By Patrick Donahue

European finance chiefs will seek to win back crisis-management momentum to navigate the currency area through emerging political pitfalls after markets signaled last week that the three-year crisis is far from over.

Ministers from the 17-member euro area meet in Brussels today to discuss aid to Cyprus and Greece as a tightening election contest in Italy and a political scandal in Spain disrupt market calm. Group of 20 finance chiefs and central bankers will gather in Moscow Feb. 15-16.

“We don’t know yet how we’re going to get out of the crisis,” Wolfgang Franz, the chairman of Chancellor Angela Merkel’s council of economic advisers, told Welt am Sonntag. “If the crisis is a marathon, we’ve got two-thirds of the course behind us. But the last third is always the hardest.”

European Union leaders who last week reached a seven-year budget agreement that for the first time cuts spending will look ahead to Italy’s Feb. 24-25 elections as polls show the vote might fail to deliver a governing majority. European stocks last week posted a second weekly drop as investor concern about policy roadblocks in Italy and Spain revived.

Yields on Italian 10-year bonds climbed to a year-to-date high of more than 4.5 percent as former Premier Silvio Berlusconi narrowed the lead of front-runner Pier Luigi Bersani. The euro’s climb was broken last week, falling 2 percent against the U.S. dollar to $1.3365, after European Central Bank President Mario Draghi voiced concern that euro strength could hamper the recovery.

Draghi’s statement came after the euro climbed as high as $1.37 on Feb. 1, injecting a new dimension into efforts to overcome the crisis. The ECB president joined Merkel’s government in countering calls by French President Francois Hollande to steer the value of the euro lower to boost growth.

“The exchange rate is not a policy target, but it is important for growth and price stability,” Draghi said on Feb. 7. “We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability.”

While Draghi reiterated that growth in the euro area should gain steam later this year, a rise in the euro could dampen a recovery by weighing on exports and cooling inflation.

Merkel adviser Franz, who is president of the ZEW institute, cited the Italian election, the Cypriot bailout, Spanish Prime Minister Mariano Rajoy’s scandal and continuing programs in Greece and Portugal as possible crisis hurdles.

“That the worst of the euro crisis behind us, I’d rather not yet weigh in on that,” Franz told Welt in the interview.

Italians may have to return to the polls if the election later this month results in a so-called hung parliament, Stefano Fassina, who oversees economic policy for front-runner Bersani, said in a Twitter statement last week.

A media blitz by Berlusconi has gained traction and shrunk Bersani’s once-sizable lead. The final polls of the campaign showed Feb. 8 that while Bersani still leads, he may need to forge an alliance with outgoing Prime Minister Mario Monti.

Bersani could win an outright majority in the Chamber of Deputies, with an average six-point lead over Berlusconi’s bloc, five polls from Feb. 8 show. Still, he may fall short of a Senate majority, which could force him to team up with Monti and risk alienating allies in his center-left coalition.

Next week’s presidential election in Cyprus could also influence the crisis schedule. The country has been in talks to become the fifth recipient of rescue aid, though euro area leaders are awaiting a new leadership that may be more amenable to demands such as privatizing state assets.

Nicos Anastasiades, who leads the main opposition DISY party, is poised to win the Feb. 17 election, according to three final polls. A runoff in Cyprus will be held Feb. 24 if none of the candidates next week wins an outright majority.

The Cyprus bailout is fraught because any aid package could approach the size of the island nation’s 18 billion-euro ($24 billion) economy even as accusations are made about tax fraud and deposits by Russian billionaires.

ECB Executive Board Member Joerg Asmussen warned that a failure to agree on a package for Cyprus would throw the progress achieved by policy makers into danger. He told Handelsblatt he expects a decision by the end of March.

“If we allow a system-relevant country to fall, we risk the progress” achieved last year, Handelsblatt cited him as saying. Cyprus will default without a rescue, he said.

In Spain, Rajoy’s government sought to rebut corruption allegations that spurred a rise in the country’s borrowing costs. The 10-year bond yield, which dropped below 5 percent a month ago, rose above 5.5 percent Feb. 7.

Last week in Berlin, Rajoy repeated his denial of allegations in El Pais newspaper that he or members of his People’s Party received illegal payments. Merkel offered her backing to Rajoy at a Feb. 4 press conference, lauding the premier for his efforts to repair the Spanish economy.

Today’s euro group meeting, which will be attended by International Monetary Fund Managing Director Christine Lagarde, will be followed by a tribute to Luxembourg Premier Jean-Claude Juncker, who stepped down as euro group chairman this year. Dutch Finance Minister Jeroen Dijsselbloem succeeded him.

[Bloomberg]