By Paul Taylor
Gallows humor was rife among the grandees of European integration at the annual conference of the Friends of Europe think-tank on "the state of the union" last week.
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"Hopefully next year we won't be talking about Greek debt," Etienne Davignon, 79, a Belgian former European Commissioner and patriarch of the European project, joked in his closing remarks.
"Either it will have gone or we will have gone."
The opening session was billed as: "The EU's three ages: rise, decline and fall?"
The question mark was the only concession to hope.
Weary cynicism surrounds next Sunday's (October 23) summit of the 27 EU leaders, their sixth attempt this year to draw a line under the euro zone crisis that has led to bailouts of Greece, Ireland and Portugal and is now singeing Italy and Spain.
They trumpeted a "comprehensive response" back in March, but, due mainly to German caution, adopted a catalog of half-measures described by British Prime Minister David Cameron last week as "a bit too little, a bit too late".
In July, with bond market contagion spreading for the first time to Italy, the euro zone's third biggest economy, leaders of the 17-nation single currency area agreed on a second bailout for Greece involving "voluntary" writedowns for private bondholders and more powers for their EFSF rescue fund.
Traders quickly spotted that the accord would take months to implement and might be derailed in any of the 17 national parliaments that had to approve it, or by Greece's failure to achieve its fiscal targets. Confidence evaporated.
Spanish and Italian borrowing costs were driven so high that the European Central Bank had to intervene in emergency in August to buy those countries' bonds and force yields down.
After weeks of bruising debate, first in the German then in the Slovak parliament, and haggling with Finland over its demand for collateral on Greek loans, the beefed-up 440-billion-euro European Financial Stability Facility is finally ready to act.
But the goalposts have moved in the meantime. The situation has deteriorated and more radical action is now required.
Greece has strayed off course again and doubts about whether it will ever be able to repay its debts have hardened as the country has slumped deeper into recession and public resistance to austerity measures has mounted.
Germany and its north European allies are demanding that private bondholders be made to contribute more toward a second rescue for Greece, but still on a "voluntary" basis with no losses for taxpayers or the European Central Bank.
The talk now is of building a firewall around Greece and convincing investors that other euro zone sovereigns are safe, without another ghastly round of ratifications in member states.
The key elements in the latest "comprehensive strategy" are: reducing Greece's debt and giving it longer to recover; bolstering European banks' ability to absorb losses; leveraging the rescue fund to prevent contagion to larger economies; and launching steps toward closer euro zone fiscal integration.
Yet there is scope for each of these elements to fall short, or be overtaken by events, especially with the economic growth outlook darkening as austerity measures cripple demand.
Greek debt relief may be too small to avoid a hard default. Banks may struggle to raise capital and governments fearful for their own credit ratings may equivocate about what to do if they can't raise it on the markets.
Policymakers hope to stabilize the euro zone bond market by using the EFSF to offer partial loss insurance to investors buying new Spanish or Italian bonds.
This may not be enough to restore confidence if Italy's chaotic politics, compounded by the economic slowdown, thwart austerity plans. Markets are bound to test Europe's defences.
Further credit ratings downgrades could exacerbate the crisis. If France's AAA rating were pulled into doubt due to the capital needs of its banks, heavily exposed to peripheral euro zone debt, then the entire rescue strategy could falter.
With so many "ifs", the chances of this "comprehensive strategy" being the one that does the trick are anything but certain.
Pressure for decisive action from other major economies, which dominated last weekend's G20 finance chiefs' meeting in Paris, may improve the Europeans' chance of success.
The world's treasuries and central banks are so alarmed at the risk of a financial meltdown that they may be ready to pile in to support even a shaky European plan.
European policymakers still reject the nuclear option of a mandatory restructuring of Greek debt, which would trigger a "credit event" with the payment of default insurance and send a shockwave through the financial sector.
Instead, private bondholders face a bigger "voluntary" writedown of up to 50 percent while euro zone governments and the ECB are shielded from losses on Greek debt to avoid a public backlash that would make further rescue measures impossible.
It is easier for European politicians to support banks that are unable to raise private capital than it would be to admit they had poured taxpayers' money down a Greek hole.
Radical solutions such as using the ECB as Europe's lender of last resort or issuing joint euro zone bonds, are politically taboo in Germany.
Barring such game-changers, expect the euro zone debt crisis to rumble on and on, if it doesn't explode.
(Writing by Paul Taylor, editing by Mike Peacock)