Pedro Armestre/Agence France-Presse â Getty Images  Bankia, the troubled Spanish lender, has asked the government for billions of euros in state aid.  LONDON — As Spain’s economic crisis deepens and uncertainty swirls over Greece’s future in the euro zone, the guardians of the increasingly fragile European monetary union are near a moment of truth: can they muster the will and resources to keep the euro zone from breaking apart?  The question has grown more urgent since the release of data Friday showing a record-high rate of unemployment in the euro zone, poor job creation in the United States and a slowdown in manufacturing in China. Combined, those signals have fueled fears of a second worldwide recession.  On consecutive days last week, two of the most powerful figures in Europe — Mario Draghi, president of the European Central Bank, and Olli Rehn, the most senior economic official in Brussels — warned that the future of the euro zone was in doubt. In the words of Mr. Rehn, the union might well disintegrate unless policy makers take steps to bind the 17 European Union nations that use the euro closer together.  Coming as they did from two men at the very soul of the European project, the cautions were a stark reminder of just how much the Spanish financial crisis had shaken the confidence of the European brain trust, to say nothing of investors from New York to Beijing.  Over the weekend, leaders of two of Europe’s most vulnerable countries rallied to the cry of more unification. Mario Monti of Italy called for using euro bonds to create a quicker path to common debt for Europe. And Mariano Rajoy of Spain floated the idea of a common fiscal authority in Europe to synchronize budgets and manage debts.  German policy makers have said that kind of deeper budget integration and supervision is a prerequisite before any sort of euro bonds could be issued. Chancellor Angela Merkel of Germany called last week for a plan to give more power and competencies to the European Commission in Brussels, but through treaty changes as part of a five- or even 10-year process.  Ms. Merkel is trying to remake the Continent’s economy after Germany’s own, with less-regulated labor markets and higher retirement ages at the top of the list. She would like to see strict deficit controls enforced across the euro zone by the European Court of Justice, as part of the broader ceding of national power at the heart of her vision for more centralization.  But as global economic gloom deepens, there is a risk that such lofty talk could be too little, too late for investors, especially with Spain seeming on the brink of a banking collapse.  Spain is sitting on an estimated 220 billion euros, or about $273 billion, in failed real estate loans alone — a number that surpasses the entire output of the Greek economy. And with the fourth-largest euro zone economy — behind Germany, France and Italy — there is little doubt that Spain is too big to fail. Or, more precisely, to be allowed to fail.  Indeed, many investors and money managers now see Europe’s challenge as not how to bail out sickly Spanish banks, but how to keep Spain and even Italy afloat and in the euro zone as money keeps leaving these countries, forcing up interest rates and leaving sagging local banks as the only buyers of government debt.  “The euro zone is disintegrating and this has started to feed into institutional capital flight out of the euro zone,” said Jens Nordvig, a senior bond and currency specialist at Nomura in New York. “The crisis has reached a new level. Policy makers are realizing that there are only two options. Further integration or a breakup.”  Arriving at an action plan and amassing the cash to back it up will be no easy matter, though. Analysts estimate that a comprehensive rescue for Spain would cost 350 billion euros, and one for Italy even more. Sums that large would quickly overwhelm the 500 billion euros available in the new European rescue fund, the European Stability Mechanism.  Integration, in the form of banking and fiscal unions, would take time, of course, although policy makers are pushing harder than ever on these fronts. As for short-term measures that countries like Spain are pushing for, namely to press Europe to provide money for its banks or buy its bonds in bulk, these steps would require sacrifices that Spain seems in no mood to make.  It is the nub of the euro zone’s existential quandary: how to get taxpayers in northern creditor countries like Germany to provide funds to countries like Greece and Spain that are unwilling to accept the loss of sovereign control over their banks and budgets that would be a consequence of such assistance.  Nicholas Kulish contributed reporting from Berlin.
The economic crisis in Europe is becoming an existential one for the monetary union, officials say, unless governments act to solidify the alliance.