Here's Where We Stand Right Now On The Europe Crisis

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Photo: NASA

Everyone’s waiting expectantly for the next big eurozone summit.Pressure is mounting on Italy, arguments are escalating between euro area and non-euro EU states, and everyone’s speculating on new plans to leverage the EFSF and recapitalize the banks.

But before you start freaking out about every big new rumour, here’s the latest on what’s happening and how likely all these whispers are to come to fruition.

UPDATE: The progress of a eurozone plan is up in the air right now, after news that a meeting of EU financial ministers on Wednesday was cancelled.

The Polish finance minister wrote in a note to Eurogroup President Jean-Claude Juncker that the Ecofin would not meet over doubts that the plan would be ready by tomorrow. But now CNBC’s Steve Liesman is reporting that the Ecofin meeting was not needed because EU leaders are nearing a solution. In fact, that meeting might never even been scheduled in the first place.

According to the UK, the big summit of EU leaders is indeed still on.

Haircuts on Greek bonds

Everyone -- even the ECB -- is now talking about much bigger haircuts on Greek bonds than the 21% agreed upon in July. In fact even France seems to be agreeing to more than double that.

The size of these write downs could cripple the banking sector, which has already suffered significant stress with the current writedowns (remember Dexia?).

On the other hand, bigger haircuts seem like the only way to make Greek debt sustainable.

Bank recapitalizations

The progress of a plan to recapitalize the banks was one of the biggest developments to come out of last Sunday's meeting of EU leaders (though we still haven't heard all the details).

Bad news is that the size of these recapitalizations will probably still be too small to calm markets, at just €100-110 billion ($139-153 billion).

Banks will face higher capital requirements under the newest round of stress tests. They will first have to seek capital on their own, then from their national banks, and only after they've exhausted both these measures will they be able to access EFSF funds.

This would probably bar fragile banks in core European countries like France from EFSF funds, placing more stress on the French government -- and thus France's credit rating.

Leveraging the EFSF--the pan-European bailout fund.

New reforms from Italy

Italy is quickly joining Greece as the focus of European angst.

Everyone's waiting for new reforms from PM Silvio Berlusconi and his government, but they're dithering over new austerity and growth programs. At the same time, Berlusconi's coalition looks increasingly fragile, making reforms harder to push through the legislature.

Even so, the prognosis is grim for Italy, with $2.2 trillion in public debt and growth grinding to a halt.

Escalating conflict between EU states with and without the euro

Intensifying arguments between EU states that use the euro and those which do not comprised some of the biggest news to come out of the EU summit over the weekend.

Of particular note was a choice statement by French President Nicolas Sarkozy, who told U.K. PM David Cameron, 'You have lost a good opportunity to shut up...We are sick of you criticising us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings.'

Even so, non-EU leaders are planning to gate crash the next big eurozone summit on Wednesday.

Changes to EU governance

Clearly, changes need to be made in the eurozone to better manage and prevent crisis and public spending problems.

Herman van Rompuy told reporters after the big summit Sunday that euro area leaders made a LOT of progress on this issue, but those details remain to be seen.

With everyone talking about treaty changes, however, it is unlikely that we'll see tangible changes to EU governance anytime soon. In addition to the opposition any changes would face from non-euro EU countries, approval of any treaty amendments would take time -- time that EU leaders don't seem to have right now.

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