With the failure of the European Union to offer an explicit rescue package to the Greek government at last week’s summit, the question now is not whether the EU and the Euro will slip into crisis. The crisis has already begun. The question is how deep-going the crisis will be, how widely it will spread from the economic arena to the political, and how much of the rest of the world economy would be drawn in by a failure to solve it effectively.

Greek PM George Papandreou had been reasonably confident the EU would offer some form of backstop to his country’s troubled finances at the meeting, most likely in the form of a repayments guarantee by France and Germany, which would limit the skyrocketing costs for Greece on the bonds market.

But after a long meeting of key EU national heads, the two key players — Nicolas Sarkozy and Angela Merkel — could not agree on a strategy, with Merkel refusing to commit to any concrete action. Instead, the EU issued a statement that merely expressed a commitment to take “determined and co-ordinated action” to safeguard the Euro, and that it “supports the Greek government”.

Greek PM Papandreou hit out at the EU’s refusal to commit to anything concrete — save for a three-way supervision of the Greek economy by the Commission, the European Central Bank, and “drawing on the expertise of the IMF”. The EU, Papandreou said, was creating an atmosphere of imminent crisis by acting “timidly”.

The EU’s statement, short on concrete measures, failed to calm the currency markets, with the Euro falling to a nine-month low of $1.36. It came at the same time as it was announced Germany had practically no economic recovery to speak of over the last quarter, with growth of about 0.1 per cent.

Merkel’s refusal to consent to a more explicit commitment to a Greek rescue package comes as polls show that 67 per cent of Germans don’t want to pay for any assistance to Greece. Indeed, a clear majority want Greece to be thrown out of the Eurozone if they cannot get their finances in order on their own.

Much of the pressure is coming from Merkel’s new coalition, the FDP, just about the most free-market party in continental Europe. Much of the resistance from the FDP to a package comes not only from indignation that Greece has cooked the books for so many years — albeit with the EU turning a blind eye — but also with fears that such a move would legitimately bail out Portugal and Spain.

Spain is the real worry, even though its public debt — 70 per cent — is nowhere near Greece’s, at 130 per cent. But it has 20 per cent unemployment and the ‘Socialist’ Zapatero government is deeply unpopular. Thus, though it has an 11.4 per cent deficit (above the mandated Eurozone level of 3 per cent), the Spanish government is unlikely to do anything about it, thus sending the proverbial ‘wrong message’ to the markets.

But the plain fact is that, politically speaking, there is very little the Spanish government — or indeed any of the so-called PIGS (Portugal, Italy, Greece and Spain) — can do. The first major strike — Greece’s public service workers last week — may have been underwhelming, but it is quite possible this was somewhat muted by the limited sympathies public servants enjoy from the wider populace. Even the mildest moves towards spending and conditions cuts in Portugal, Spain and Italy is being met with concerted protest, with the Portuguese public service coming out in early February and a general strike planned in Italy for March 12.

Were the basket case economies of Europe sprinkled amongst the merely sluggish ones, it is possible the attitude of the latter would not be so censorious. But of course they are not, and the north-south split shadows a fundamental European historical divide. Grounded in the Reformation, and the transformation of northern Europe by protestant individualism, that development rapidly separated their economic fortunes and effectively turned France and Germany (and the low countries) into the European economic centre, and the Mediterranean into a long-term underdeveloped periphery.

When Portugal, Spain and Greece managed to shuck off their dictatorships, it was done so overwhelmingly by the organised working class. Unable to politically achieve full socialism, they settled instead for benefits, pensions and public service conditions that the economies — whose expansion remained limited due to low trust in their currencies — could not sustain.

On paper, the Euro was meant to be a solution to this. The currency’s stability would be guaranteed by the size of the Eurozone, anchored by the centre, with fiscal discipline imposed on the south by the 3 per cent deficit limit, and hard-hit local industries compensated by stabilisation funds. In reality, the 3 per cent deficit limit has been run like the Dublin branch of AA, with even purportedly proper Germany running a 5.5 per cent deficit to cover the recent unpleasantness. Greece, it is widely believed, never met the Maastricht criteria for Euro entry anyway, and was simply ‘limbo-danced’ under the bar by collusion between the Greek government and Eurostat, as its failure to make the criteria was effectively stalling the Eurozone process (which now includes 16 EU nations).

The separation of fiscal policy — which remained with nation-state governments — and monetary policy coming out of the European Central Bank was always going to be a disaster. People said it at the time and throughout the period, but the political pressure to create a Eurozone and continue the European project was so great as to override it. The move was also based on a fair degree of Greenspan-esque delusion that the cheap capital flowing into the south would of itself make the south competitive with the north. For a variety of structural and cultural reasons this hasn’t happened, and one of the results of Euro-isation has been to turn the Mediterranean into the world’s largest bubble-bath. The most ludicrous example of this was Spain’s massive property inflation, with Greece’s consumer spending spree not so far behind.

Though the European crisis is being presented as a morality tale of profligate governments versus the responsible market, much of it was conducted by the same methods as the GFC and with the same players — Goldman Sachs, for example, assisted the Greek government with a series of swaps that means the country’s airport taxes and lottery fees have been traded away for years to come.

The upshot is the relationship between the centre and the periphery has been reversed — the currency stability of France and Germany are now attached to the tremulous future of one of the smallest economies in the Eurozone. Though many in the UK and elsewhere are taking some schadenfreude from this, it may be short-lived as major banks have some heavy positions in the PIGS economies — UK banks are exposed to the tune of £240 billion. The process has turned the European economy into an amplifier of instability.

Which leaves the economic solution in the political arena, right across the continent. And that never goes wrong, right?

Additional research by Kiki Betts-Dean.