Growing discord in Europe amid debt crisis

LONDON — After Greece recklessly spent its way into a debt crisis, potentially leaving German taxpayers to help pay for a bailout, lawmakers in Berlin offered a suggestion to their profligate neighbor to the south: If you want to raise cash, why not sell off a few islands?

That idea came a few days after the Greeks, furious over earlier German criticism of their spending habits, suggested the Germans could solve the problem by making reparations for gold stolen during the Nazi invasion. "They took away the Greek money and they never gave it back," Deputy Prime Minister Theodoros Pangalos said. "This is an issue that has to be faced sometime in the future."

The exchanges in recent weeks illustrate growing discord within the European Union (EU), a region confronting a mounting array of economic and diplomatic problems that are putting the 27-nation alliance through its toughest test in years.

In recent weeks, bitter disputes have broken out in Brussels over the naming of high-level diplomats overseas, while EU nations have been unable to reach a key agreement on how — or whether — to save Greece and prop up the hard-hit euro.

The frictions in Europe could further pressure global currency and bond markets, hamper expansion of the euro and derail attempts to boost the region's clout on the world stage.

They are also threatening to complicate efforts by the United States to work with the Europeans to solve long-standing problems, such as a massive gap in NATO financing, and newer ones, such as the push to establish global norms for financial regulation in the aftermath of the Great Recession.

"The creation and enlargement of the EU was one of Europe's biggest achievements, but now its inability to speak as one, and its failure to agree on how to tackle its underlying economic and social challenges, is undermining Europe's standing and potentially leading it into a period of decline," said Simon Tilford, chief economist at the Center for European Reform, a London think tank.

After weeks of negotiations, these countries remain at odds over how to handle the single biggest issue confronting the region: the debt woes in Greece that have sparked the worst crisis in the 11-year history of the euro.

Germany, Europe's financial powerhouse, is reluctant to bail out a nation seen as running itself into the ground with reckless spending, a culture of tax evasion and a history of producing erroneous economic data.

Confronting mounting political pressure at home, Germany — expected to lead any bailout — last week surprised many of its neighbors by backtracking on its initial opposition to having the International Monetary Fund (IMF) step in to rescue Greece. Being forced to seek aid from the IMF has been seen as deeply embarrassing to eurozone nations, and it has been strongly opposed by France.

The about-face in Germany illustrated how deep domestic opposition is running there to aiding ailing partners in the euro and raised the possibility that EU leaders would not reach agreement on an aid plan at a summit this week, causing the hard-hit euro to shed another 1 percent against the dollar Thursday.

The Greek crisis is also bringing other major divisions to the surface. A fresh spat erupted between Germany and France — the region's two biggest powers — last week over Germany's massive trade surplus with the rest of the EU, a spat analysts say must be resolved for the long-term stability of the euro.

French Finance Minister Christine Lagarde suggested German consumers should open their wallets and buy more of what the rest of Europe sells.

Germany's Economy Minister Rainer Bruederle fired back: "For countries which in the past have lived off entitlements and neglected their competitiveness to point their finger at others is politically ... understandable, but still unfair," he told the Frankfurter Allgemeine newspaper.

Admission to the club of nations that uses the euro is expected to be far tougher for countries, such as Iceland, that want in, and the likelihood that some members might leave — by choice or force — has never been greater.

Adoption of the euro fostered growth and initially buffered nations such as Spain, Greece and Portugal from the financial crisis.

But leading economists say the inability of those countries to devalue their currencies now and become more competitive is a key factor in their prolonged economic downturns, potentially relegating them to years of high unemployment, stagnant wages and rising poverty. It will test their will, analysts say, to remain in the euro.

At the same time, Germany is seeking a way to eject nations from the euro club if they cannot abide by strict codes on public finances. In a speech Wednesday before the German parliament, Chancellor Angela Merkel said Europe needs to "make it possible, as a last resort, to exclude a country from the eurozone."

Skepticism over a more integrated Europe, meanwhile, is growing. In Britain, for example, which has kept its own currency, the pound, politicians have used the Greek crisis as evidence of why their country should have nothing to do with the euro.

Cross-channel frictions are increasing, with a French-led push to impose new restrictions on hedge funds in London seen as a direct assault on Britain's massive financial-services industry.

Britain's Conservative Party — the front-runner in upcoming elections — has vowed to hold national referendums on any measure that would grant the EU new powers.