The perception that European leaders lack the political will to tackle the continent's financial and economic problems has left markets on edge for weeks. Recession is spreading and government borrowing costs are on the rise across much of Europe, making it harder for heavily indebted countries to finance their deficits. The biggest fear is that if Greece cannot be saved, other larger economies — like Spain or Portugal — might face the same fate.
The eurozone countries "have to consider all kinds of events," Luxembourg Prime Minister Jean-Claude Juncker told reporters after a European Union summit, but insisted that "the working assumption" was that Greece would remain part of the euro. Leaders gathered in Brussels recognized that Greece had endured significant hardships and promised to release development funds aimed at spurring growth.
But the statement from Juncker, who also chairs meetings of eurozone finance ministers, was a frank admission that Greece could wind up abandoning the euro — especially after fringe political parties that are threatening to renege on commitments made to secure bailout loans saw their popularity surge in recent elections. No party has been able to form a government, and the country will vote again June 17.
Many analysts fear a Greek exit would cause investors to doubt the financial viability of other weak members that use the currency and create global financial panic. Others have said that Greece, already in its fifth year of recession, has no hope of recovery if it sticks to the spending cuts and tax hikes it agreed to in order to secure bailout loans.
"We want Greece to remain in the euro area," German Chancellor Angela Merkel said after the meeting. "We expect that they will stick to the commitments that they have entered into."
Political uncertainty in Greece is just one of the fires the Europe needs to put out. Leaders are also facing rising borrowing costs in Spain and Italy that could force them to seek bailouts and sluggish growth across the region exacerbated by budget cuts meant to reassure markets about high debt levels.
But the meeting was short on answers, even as leaders described a wide-ranging discussion that touched on ways to boost growth and ensure that the debt crisis, which has eaten away at Europe's economies and confidence in their currency for more than two years, never recurs.
Markets had expected the summit to disappoint and it did. Europe's stock markets had fallen heavily during trading on Wednesday and the euro hit a near two-year low against the dollar.
Asian stock markets struggled to make headway early Thursday as the lack of a breakthrough in Europe unnerved traders. Japan's benchmark Nikkei 225 was marginally down at 8,550.62 while Hong Kong's Hang Seng Index fell 0.2 per cent to 18,749.19.
Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong, said Thursday: "Europe is not doing enough, and the market may not wait for them."
One of the biggest questions facing Europe is whether it's time to cut Greece some slack. Some European countries seemed ready to ease the pressure, and international organizations have called for the pace of austerity measures to be slowed in some struggling countries.
But the Thursday's summit of 27 European Union leaders ended with no apparent concessions. A final statement said Greece had to respect its commitments and trumpeted the money the Eurozone and the International Monetary Fund had loaned Greece as a sign of their "solidarity." It did say that funds for economic development would be sent to Greece — though it's unclear how much of an immediate impact on growth they would have.
Juncker insisted early Thursday that he had not asked the euro nations to prepare national contingency plans for a possible chaotic departure of Greece from the currency.
French President Francois Hollande said that to evoke the even the possibility was dangerous — and would send a signal to the markets that the eurozone wasn't standing behind Greece.
The debate reflects the fine line European leaders must walk between pressuring Greece to stick to a program of spending cuts and tax hikes that have exacerbated its economic slowdown and trying to ensure its presence in the eurozone.
Greece is now in its fifth year of recession, and many argue the country cannot hope for a recovery if it sticks to the bailout deal. The minor parties that fared well in recent elections have said the country needs a break, and even some international organizations have begun to call for easing austerity measures in some struggling countries.
Slow growth and uncertainty over Greece is making things worse for other struggling eurozone countries, like Spain, whose borrowing rates are high — and rising — because of fears that its government finances might be overwhelmed by the costs of rescuing its ailing banking sector.
In a meeting early Wednesday in Paris with Hollande, Spanish Prime Minister Mariano Rajoy warned that his country couldn't continue much longer with its current high borrowing rates. High borrowing rates are at the heart of Europe's crisis and are what caused Greece, Ireland and Portugal to seek bailouts.
"Europe has to come up with an answer," Rajoy said. "It is a must, because we cannot go on like this for a long time, with large differences when it comes to financing ourselves."
Rajoy suggested the European Central Bank resume some of its emergency measures, such as buying the bonds of weak countries, which has the impact of lowering countries' borrowing rates. The ECB has suspended the purchases because, as an independent body, it does not want to be seen supporting governments directly. Instead, it has given European banks massive amounts of cheap loans to bolster confidence in the financial system and allow banks to buy up their country's debt.
Leaders on Thursday also discussed ways to buoy growth, like unleashing unused EU development funds that will go to Greece and others, increasing the financing of the European Investment Bank, which could then give loans to companies, and issuing "project bonds," debt that would be invested in large infrastructure projects.
They also addressed the contentious issue of whether the countries that use the euro should spread the risk and borrow money jointly — issuing so-called "eurobonds." This would mean every country could borrow funds at the same rate, substantially lowering the costs for the more indebted countries.
Hollande has pushed for them as an important way to ensure such a crisis never happens again, but Merkel has rejected them, fearing they would reduce the pressure on heavily indebted governments to heal their finances and force Germany to borrow at higher rates.
"I believe that they are not a contribution to foster growth in the eurozone because the very similar interest rates which we had over many years, have basically led to grave wrong developments," she said as she headed into Wednesday's meeting.
Don Melvin also contributed to this story.Suggest a correction