But extended debate may fast become a luxury as economic activity in Spain slows, the cost of a banking-sector rescue rises and the euro zone’s uncertain future scares off investors.
The release Tuesday of discouraging figures on Spain’s retail sales and exports further contributed to the sense of the country’s fragility. And the resignation of Spain’s central bank head, a month ahead of schedule, highlighted the struggle to fix long-standing problems in the country’s financial sector.
Underscoring the urgency of the situation, U.S. Treasury Undersecretary Lael Brainard arrived in Athens on Tuesday for a previously unannounced European trip that will include stops in Madrid, Frankfurt, Paris and Berlin. The purpose, according to a release, was to “meet with senior government officials in each country to discuss their plans for achieving economic stability and growth in Europe.”
U.S. officials have been having similar conversations with European officials for more than two years, citing slow growth, high public debt and the potential for a major financial crash in the euro zone as a chief risk to the U.S. and global economies.
But the discussions have become even more pressing with mounting worries about Spain’s weakening condition and upcoming elections in Greece that could push that country toward an exit from the euro zone.
The euro zone has set up a range of programs in response to the crisis, providing hundreds of billions in low-interest bailout loans to Greece, Ireland and Portugal and establishing emergency funds to help others.
Yet those steps — which represent a once-unthinkable transfer of wealth from rich euro nations to struggling ones — have not extinguished the ultimate risk: that the currency union may crack apart.
The fallout from a Greek exit would be unpredictable, with investors likely to pull money from the entire 17-nation region and banks likely to further slow or shut down lending. Analysts put the potential cost at hundreds of billions of dollars in lost economic activity. Greece’s departure could also deal a fierce blow to overall confidence in the euro, with investors uncertain about whether other struggling countries would follow suit and drop the currency.
The impact could be felt most deeply in Spain. Bond investors already seem to be abandoning it. Bank and economic analysts cite a steady outflow of cash from the country this year, and the interest rates on Spanish government bonds have been rising to record levels, reflecting the increasing unwillingness of investors to lend it money.