Leaders of the world's largest economies gathering for the G-20 summit in Mexico are presenting a united front in promoting growth and job creation in order to repair a global economy laid low by the financial crisis in Europe.
However, among the 17-country group that uses the euro, there still appears to be little concrete agreement over how best to solve the problems of too much government debt holding back the region's recovery.
A narrow victory for the New Democracy party in elections over the weekend in Greece means that the country is more likely to stick to the harsh austerity terms of its 240 billion euro ($300 billion) bailout package and avoid a chaotic exit from the euro in the very near future — an event many fear would destabilize Europe and send shockwaves through the world.
However, news of the election result has not given Europe the breathing space it needed to sort out its problems.
Greece's economy is still in a very vulnerable state. The country is in a fifth straight year of recession and could easily deteriorate to point where a default and euro exit were inevitable. It is looking to renegotiate some of the harsh austerity terms and conditions of the 240 billion euro bailout it relies on to pay its way — something that other European countries such as Germany are opposed to.
However, a European Union official speaking in Brussels on Tuesday argued that the terms of Greece's bailout will be renegotiated because worsening economic conditions have made the old bailout agreement an "illusion."
The remarks highlight come amid a fierce debate over how much leniency Greece should be shown in meeting the targets it agreed to in order to secure its bailout loan.
The official, who spoke on condition of anonymity, citing policy, said that the goals of the agreement would not be changed: They remain to reduce Greece's debt to a level that is sustainable and to reform its economy to make it competitive. But how those goals are achieved — and over what time period — will be up for discussion.
Meanwhile heavily indebted Spain and Italy continue to see their borrowing costs rise, increasing pressure on their government finances and keeping alive fears that another big bailout might be needed. That would considerably strain the eurozone's ability to protect its members and keep the currency union together.
Finance ministers from the 17 countries that use the euro meet in Luxembourg on Thursday to discuss how best to solve the problem that threatens to place larger and larger demands on national budgets and further destabilize the region's economies. Europe is a substantial trading partner with the rest of the world. If it falls into a deep recession sparked by a default in Greece or a massive bailout for Spain, orders for goods made in the U.S. and China are going to start falling off.
At the moment, the debate centers on whether to take the dramatic step and push for greater banking, fiscal and political union in order to rescue the single currency. However, there are concerns, especially in Germany, that this is a long-term solution and can't be rushed into when the legal and political framework is not in place.
Here's a look at the latest developments in Europe:
The debate over whether Greece's bailout terms should be renegotiated is at the heart of Europe's crisis response. With economic conditions in Greece worsening by the day, the EU official speaking in Brussels said that said that renegotiating bailout terms — known as the "Memorandum of Understanding" — was only natural. He said it was part of the normal process of assessing the progress of any country that has received an international rescue.
And he noted that Greece's progress has clearly slowed as economic conditions have worsened. The economy is in its fifth year of recession, unemployment is at a record 22 percent, and many Greeks are struggling under the cost cuts and tax hikes imposed in exchange for the rescue.
"Anybody who would say we cannot renegotiate the MoU is delusional," he said. "If you were not to change the MoU, we would be signing off on an illusion."
But it's unclear if the renegotiation will be that routine. Germany — whose economy is the largest of the 17 countries that use the euro — has held a firm line in recent days, saying it wants Greece to continue to use the euro, but that it must hold up its end of the bargain.
Chancellor Angela Merkel's office said Monday that she assumed "that Greece will keep to its European commitments."
Germany's position is at least partially political: Its government is footing a large part of the bill for Greece's rescue, and it needs to be able to show its citizens that Greece is taking the steps necessary to ensure it can pay down its astronomical debt and never ask for another bailout.
Spain paid sharply higher interest rates in a short-term bill auction on Tuesday, highlighting growing investor concerns that the country might eventually a bailout itself. The Treasury raised 3.39 billion euros ($4.28 billion) in 12- and 18-month bills — more than its upper target of 3 billion euros — but the cost skyrocketed.
The auction — together with the fact that Spain's borrowing costs are at 7 percent — show that markets remained deeply skeptical about whether the country will be able to manage without a bailout like the ones received by Greece, Ireland and Portugal's. It also highlights doubts about Europe's chances to contain and end the crisis.
Spain is bigger than the three bailout countries combined, and would stretch the eurozone's 500 billion euro bailout fund if help were needed. Worries about Spain's ability to repay its debt grew last week when the country agreed to accept a eurozone loan of up to 100 billion euros to shore up its ailing banks, which are sitting on massive amounts of soured real estate investments.
Markets saw that move as an admission that Spain couldn't afford to raise the money to save the banks itself — and that has stoked fears that soon it won't be able to raise enough money to finance itself.
The debt crisis is also spilling over to the "real economy," as cost cuts eliminate government jobs and uncertainty kills off consumer confidence. French food and drink group Danone SA warned Tuesday that those economic woes would hit its profits this year. The Paris-based maker of Activia yogurt and Evian bottled water blamed the "swift deterioration" in sales across southern Europe for what it expects to be a half-percentage-point drop in its core operating margin this year. As recently as April Danone had forecast a 2012 profit margin stable with the 14.72 percent margin achieved in 2011.
Concerns about the heavily indebted economies in southern Europe also sent a closely-watched survey of German investor confidence plummeting in June. The ZEW institute reported that its monthly confidence index dropped by 27.7 points to a level of minus 16.9 points — its strongest decline since October 1998.
Germany's export-oriented economy ships a lot of its goods to countries where the crisis is weighing on the economy.
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