German Chancellor Angela Merkel greets Nicolas Sarkozy upon his arrival at the Chancellery in Berlin on Monday. The French president was in Germany for the first high-level talks of the year about the euro crisis, against the background of a simmering row over the controversial "Tobin tax" on financial-market transactions. AFP

BERLIN - The eurozone crisis seemed to vanish from the headlines for a brief moment as 2011 turned into 2012, but it is about to return with a vengeance.

The coming months will be decisive in determining whether European leaders can hold their increasingly fragile currency bloc together or will stumble as they try to overcome a daunting series of political, economic and financial obstacles at the start of the new year.

In Greece, where the crisis started more than two years ago, the government is in a race against time to agree to a bond-swap deal with banks. The deal will form an essential part of a new 130-billion-euro ($165 billion) bailout package from European partners and the International Monetary Fund (IMF).

Without the package, Athens faces the threat of a debt default in March.

But talks have dragged on for weeks with the banks and investment funds that are being asked to accept a 50-percent loss on their Greek bonds to help pay for the bailout, sowing doubts about Athens' ability to extricate itself from its troubles.

"The risk of a disorderly Greek default is once again on the rise," and there is a chance the crisis will spread to Italy and other countries, economists at the investment bank Barclays Capital said this past week.

Compounding the troubles, both Greece and France face elections within months that could complicate decision-making in those states and thwart the broader bloc's ability to act swiftly when the pressure is high to bed down agreements that were sealed at an EU summit this past month.

An important part of the summit package was a deal to funnel 200 billion euros to the IMF, money that could be used to offer precautionary credit to Italy and possibly Spain.

Eurozone struggles

But the eurozone is struggling to get the 50 billion euros it needs from nations outside the currency bloc. A senior German official said on condition of anonymity that securing the participation of Britain, which has shown no inclination to contribute, was essential.

Even if those funds are secured, neither Italy nor Spain has shown any willingness to accept aid - and the stigma and greater fiscal oversight that would come with it.

Ten-year yields on Italian bonds have pushed back above the 7-percent mark during the past week, approaching record euro-era highs. And both Rome and Madrid must sell bonds this week in the first important market tests of 2012 for the third- and fourth-biggest economies in the eurozone.

End of 'Merkozy'?

The Greek election, expected by the end of March, seems unlikely to produce an outright winner, meaning coalition talks could drag on in the country and prolong uncertainty.

In France, polls suggest there is a good chance President Nicolas Sarkozy, who has worked with German Chancellor Angela Merkel to steer Europe's response to the crisis, could be pushed out of office by his Socialist challenger, Francois Hollande.

While Merkel and Sarkozy have polar-opposite temperaments and clashed frequently when the Frenchman first took power in 2007, they are both conservatives, born just half a year apart, and have developed an effective partnership after years of attending crisis summits.

And after years of being frustrated with the French president's shoot-from-the-hip style, government officials in Berlin say they are now worried about the end of "Merkozy", a short-hand term for the relationship between Merkel and Sarkozy.

A cut in France's triple-A credit rating in the weeks ahead could also upset the delicate balance between France and Germany, although some economists believe it could force the French to accept more far-reaching fiscal reforms, regardless of who wins the country's two-round election in April and May.

"It won't be Merkozy anymore," said the French economist Jacques Delpla. "It will be Angela Merkel and (IMF chief) Christine Lagarde dictating policy in Europe." "The next French president, whether it's Hollande or Sarkozy, won't have many options. The deficit will need to be cut, taxes increased and spending cut."

Recession risk

Fittingly, Merkel and Sarkozy kicked off 2012 with a meeting on Monday in Berlin to prepare an EU summit scheduled for January 30.

Achieving such growth will perhaps be the most difficult goal for the bloc to reach. The eurozone, after seeing several years of fiscal consolidation used to push down the debts and deficits that had become swollen by the global financial crisis of 2008 and 2009, is headed for a recession. That has helped to push the euro down to its lowest point in 16 months when compared with the dollar.

Even Germany is at risk of falling into recession. The Greek economy is entering its fifth straight year of contraction and the country has almost no hope of being able to pay down its massive debt.

Reuters