IMF says euro under ‘a shadow’

ROME — The International Monetary Fund said Tuesday that the euro, a currency born a decade ago out of the post-World War II urge to knit Western European nations more closely together, was under “a shadow” and hinted it might not survive the current battle over government debt.

With European leaders struggling to agree how to divide the costs of another Greek rescue program, the IMF said there was “no consistent road map ahead, leaving both orderly and disorderly outcomes on the table. . . . The reaction by national authorities and economic agents has been one of retrenchment, threatening to turn back the clock on economic and financial integration, the very foundation of [the Economic and Monetary Union],” or EM

Nearly two years after a crisis that began with the disclosure of Greece’s inordinate levels of public debt, and with three euro-zone governments now under IMF programs, the comments in a report released Tuesday mark the agency’s most explicit statement to date that the 17-nation currency union may itself be in jeopardy.

European leaders are set to meet in Brussels on Thursday, amid renewed doubt about their ability to craft a durable fix for the euro — a summit the London-based Capital Economics consulting firm has dubbed the euro zone’s “last chance saloon.”

Leaders have ruled out a breakup of the euro zone as unthinkable. Such a move would end ambitions for a European currency to challenge the dollar as a world reserve and, depending on which countries stay in or leave the currency union, possibly force a major reordering of world finances.

But a breakup has nevertheless been a staple part of the discussion since Greece’s problems became acute in the fall of 2009. Some analysts see the outcome as inevitable in a region where economic performance is diverging: Either stronger economies like Germany will leave to protect themselves from paying for a succession of bailouts, or weaker ones will want to regain control of their own currency and monetary policy.

The inability of leaders to agree on a course of action has only hardened those views. They approved hundreds of billions last year for a bailout fund, ensuring that Greece, Ireland and Portugal could keep paying their bills.

But it was not considered adequate to the scale of Europe’s problems — weak banks, even weaker public finances, tangled governance and lagging growth, problems that have as much to do with economic structure and culture as with the availability of cash.

A breakup would be costly. In a study presented to the IMF, ING chief economist Mark Cliffe estimated that Greece’s economic ouput might fall as much as 10 percent if it pulled out of the currency union. Output throughout the region would also fall sharply.

But the risk, with each week of unresolved crisis, seems more concrete. The IMF has cited the euro zone’s problems as perhaps the chief risk to the global economic recovery. And analysts at Capital Economics said that “a very decisive response which could be applied not just to Greece but also to Spain and Italy” was essential. Otherwise, they said, the situation could become “irretrievable.”