BRUSSELS – The euro is under siege – and the next few days will be crucial. Financial markets are betting heavily that Greece’s crushing debt could drag down the entire eurozone, and that could force reluctant EU leaders into an embarrassing bailout. If EU leaders don’t take some kind of decisive action this week at their summit meeting, the euro could continue its slide – and Greece’s economic woes could spread to other countries in the 16-nation eurozone like Portugal, Spain or even farther to heavily indebted Italy and Belgium. European Union leaders will issue a statement on Greece after the meeting, officials said yesterday, but added the contents had not yet been discussed and would not say if it would lay out details of a bailout. «Thursday’s EU summit is the real litmus test,» said VTB Capital analyst Neil MacKinnon. «If it fails to come up with any debt restructuring package or a quasi-bailout, then the pressure on the euro will increase.» Investors have turned increasingly pessimistic on the outlook for the euro, so much so that speculative traders’ short positions, or bets against the single currency, have reached a record high, said MacKinnon. While some of those short trades, reported by the US Commodity Futures Trading Commission, will have been unwound – the euro was in fact up somewhat yesterday – the data suggest market sentiment is at a turning point. Yesterday, a new Commission – the EU government – was formally approved by the European Parliament, and now must immediately confront a gathering sense that the euro’s fundamental weakness – no common fiscal policy for its wildly diverse economies – has been exposed. A bailout would be a blow to monetary union by showing that the framework set up to support it was insufficient to ward off a crisis. With budgets in the hands of 16 separate governments, the euro relies on a set of rules limiting deficits to 3 percent of gross domestic product. Large deficits can undermine a currency. Continued market skepticism about government finances could mean Greece and other troubled countries will have to pay higher interest rates to borrow. That would intensify austerity measures – less spending and more taxes – that in turn will mean less money in many workers’ pockets, particularly in the public sector, as well as less stimulus for flagging growth. The European Union’s own government-backed lender said yesterday that its rules do not permit it to bail out Greece or any other European country that can’t pay its debts, narrowing leaders’ options. The euro is now trading near an eight-month low against the US dollar on worries about Greece. European stocks inched up yesterday, and the euro rose by three-quarters of a cent to $1.3725, on speculation that heads of state and government will have to announce something at tomorrow’s summit. The euro was as high as $1.51 in December. The bounce followed news that European Central Bank President Jean-Claude Trichet had left a banking conference in Australia to attend the summit, stoking expectations of some kind of backstop for Greece. Jittery markets are piling the pressure on EU nations to state clearly what they would do if a euro member is likely to default. Officials have not managed to calm these market worries with repeated assurances from both the EU and the Greek government that Greece can pull itself out of its debt crisis with a harsh austerity program of cuts to public spending that have already triggered strikes and protests. Greek Prime Minister George Papandreou held government talks yesterday on accelerating those cuts with reforms to pensions and wages – an effort to prove to markets that Greece can and will make long-term spending reductions and not need a bailout. The EU’s executive Commission has backed the Greek program and says no bailout will be needed. European Union nations say the same, rejecting reports that they are talking about possible bailout plans. The bailout options are limited – but not impossible. European Union agencies – such as the European Commission – can’t take on debt for governments. Neither can the European Investment Bank, it said. It has 75 billion euros ($103 billion) to lend for infrastructure and economy projects, usually in poorer EU nations. Three EU members that don’t use the euro – Hungary, Latvia and Romania – have secured bailouts from the International Monetary Fund and the EU. But EU officials say that IMF help won’t be needed for a euro country. That leaves the ball in the court of EU governments. Legally, governments can do it if a member state «is seriously threatened with severe difficulties caused by… exceptional occurrences beyond its control.» What remains is deciding how to do it and what taking on Greek debt could do to richer nations. EU governments could cut the costs of Greek spreads overnight by agreeing to jointly underwrite Greece’s debt – but this could hike the cost of their own borrowings. What is clear is that EU governments do not want to let Greece off the hook – and that any option would force Greece to make long-delayed reforms to rife tax evasion, rigid labor market rules and an inefficient and high-spending pension and healthcare system.