Italy braced for a confidence vote in Silvio Berlusconi's government and Slovak leaders scrambled to secure approval for a stronger euro zone rescue fund on Wednesday, highlighting the political hurdles to resolving the bloc's debt crisis.
The European Union's top economic official said in Dublin that the currency bloc was in a very dangerous situation and pressed governments to take strong action at an EU summit which has been pushed back to October 23 to give politicians time to come up with a new strategy for Greece and ailing banks.
Inspectors from Europe and the International Monetary Fund gave a green light on Tuesday for Greece to receive a new aid payment needed to avert default, but new data showed the country's budget deficit widening and Greek tax inspectors vowed to strike next week in protest at wage and pension cuts.
Two years into a crisis that leaders have warned could plunge western economies back into recession, the 17-nation currency zone is struggling to deliver the big bang crisis solution that foreign governments, economists and investors say is needed to stop the rot.
Germany and France have promised to come up with proposals for a new comprehensive plan by the end of the month, raising hopes in financial markets. The euro pushed up to its top level against the dollar nearly a month on Wednesday.
But sources say the two countries still have a long way to go in formulating a deal. European Commission President Jose Manuel Barroso is due to propose a plan for recapitalizing European banks, one of the most contentious issues, later on Wednesday.
In the meantime, political turmoil in other euro zone members is feeding uncertainty over the bloc's crisis response, keeping investors on edge.
The market's trying to get ahead of the politicians doing something, and to my mind it's too early, Graham Neilson, chief investment strategist at credit hedge fund firm Cairn Capital, told Reuters.
If they deliver what they normally deliver, which is well below expectations, then risk assets will sell off and the euro will come under pressure once again.
A group of European elder statesmen, including former German and French foreign ministers Joschka Fischer and Bernard Kouchner, warned that the pursuit of national, rather than European, crisis solutions risked tearing the bloc apart.
The euro is far from perfect, as this crisis has revealed, they said in a letter to the Financial Times. But the answer is to fix the faults rather than allowing it to undermine and perhaps destroy the global financial system.
Italy's President Giorgio Napolitano, in an unusually blunt statement, expressed deep concern on Wednesday about the ability of Prime Minister Silvio Berlusconi's government to deliver on promised economic reforms.
The Italian leader, who came under renewed pressure to step down last week after suggesting his party rename itself with a vulgar slang term for female genitalia, suffered another embarrassment late on Tuesday when he failed to pass a key budget provision.
Berlusconi planned to address parliament on Thursday, with a confidence vote likely the following day.
We could have a government crisis at any time and even head toward early elections, Massimo Franco, political commentator for the Corriere della Sera newspaper wrote.
Markets are also looking nervously toward Slovakia, a country of just 5.4 million people -- less then 2 percent of the euro bloc's population -- which is holding up approval of the new powers that governments agreed in July for their rescue fund to buy bonds and recapitalize banks.
Prime Minister Iveta Radicova's government collapsed on Tuesday after lawmakers rejected a plan to bolster the 440 billion euro ($600 billion) European Financial Stability Facility (EFSF).
Radicova's outgoing government was due to hold talks with the opposition on Wednesday and a second vote in parliament is likely to approve the pact, possibly by the end of the week.
A stronger EFSF is seen as vital to deal with a possible Greek debt default.
The troika of European Commission, European Central Bank and IMF inspectors said on Tuesday that Greece should receive the 8 billion euro aid tranche it needs to stave off bankruptcy next month.
But they also said reform progress had been uneven, Greece's recession deeper than expected and privatization revenues short of target.
European governments have suggested in recent days that Greece's private sector creditors will have to make a bigger contribution to debt relief than initially planned, and sources have told Reuters the European countries that bailed out Athens may also have to accept losses on their loans.
Jens Weidmann, president of the German Bundesbank, told the Bild newspaper on Wednesday that a Greek debt writedown cannot be ruled out.
Greek tax inspectors said they would go on strike next week to protest against planned wage and pension cuts, threatening more disruption to revenue collection efforts that are already falling behind target. Much of the country is expected to be shut down by a general strike on October 19.
The euro crisis has stoked new fears about global growth only three years after the bankruptcy of U.S. investment bank Lehman Brothers unleashed a financial meltdown that plunged the world into recession.
Alcoa, the largest U.S. aluminum producer, said recession fears were knocking prices for the metal lower.
It almost looks like the world is worrying itself into another recession and that should not be allowed to happen, the company's CEO Klaus Kleinfeld said.
($1 = 0.733 Euros)
(Writing by Noah Barkin in Berlin; Additional reporting by Jan Lopatka and Martin Santa in Bratislava, Laurence Fletcher in London, Carmel Crimmins in Dublin, Harry Papachristou in Athens; Editing by Ruth Pitchford)