About this time last year, European leaders were well aware that all was not rosy in euroland. The economy was still on its knees throughout much of the region and mounting bank and sovereign debt woes cast a pall. But few could have predicted that two of the smaller members, Greece and Ireland, would become insolvent and need major bailouts or that a handful of other debt-ridden countries -- Portugal, Spain, Belgium and Austria -- would face the wrath of angry bond investors. Or that their cherished common currency was about to face the most tumultuous year in its history.
Now, as they prepare to gather for their annual meeting in Brussels on Thursday and Friday, the euro pols are only too aware that they are playing a high stakes game. If they fail to overhaul the euro zone's fiscal rules, set up a permanent crisis mechanism for resolving future Greeces, stabilize the financial sector and regain the confidence of international investors, they could be dooming their grand experiment to an extremely bitter and costly end.
So far, the reports coming out of various European capitals are mixed. Some say the summit will do little or nothing to address the key underlying problems that threaten to unravel the euro zone: the deepening fiscal divide and wide disparity in competitiveness between the wealthier and poorer members, as well as the deeply damaged financial sector that stands in the way of economic recovery. Others say that, at the least, the Europeans will agree on the crisis mechanism and that they will boost the capital base of the European Central Bank so it can undertake more of its own version of quantitative easing to rescuscitate the banks.
They had better work fast, because international investors seem to be out of patience.
Apart from Portugal and Spain, the latter of which the helpful folks at Moody's threatened with a downgrade on the eve of the summit, bond investors also now fret about two smaller, heavily indebted euro zone members, Austria and Belgium. Like Greece and Ireland, both depend heavily on external financing to meet their debt obligations.
Lacking large domestic financial sectors that they can pressure, à la Italy, to help them meet their capital requirements, the smaller countries are forced to rely on the international market. "In good times this is irrelevant," global intelligence firm Stratfor said in a report. "But when money gets tight and investors get scared, an investor stampede can crush a state's finances overnight."
And if technologically advanced Belgium or Austria "go the way of Greece, all bets will be off in Europe," Stratfor warns.
I'm betting that not even the let-em-rot faction in Germany would let things get that far. But that doesn't mean I'm in any rush to load up on euros, either.