The countries must deliver. In the end it is governments that are responsible for the euro area — it is not just the ECB.
LONDON — Eighteen months into a sovereign debt crisis — and after many futile efforts to resolve it — the endgame appears to be fast approaching for Europe.
While its leaders may well hold to the current path of offering piecemeal solutions, nervous investors are fleeing European countries and banks.
Two main options exist: Either the eurozone splits apart or it binds closer together.
Each of these paths — Greece, and possibly others, dropping the euro or the emergence of a deeper political union in which a federal Europe takes control of national budgets — would lead to serious political, legal and financial consequences.
But with financial panic now threatening to move from Italy and Spain to Belgium, France and even Germany, the eurozone's paymaster, the pressure upon Europe to arrive at a solution has reached its most intense point yet.
Even the British satirical weekly, Private Eye, has weighed in, proposing last week that the answer was for Europe itself to leave the European Union.
Underlying these scenarios however, from the absurd to the less so, has been Europe's persistent inability to rectify the central conundrum of its common currency project: how to get money from the few countries that have it, mainly Germany and the Netherlands, to the many that need it — Greece, Italy, Spain, Portugal, Ireland and perhaps even France.
In recent days, eurozone leaders have been pursuing a deal that would institute strict new budget rules while avoiding the need to rewrite existing treaties.
The consequences for continued inaction are dire. Uncertainty and austerity have killed the eurozone's growth prospects and analysts now expect the euro area's economy to shrink by 0.2 percent next year — a blow for the many U.S. companies that export there.
U.S. financial institutions are also at risk. According to the Institute of International Finance, U.S. financial institutions have $767 billion worth of exposure via bonds, credit derivatives and other guarantees to private and public sector borrowers in the eurozone's weakest economies.
And as the European Central Bank continues to hold back from printing money as its counterparts in the United States and Britain have done, investors now see a much higher likelihood of a broad market crash and a worldwide recession.
Such anxieties were on display last week when Vitor Constancio, the vice president of the ECB, gave a speech to investors in London.
It was billed as an address on the international monetary system, but, given the circumstances, there was little interest from investors in Constancio's views regarding fixed versus floating exchange rates and quite a lot in terms of what steps the ECB might take to address the crisis.
One somewhat frantic investment banker noted that beyond the Italians and the Spanish, even the Germans were having problems selling their bonds. What, he asked, was the European Central Bank going to do about it?
Constancio mentioned the bank's bond-buying program and making loans available to banks, but he was blunt in saying that unless countries like Greece and Italy followed treaty rules and reduced their budget deficits, there was not much he could do.
"The countries must deliver," said Constancio, a former governor of the Portuguese central bank. "In the end it is governments that are responsible for the euro area — it is not just the ECB."
But it is this eat-your-spinach policy approach that many analysts are now saying is making the situation worse as countries throughout the euro area — including even Germany, the region's economic locomotive — cut spending and raise taxes to meet budget deficit targets.
In a recent paper, Simon Tilford, an economist at the London-based Center for European Reform, points out that imposing more rules in place of a federal framework whereby the eurozone can commonly transfer or borrow money — as is the case in the United States — will end in disaster.
"The solution to the problem has become the problem itself," he said. "And investors see this: you can not just keep cutting spending in the teeth of a recession."
Bernard Connolly, a long and persistent critic of Europe, estimates that it would cost Germany, as the main surplus country in the euro area, about 7 percent of its gross domestic product per year to transfer sufficient funds to bail out the deficit countries, including France.
That amount, he has argued, would far surpass the huge reparations bill forced upon Germany by the victorious western powers after World War I, the final payment of which Germany made in 2010.
Analysts say it is Germany's unbending attitude that it not become responsible for debts of weaker economies that has so far stymied progress on the widely supported idea of a euro area able to issue its own bonds.
Lack of movement on a federal Europe has pushed investors to consider what would happen if a country like Greece exited the eurozone. Analysts predict dire consequences for the departing country, ranging from default to a collapse of its banking system.
A recent report by UBS estimates that in the first year, the citizens of the exiting nation would suffer a cost of as much as 11,000 euros per person on top of the austerity-induced pain they had already incurred.
Such a move might be legally impossible: there is no provision in any European treaty for a country to leave or be expelled from the eurozone — a conscious choice by the framers of the project.
But if a country made such a decision, it would have to leave the 27-member EU as well, thus entering a more profound state of exile.
A view is now taking hold among many European leaders that the ever-worsening crisis might result in Brussels being given direct control over the budgets of countries that continue to run excessive deficits — a proposal made recently by the euro's most passionate advocate, Jean-Claude Trichet, a former president of the ECB.
"The will to make this thing work is stronger than you might think," said Larry Hatheway, an economist at UBS and one of the authors of the report on the cost of one or more countries leaving the eurozone.
In this vein, several economists at Bruegel, a Brussels-based research institute, have come out with a plan for a euro area wide finance minister, elected by the European Parliament, who would have limited federal powers to raise revenue.
This is a radical measure, to be sure. Not only would they challenge the sovereignty of nations, but they would also require time and treaty changes.
With time in short supply, pressure is building on the ECB to defy German objections and buy more distressed government bonds, although there is little indication the bank has decided to do so.
Last week, Constancio actually appeared to boast about the bank's restraint thus far, explaining to harried investors that the ECB's bond-buying effort represented about 2 percent of euro-area GDP. That compares with an intervention of 11 percent of GDP by the Federal Reserve in the United States and 13 percent by the Bank of England.
"We are not financing the deficits of countries," he said.