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.
Anxieties about the health of the euro, which have spread from Greece to Portugal, Spain and Italy, are 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.
The ratio of Greece’s public debt to its 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.
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.
It does not help matters that the EU 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, questions remain about whether the union or its leading member states will take charge before further damage is done.
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 economic growth and productivity improvements.
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.
With the European Union undergoing a triple political transition, it is not clear where 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.”