LONDON — After Greece recklessly spent its way into a debt crisis, potentially leaving German taxpayers to help fund a bailout, lawmakers in Berlin offered a suggestion to their profligate neighbors to the south: If you want to raise cash, why not sell off a few of your islands?
That idea came only a few days after the Greeks, furious over earlier German criticism of their spending habits, suggested the Germans could solve the problem by making reparations for gold stolen during the Nazi invasion. “They took away the Greek money and they never gave it back,” Deputy Prime Minister Theodoros Pangalos said. “This is an issue that has to be faced sometime in the future.”
The sharp exchanges in recent weeks underscored a growing discord within the European Union, a region confronting a mounting array of economic and diplomatic problems that are putting the 27-nation alliance through its toughest test in years. In recent weeks, bitter disputes have broken out in Brussels over the naming of high-level diplomats overseas, while E.U. nations have been unable to reach a key agreement on how — and whether — to save Greece and prop up the hard-hit euro.
The frictions in Europe could further pressure global currency and bond markets, hamper expansion of the euro and derail attempts to boost the region’s clout on the world stage. They are also threatening to complicate efforts by Washington to work with the Europeans to solve long-standing problems, such as a massive gap in NATO financing, as well as newer ones, such as the push to establish global norms for financial regulation in the aftermath of the “Great Recession.”
“The creation and enlargement of the E.U. was one of Europe’s biggest achievements, but now its inability to speak as one, and its failure to agree on how to tackle its underlying economic and social challenges, is undermining Europe’s standing and potentially leading it into a period of decline,” said Simon Tilford, chief economist at the Center for European Reform, a London-based think tank.
After weeks of negotiations, these countries are still at odds over how to handle the single biggest issue confronting the region: the debt woes in Greece that have sparked the worst crisis in the 11-year history of the euro. Germany, Europe’s financial powerhouse, is reluctant to bail out a nation seen as running itself into the ground with reckless spending, a culture of tax evasion and a history of producing erroneous economic data.
Confronting mounting political pressure at home, Germany — looked to by other nations in the region to lead any bailout — this week surprised many of its neighbors by backtracking on its initial opposition to having the International Monetary Fund step in to rescue Greece. Such a move has been seen as deeply embarrassing to euro-zone nations and has been strongly opposed by neighboring France.
But the about-face in Germany illustrated just how deep domestic opposition is running there to aiding ailing partners in the euro, and it raised the specter that E.U. leaders would not reach agreement on an aid plan at a summit next week, causing the already hard-hit euro to shed another 1 percent against the dollar on Thursday.
The Greek crisis is also bringing other major divisions to the surface. This week, a fresh spat erupted between Germany and France — the region’s two biggest powers — over Germany’s massive trade surplus with the rest of the European Union, a spat that analysts say must be resolved for the long-term stability of the euro. French Finance Minister Christine Lagarde suggested on Monday that German consumers should open their wallets and buy more of what the rest of Europe sells.
German Economy Minister Rainer Bruederle promptly fired back: “For countries which in the past have lived off entitlements and neglected their competitiveness to point their finger at others is politically . . . understandable but still unfair,” he told the Frankfurter Allgemeine newspaper.
Not only is admission to the club of nations that use the euro expected to be far tougher for countries, such as Iceland, that want in, but the likelihood that some members might leave — by choice or force — has never been greater.
Adoption of the euro fostered growth and initially buffered nations such as Spain, Greece and Portugal from the financial crisis. But leading economists say the inability of those countries to devalue their currencies now and become more competitive is a key factor in their prolonged economic downturns, potentially relegating them to years of high unemployment, stagnant wages and rising poverty. It will test their will, analysts say, to remain in the euro zone.
At the same time, Germany is seeking a way to eject nations from the euro club if they cannot abide by strict codes on public finances.
Skepticism over a more integrated Europe, meanwhile, is growing. In Britain, for example, which has proudly kept its own currency, the pound, politicians have used the Greek crisis as evidence of why their country should have nothing to do with the euro.
Cross-channel frictions are increasing, with a French-led push to impose new restrictions on hedge funds in the City of London seen as a direct assault on Britain’s massive financial services industry. Britain’s Conservative Party — the front-runner in upcoming elections — has vowed to hold national referendums on any measure that would grant the European Union new powers.
Europe’s squabbles are not only economic. A few months ago, the European Union ratified the Lisbon Treaty, a document meant to deepen regional unity in part by creating a new secretary of state to represent the union overseas. But the process of reinventing the alliance’s 5,000-member diplomatic corps has become paralyzed by infighting, with fierce debates erupting over the selection of high-ranking diplomats to represent European interests overseas.
The region’s leaders have played down recent divisions. Some say the fighting in Brussels touched off by the arrival of the region’s new secretary of state, Catherine Ashton, and the new European Council president, Herman Van Rompuy, is no different from the turf wars in Washington during changes of presidential administrations.
“There is a still an extraordinary level of cooperation between the U.S. and the E.U.,” said a senior U.S. official involved in European policy. But, he added, “clearly the E.U. and its institutions are going through a period of transition, and we have no choice but to be patient.”