Image: Jim Jubak

Jim Jubak

This week's summit of European leaders is the last real chance to save the euro.

If this summit fails to produce a credible long-term plan for fiscal union, effective short-term policies to reduce interest rates in Italy and Spain and at least create the hope of increased economic growth, then I think the momentum toward dissolution of the common currency will be irresistible.

The result won't end the euro tomorrow or even necessarily this year. Given the costs of ending the euro, I expect any path toward the end of the currency to be long and messy. The euro won't go easily. But kicking and screaming, it will go -- unless the summit scheduled for Thursday and Friday reverses the current course.

And I'm not optimistic about that. In its current form -- after two years of promises, halfway efforts and astonishing denial -- I think the euro is cooked. Stick a fork in it.

Politics vs. the euro

Why am I so pessimistic? In what has always been a political crisis, the euro has almost run out of political room. I think there's just enough space for one more try. But if this attempt at the European summit doesn't work, I think the euro is out of time. Politics from both ends of the crisis -- the weak economies of the periphery and the strong economies of the center -- will soon have built enough momentum that this crisis will be able to move in only one direction, and that is toward the end of the euro.

The politics have taken a decided turn for the worse in countries such as Greece and Spain, which are at the heart of the eurozone financial crisis.

At this week's summit, Greece will ask for more time to meet the terms of its bailout deal. According to a draft proposal, the newly elected coalition headed by the New Democracy Party will ask for a two-year extension; an end to plans to cut 150,000 government jobs; reductions in required sales taxes on cafés, bars and restaurants; and an increase in the income threshold that triggers higher taxes.

Think about the significance of the Greek request for the other countries facing austerity requirements. If Greece gets a break, why shouldn't Portugal or Ireland? Any concessions to Greece will be hard to deny those two countries that have, by objective measures, tried harder to meet the terms of their bailout bargains.

But we should also think about the effect on the euro crisis if European leaders don't offer any carrot to go with the stick. The "austerity countries" are headed toward a series of political crises on the Greek model, because voters can't see any light at the end of the tunnel in a tolerable time frame. Even the good stories aren't likely to raise anyone's spirits. On June 19, the Irish government said that it will easily reach its budget target for 2012. Unfortunately, that will leave Ireland looking at many more years more of austerity before it can return to financing its borrowings in the financial markets. The 2012 budget target is, after all, a deficit of 8.6% of gross domestic product.

And, of course, that 8.6%-of-GDP budget deficit isn't the end of austerity; it's merely a signpost on the road of pain.

The big danger that looms is that the governments of Spain and Italy will lose so much political support that they won't be able to implement promised austerity and necessary economic reforms. The government of Mario Monti in Italy, indeed, seems headed in that direction -- which is why, in my opinion, Monti has recently become so vocal about the need for the eurozone to implement a bigger program aimed at increasing economic growth.

The hard-pressed governments in the austerity group need to show something or else they will be forced from power. And any likely replacement governments will be weaker -- and therefore less able to deliver on austerity and reform promises -- and will be likely to have won power on the basis of promises to negotiate a better deal.

But this is only half of the deterioration in the politics of the eurozone debt crisis.

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