaders and the Central Bank will almost surely have to bend the rules to provide guarantees or loans, if necessary. But even tiding over countries in trouble will not solve the main flaw in the euro: the sharp divergence of national economies that share a common currency without significant fiscal coordination, let alone a single treasury.
“The challenges facing the euro zone are very serious,” said Simon Tilford, chief economist for the Center for European Reform in London. “For countries that have become pretty uncompetitive in the euro zone and have weak public finances, the current environment is very dangerous.”
It does not help matters that the European Union is undergoing a major political transition to new leaders, a new Commission and Parliament, and a new governing treaty, the Lisbon Treaty, which creates a new president and foreign affairs chief. But even if all these positions were filled, serious questions remain about whether the union or its leading member states will take charge before further damage is done.
In some sense, there is a game of chicken being played, with Greece counting on help and other countries holding back until Athens pays a steep price for its profligacy and manipulation of statistics. But the delay is costly, and there are deeper structural problems that few want to discuss.
Greece, Italy, Portugal and Spain — known now as the PIIGS, if Ireland is included — are the weak sisters of Europe, with high structural deficits matched with low prospects for the kind of economic growth and productivity improvements that can bring them back to health.
The north-south split is partly geographic, partly cultural, partly religious and partly historical, but the southerners tend to be poorer and to have less competitive economies.
“The markets are having fun testing the euro,” said Nicolas Véron, a senior fellow at Bruegel, an economic policy research institute in Brussels. But the markets are also increasing pressure on the biggest European economies, like Germany and France, to figure out ways to rescue Greece, which is already facing strikes in light of current austerity measures, and to bolster the others.
But with the European Union undergoing a triple political transition, it is not entirely clear where that leadership will come from.
“Who’s in charge now?” asked Antonio Missoroli, director of studies for the European Policy Center in Brussels. “Nobody yet, and it may still take time.”
There is a newly nominated European Commission and now a new European president, Herman Van Rompuy, and European minister for foreign affairs, Catherine Ashton. The commissioner in charge of this crisis, Joaquín Almunia, is a lame duck, due to switch jobs and become competition commissioner.
Mr. Van Rompuy has announced an informal economic summit meeting for next Thursday, to get the member nations to concentrate on the crisis.
Default for a member of the euro zone is simply unacceptable, European officials and analysts say — a country is not a bank. At the moment, even calling in the International Monetary Fund to help Greece is considered too embarrassing and not yet necessary, given the new Greek government’s apparent determination to deal realistically with its problems.
More likely, they say, is a set of bilateral loans or loan guarantees from richer countries like Germany. Leaders in France, Germany and other European nations have already begun discussing how such aid might be structured, officials said last week.
“It’s highly unlikely Greece will be allowed to default,” Mr. Missoroli said. “But no one wants to say that out loud to take the pressure off the Greek government.”
But it is also unprecedented, and difficult politically, for the European Union, or any member country, to impose conditions for economic adjustment on another member country, which is why some analysts urge the involvement of the International Monetary Fund.
Jacques Mistral, an economist at the French Institute for International Relations, said that the main actors now were Jean-Claude Trichet, president of the European Central Bank, and the leaders and finance ministers of Germany and France.
“That’s the troika, and they’re leading the process to explore different ways and compromises,” Mr. Mistral said. “When there is a will there is a path.”
But summoning that will has proved difficult in the northern tier, which mistrusts the southerners. Greece is a prime example of the disease in the euro zone, said Mr. Tilford, the economist in London, made worse by political mismanagement; the global recession, which has hit tax receipts; and the impossibility of devaluing a shared currency.
Portugal, the poorest country in the euro zone, has been stagnating for years, proving that membership in the euro “is not a panacea,” he added.
In addition, Portugal has something of a political crisis, with Parliament voting down an austerity plan on Friday that was promoted by the minority Socialist government.
Spain has relatively low debt, but high unemployment and weak banks, and after the bursting of the housing bubble it can no longer rely on construction and inflated asset prices to propel growth.
These aspects, together with the larger size of the Spanish economy, had led Nouriel Roubini, a professor at New York University, to suggest this week that Spain is a bigger threat to the euro zone than Greece.
At the same time, some northern countries, like Germany and the Netherlands, are still playing “beggar thy neighbor” by their reluctance to stimulate their own domestic purchasing, which could help weaker countries to export.
“The southerners can do their best to cut costs and be competitive,” Mr. Tilford said. “But they need the others to create more domestic demand and be less export dependent.”
Critics like Mr. Fitoussi are left wondering why the crisis was ever allowed to expand to this point. “This is much ado about nothing,” he said. “But the nothing can ruin the whole project. I don’t think the euro is in danger. But the leaders are taking too much time.”