The future of the euro may be determined in the coming weeks, as Greek voters decide whether to honor the country's international bailout and create a first test for Spain's newly built 100 billion-euro ($125 billion) banking firewall.

With Greece going to the polls in six days, the most recent surveys showed the main party opposing the terms of its bailout vying for first place. The government in Athens has “a few weeks” before exhausting its funds, making this is “a make-or-break period,” former Greek Prime Minister George Papandreou told Bloomberg Television in a June 8 interview.

The European debt crisis, now in its third year, reached a new milestone after Spain abandoned unilateral attempts to rescue its banks and became the fourth country in the 17-member currency union to seek an emergency bailout. The aid blueprint hammered out in an emergency conference call among euro finance chiefs two days ago is designed to create a line of defense if the Greek vote unleashes a new bout of market turmoil.

“We are approaching a moment of truth for the euro zone,” U.K. Chancellor of the Exchequer George Osborne wrote in the Sunday Telegraph yesterday. “After more than two years of uncertainty, instability and slow growth, decisions taken over the next few months could determine the economic future of the whole European continent for the next decade and beyond.”

Markets retreated from earlier highs after initially surging following the announcement of Spanish aid. Spanish 10-year yields rose 23 basis points to 6.4 percent as of 1:37 p.m. in Madrid after earlier falling to as low as 6.02 percent. Similar Italian securities rose to the highest in a week.

Polls show the June 17 election in Greece may be a close race. New Democracy, Greece's largest pro-bailout party, led anti-bailout Syriza by 22.7 percent to 22 percent, according to an ANT1 TV poll on June 1, the last date surveys were made public. An election on May 6 failed to produce a viable governing majority.

Syriza's leader, Alexis Tsipras, has pledged to keep Greece in the euro while scrapping bailout terms in order to end the hardship brought on by austerity. Meanwhile, pro-bailout proponents, such as New Democracy leader Antonis Samaras, have framed the contest as a decision on whether to leave the euro area. A departure would trigger hyperinflation, a bank run and widespread poverty, Samaras has said.

'Splintering of Europe'

The currency bloc, which at its setup in 1999 capped Europe's progression from war to prosperity, was declared irreversible by its founders. European Union treaties make no provision for a country to withdraw from the currency and the European Central Bank's legal department said in December 2009 that an expulsion “would be so challenging, conceptually, legally and practically, that its likelihood is close to zero.”

“This is the point where we have to make the decision,” Papandreou said in the interview, aired on Bloomberg's Inside Track today. “If we don't, I believe we have a small window of time — the next few months — and maybe if we have that — before we see a splintering of Europe. So this is a make-or-break period.”

After Spain became the latest bailout recipient, Italy moved toward the front line of the debt crisis with its more than 2 trillion euros in debt, placing pressure on Prime Minister Mario Monti's unelected government to avoid a market rout.

As the Greek election result is declared, leaders of the Group of 20 most industrialized nations will be preparing for discussions on the threat of the debt crisis at a summit meeting in Los Cabos, Mexico. The June 18-19 gathering will be part of a series of meetings on the euro crisis culminating in an EU meeting in Brussels at the end of the month, which might present a “master plan” drawn up by officials including EU President Herman Van Rompuy and ECB President Mario Draghi to hold the euro together.

President Barack Obama kept up his pressure on European leaders to take “decisive” action to bolster growth and tackle debt, telling reporters June 8 at the White House that the euro crisis is increasingly becoming a drag on the U.S. economy.

The euro area needs an overhaul, ECB Council member Jens Weidmann told Welt am Sonntag in an interview published yesterday.

'More Clarity'

“The currency union can't function sustainably the way it is at the moment,” Weidmann, who is also Bundesbank president, was cited by the Berlin-based paper as saying. “We need more clarity if we want to go down the route to a fiscal union, or if we want to keep relying on self-responsible national budget policies. In the latter case, the common liabilities need to be narrowly limited.”

The Spanish bailout, which was announced June 9 after a three-hour conference call of European finance ministers, may offer a salve to markets ahead of the Greek vote.

Spanish government bonds posted their first weekly gain in a month and the country's borrowing costs retreated last week amid optimism European leaders were preparing a bailout for Spanish banks.

“With the Spanish bailout at least we've bought more time and helped to ring-fence Greece,” Carsten Brzeski, a former European Commission economist who works for ING Groep NV in Brussels, said yesterday in an interview. “It gives much more breathing space to come up with this 'master plan'.”

That plan may involve a menu of proposals suggested by European leaders over the past weeks, including the possibility of a more integrated banking system, with euro-wide mechanisms such as deposit insurance leading to a so-called fiscal union.

Spanish Prime Minister Mariano Rajoy, who as recently as May 28 said he wouldn't seek a bailout, yesterday characterized the weekend deal as a credit line for banks and an endorsement of his policies. Rajoy was forced to back off his pledge that the government would re-capitalize the banking system on its own after foreign investors scaled back their holdings of Spanish debt.

“If we hadn't done what we've done in the past five months, the intervention of the Kingdom of Spain would have been on the table yesterday,” Rajoy told reporters in Madrid. He stuck to plans to visit the European soccer championship in Poland because the situation is “resolved.”

Spain is twice the size of the three economies that have sought bailout assistance so far — Greece, Ireland and Portugal. The funds will be channeled through the state-run FROB bank-rescue fund, and will add to Spain's debt, which was 68.5 percent of gross domestic product last year.

The bailout adds to the 386 billion euros in bailout funds from European governments and the International Monetary Fund have made since 2010.

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Coming Weeks May Set Euro's Fate

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