European leaders are racing to hash out a grand bargain to save the euro and prevent the region’s 21 / 2-year debt crisis from going critical. To grasp the equally grand flaws of the currency union they are trying to fix, look no further than the plight of Flor Martinez, a feisty but fearful Spanish retiree.

Martinez, 67, is counting the days until July 13, the date when her life savings — now locked up in a certificate of deposit — is finally available for withdrawal from her now-wobbly Spanish bank. If her money were stashed, say, in Miami instead of Madrid, Martinez could rest assured: Even if the bank went bust, the Federal Deposit Insurance Corp. in Washington would step in to protect her cash.

But instead, Martinez, a former hotel clerk, lives in the euro zone — a partially integrated group of 17 nations from Germany to Greece, Finland to Spain that share a common currency. And when it comes to banking deposits, it is every nation for itself.

In times of crisis, European leaders are learning, that is a recipe for disaster. Taxpayers in rock-solid Germany, for instance, have yet to make the leap to putting their cash on the line to directly insure depositors in hard-hit Spain or Greece. That has robbed Martinez of the confidence she might otherwise have to keep her money in an ailing Spanish bank, given that the same government expected to insure her deposits — Spain — is currently facing questions about its own creditworthiness. The European Union and Spain appear close to reaching a bailout deal to shore up Spanish banks that could go a good way toward bolstering confidence, turning the tide of an outflow of deposits in recent weeks that has threatened an economy nearly the size of India’s.

But that would not solve the bigger question of whether, in times both better and worse, a euro deposited in any bank in the 17 nations of the euro zone — particularly its weaker economies — would always be insured by the union’s collective might. For Martinez, her sense of insecurity is such that she has firmly decided to withdraw her nest egg no matter what, stuffing her 20,000 euros “under my mattress.” There, she insisted, they would be “safer than in any bank in Spain.”

Her fears underscore what European leaders are now recognizing as but one of several fundamental flaws of the currency union that have only fully revealed themselves in a time of extreme crisis. It has left them scrambling to reach a landmark accord by the end of a two-day summit June 29, achieving something in weeks that their predecessors who designed the euro could not do in decades: force the fiercely independent European nations – some sharing centuries of animosity — to take a far bigger leap toward economic integration.

With this nation that once commanded the world’s mightiest empire now in the firing line of investors, Europe’s time to solve a crisis that has ebbed and flowed since late 2009 is running out. Spanish officials are calling on Europe to act.

“Europe needs to decide where it is going. It needs to say that the euro is an irreversible project and not just a game,” Spain’s Prime Minister Mariano Rajoy told the Senate in Madrid this week.

Short-term fix

The big fixes being considered — including joint bank deposit insurance but also a regional banking supervisor and a temporary pooling of bad debt in some of the region’s most overextended countries — are designed to offer long-term confidence in the future of the euro, putting to rest intense market speculation about the currency’s viability. But assuming leaders are able to forge an agreement – by no means certain given the suspicions and domestic interests that still divide Europe – most of the measures would likely take years to fully take shape.

That has left Spain, and Europe, desperately in need of a short-term fix to prevent a full-blown banking crisis that could not only jeopardize the euro but also unleash a fresh bout of global financial turmoil.

The problem here — a collapsed real estate bubble that has left Spanish banks saddled with billions of euros worth of bad loans — is similar to the one in the United States that exploded with the fall of Lehman Brothers in 2008. Yet in hindsight, experts savage both Spanish and European Union authorities for falling to take the kind of decisive action the Americans did that year, when Washington agreed to pump $700 billion into troubled banks while printing money and injecting stimulus into the moribund economy.

In contrast, a consensus led by fiscally conservative Germany, the economic powerhouse of the euro zone, has forced years of austerity on struggling economies like Spain, effectively making a bad problem worse. As the unemployment rate surged — almost one in four Spaniards are now out of work – home foreclosures and business bankruptcies soared. The percentage of bad loans in the Spanish financial system went from less than 1 percent in 2007 to a dangerous 8 percent today.

That has led Spain to a point that both it, and Europe, had hoped to avoid – an international bailout now being worked out behind the scenes designed to shore up Spanish banks. With speculation of an imminent deal building, a European official said Friday that finance officials would hold a conference call on Saturday to discuss Europe’s current situation. Spanish, German and E.U. officials all denied that the Spain was going to ask for a bailout on Saturday, although German Chancellor Angela Merkel said that any country is welcome to seek aid whenever it deems it necessary.

The International Monetary Fund estimated on Friday that Spanish banks need at least $50 billion in additional capital to weather a deep economic downturn. The amount is smaller than some private analysts have estimated. But the fund said a final tally of Spanish bank needs would depend on an ongoing audit and could be perhaps twice that amount. The IMF gave Spain’s banks a mixed review, saying major banks are “well managed and appear resilient to further shocks” but that “important vulnerabilities remain” among smaller institutions.

In the meantime, the political maneuvering and complex diplomacy of a deal has in recent weeks ignited a treacherous new phase of the debt crisis and sent Spanish borrowing rates touching euro-era highs.

“It is the drawn-out nature of the process that makes investors wonder about how Europe can work,” said Juan Rubio-Ramirez, a professor of economics at Duke University. “If there is a savings bank in Texas, there is no political issue when Washington saves it. But if there are problems with a bank in Spain, you’ve got a problem in Germany, where German voters question why their money is going to help foreigners.”

Yet some of the big fixes being contemplated could set Europe down a path toward a stronger euro.

A call for oversight

On a leafy street in northern Madrid, past the cafes selling wafer-thin slices of salty Spanish ham, Miguel Bernard is sure that at least one of the fixes being hashed out by European leaders would have made a huge difference here: a strong, Europe-wide banking regulator.

Bernard heads Manos Limpias (Clean Hands), a powerful citizen gadfly group that has launched a class-action lawsuit against Bankia, the banking giant that stunned Spain and the financial world last month by revealing the bad state of its balance sheets. To save it, Spain is planning its largest bank nationalization ever, an endeavor that will cost as much as $23 billion. Spain doesn’t have the cash, leading it down the road of a bailout, with experts predicting that it might ultimately need double or triple that amount to help other troubled banks.

Bankia, Bernard and other critics say, was a case study in weak regulatory oversight. Bankia was formerly made up of seven “cajas” – or savings and loans largely regulated by regional governments and often headed by influential former politicians. One such bank – Caja Castilla La Mancha – funded a $1.4 billion international airport built in 2008 in the province where it was based. Last April, the mother of Spain’s white elephants closed after failing to receive a single scheduled flight in the previous four months.

The largest savings and loan that was merged to form Bankia in 2010, Bernard’s group claims, lavished cash on a politically connected but troubled construction company even as Spain’s real estate market was going bust. He believes a tough, region-wide banking regulator — which the rest of Europe probably would see as a watchdog for German taxpayers’ cash — would have caught the bad loans earlier or instilled a culture that made them harder to make.

But it is often said that Europeans consider themselves of their village first, their country second and, if Europe is lucky, a citizen of the E.U. third. And giving up more of their local identities in the name of integration is likely to be a long and arduous process.

Just ask Martinez, the retiree whose certificate of deposit is with Bankia.

“I am afraid of the situation we’re in, but if Europe, and especially Germany, becomes too strong and interferes in our lives, that worries me, too,” she said. “Germany has its own interests, and I’m not sure that’s always going to be good for Spain.”

Special correspondent Pamela Rolfe in Madrid, correspondent Michael Birnbaum in Berlin and staff writer Howard Schneider in Washington contributed to this report.