EUROPE: Union must confront some basic problems to limit Greek fallout in eurozone

PARIS - After years of ducking and diving, the European Union is having to confront problems of poor leadership and weak institutions as it struggles to save eurozone members from a speculators' feeding frenzy.

The EU rescue squad has teamed up with the bailiffs from the International Monetary Fund to shore up Greece, gasping under a mountain of debt and unable to borrow more.

When the Greek crisis brewed late last year, many European capitals were smug. Newly elected Prime Minister George Papandreou revealed a truth most economists had privately suspected ever since Greece joined the single EU currency in January 2001.

In essence, the country had been borrowing money like a shopaholic with a fistful of credit cards. It had stuffed the bills in drawers and shoeboxes, fearful of seeing the red line of ever-growing, money-sucking zeros.

For a while, northern Europe gloated at the woes of this archetypal "Club Med" country, facing the price of laxness, laziness and corruption.

Deepening anxiety then followed: What if Greece failed to pay its debts? Default would cripple the prestige of the euro, the EU's greatest venture.

The contagion could also spread to Portugal, Ireland, Italy and Spain - the other members of the "PIIGS" group of struggling, heavily indebted economies.

EU leaders danced around as a familiar slow song, "Crisis? What crisis?", played in the background. They then agreed, humiliatingly, to let the IMF take part in a joint bailout worth €45 billion ($82.9 billion).

The outlook brightened for Greece as the deadline ticked to May 19, when €9 billion in debt fall due. The skies darkened again on Wednesday after its rating was slashed to junk status, a sure sign of agency suspicions that other problems lurk.

Eyes then turned to Germany, the EU's paymaster. The European Commission, the European Central Bank (ECB), the IMF and France all courted Chancellor Angela Merkel, wooing her signature on the bailout.

But Merkel, whose seven-month-old coalition faces an important regional election on May 9, had to walk a tightrope between solidarity with Greece and unpopularity at home. Germans have had to swallow many austerity measures over the past five years, including labour and pensions reforms. Using hard-earned German savings to refloat a nation of perceived bludgers and 55-year-old retirees was not a vote-catcher.

As the poker game unfolded, rating agencies cut the creditworthiness of Portugal and Spain, causing stock markets and the euro to tumble.

In the search to explain the EU's paralysis, chaos and foot-dragging, Hans Martens, chief executive of the European Policy Centre think-tank, blames lack of vision at top level.

Pan-European issues are being sidelined in favour of national problems, notes Martens. "At the moment, the political tide is going towards nationalism, which is affecting mainstream parties."

Others point the finger at puny institutions rather than personalities. The EU has always had to balance central authority and national sovereignty, an approach that has been particularly messy in the case of the euro.

Sixteen countries share the single currency, which is under the authority of the ECB, and are supposed to meet tight criteria for annual borrowing and total indebtedness as a condition of membership.

But there is no centralised control over national economies or punishment for lying or inaction, which is why the Greeks played fast and loose for so long.

Daniel Gros, of the Centre for European Policy Studies think-tank in Brussels, likens the eurozone to a "gentleman's club" whose members are all equal and discreetly understand they have to work towards a common goal, stability of the common currency. Greece, in this context, has turned out to be a bit of a rotter.

How to mend the flaw is the big question.

The European Commission is expected to table proposals for beefing up co-operation, including the creation of a European Monetary Fund. But it will be too late to agree such schemes under the EU's laborious decision-making machinery if Greece goes bust and the debt crisis spreads.

"[The euro's] institutions would probably be strengthened [by a Greek default], because it would have become clear that the framework is strong enough to withstand the failure of one of its members," says Gros.

"The spanner in the works would, of course, be contagion."