BRUSSELS (Reuters) - The European Union's efforts to improve its global image are looking increasingly unconvincing as it struggles to contain a debt crisis in Greece and put down talk that its 16-nation euro currency bloc could break up.
When the last of the EU's 27 member states finally accepted the Lisbon reform treaty last year after nearly a decade of disputes and hesitation, EU leaders hailed the start of a bright new era for the world's biggest trading bloc.
But two months after the treaty came into force, the EU is dogged by rivalry among member states, differences over economic policy, confusion over who does what and criticism that it has left economic problems to fester for too long.
Policymakers in the 16 countries that use the euro are struggling to convince markets about the stability of their euro zone because of fears that other debt-ridden countries such as Spain and Portugal could follow Greece into severe trouble.
"There has been a lot of rhetoric about the 'European project' (to strengthen the EU) but to a large extent governments have had their heads in the sand and not addressed the tough underlying problems," Simon Tilford, chief economist at the Center for European Reform think tank in London, said.
"There is an insularity and provincialism which is very worrying."
The Lisbon treaty creates a full-time president, enhances the role of EU foreign policy chief and hands the European Parliament more power. It is also meant to ease decision-making and strengthen the bloc's global role.
But battles for influence continue and Spain has upset some states by seeking the lead as holder of the separate, rotating EU presidency, an organizational role that is held for six months by each country but has less visibility under the treaty.
FEARS OVER EURO AREA
A perceived lack of unity over how to solve Greece's debt problems and prevent them spreading to other countries in the euro area has contributed to the concerns of investors worried about a sovereign default. The euro has hit its lowest level against the dollar since May 2009.
"Now we are in a (difficult) situation and it is quite clear they don't have a plan for dealing with it," said Juergen Michels, an economist at Citigroup in London.
Analysts no longer discount the possibility that a smaller member of the currency bloc such as Greece could be pushed out, though most believe monetary union will survive.
Such fears prompted Ewald Nowotny, a member of the European Central Bank's Governing Council, on Friday to dismiss suggestions that the euro zone might break up as "absurd."
The stakes are high, not only because the fiscal problems could spread, but because the credibility of European economic policymakers is at stake.
"This is much more than an issue about problems in the periphery. It is a test case of the ability of the (European) Commission and Eurogroup (of finance ministers) to impose the essential fiscal discipline needed to underpin EMU (European monetary union)," BNP Paribas said in a research note on Friday.
The EU's credibility problems stretch far beyond its difficulties convincing markets it can solve its economic woes.
It suffered a deep blow to its prestige this week when Washington announced that President Barack Obama would not attend an EU-U.S. summit in Madrid in May, and indicated that confusion over who represents the EU at meetings under the Lisbon treaty had been a factor in the decision.
This was a bitter disappointment for Spain and the bloc, which represents more than 500 million people, particularly so soon after the EU's pride was hurt at international climate change talks in Copenhagen in December.
Although the final deal in Copenhagen was largely based on ideas promoted by the EU, Washington did not invite it to last-minute talks with other powers that sealed the deal and it was aggrieved that its more radical proposals were ignored.
LIGHT AT THE END OF THE TUNNEL?
Supporters of the Lisbon treaty say it is just a matter of time before its positive effects are felt.
"If we want to see movement that brings new gravity to EU institutions, it'll be in one, two or three years," said Ulrike Guerot of the European Council on Foreign Relations think tank.
There may be light at the end of the tunnel because the European Parliament is expected next week to approve the new European Commission, the EU executive body that has legislative, regulatory and policy-making powers. [ID:nLDE61225J]
The Commission's ability to launch major initiatives has been frozen since November because of delays in confirming it in office, caused largely by obstacles to securing Czech approval for the Lisbon treaty and a long wait for Ireland to back it.
But new problems are also emerging. The European Parliament has shown it is ready to flex its muscles under the new treaty, which increases its responsibility for shaping legislation, and this could hold up or water down Commission initiatives.
A battle is already looming over plans to create banking watchdogs because some parliamentarians are challenging a deal between Britain and other finance ministers. <ID:BFA001043>
Tightening financial regulation after the global economic crisis is an EU priority and any delay or failure to do so would deeply undermine the EU's reputation.