AP Business Writer

MADRID (AP) - Chaos in Greek politics and Spanish banking combined this week to underscore just how fragile Europe's economy remains after an eviscerating austerity regime that has spawned unemployment, desperation and misery. And there is no respite in sight, as Germany's finance minister predicted Friday that the crisis could last up to another two years.

Wolfgang Shaeuble, who holds the region's purse strings, chastised the leaders of the world's biggest economies as they headed to Washington for a weekend summit for efforts at fixing the crisis over the past few years that "weren't good enough." The leaders, he told French Radio Europe 1, "must show that Europe can achieve common positions more quickly."

But common positions have been in short supply.

After more than a week trying to form a government, Greek politicians gave up this week and called another vote for June - with no real reason to think it will get them any further from the chaos that reigns. Spain was forced to deny that a troubled bank faced a run on its deposits, then saw a major ratings agency downgrade 16 of its lenders and four of its semi-autonomous regions, similar to U.S. states.

On Friday, Spain's central bank announced that the level of bad loans on the books of Spanish banks _ hit by broke construction companies, recession and the worst unemployment rate in the 17-nation eurozone _ is at an 18-year high, fueling concerns about the financial sector in the eurozone's fourth-largest economy. Just hours later, the nation's Finance Ministry said Spain may have to revise its 2011 budget deficit up to 8.9 percent because three regions overshot spending forecasts.

European countries with shaky economies like Spain are straining under high borrowing rates. The rates have risen as investors are nervous about governments' debt loads relative to the strength of the economies. Under pressure from Germany, Europe's strongest economy, governments have laid off workers, cut pay for others, reduced spending on social programs and imposed higher taxes and fees to boost revenue.

Yet as economies have shrunk, countries' debt levels have worsened. In Spain, where one out of every four citizens is jobless and the rate hits one out of every two people under 25, the interest rate on 10-year government bonds stood at a worrying high of 6.2 percent Friday, not far from the 7 percent mark that is considered unsustainable in the longer term and forced Greece, Ireland and Portugal to ask for bailouts.

This week's developments suggested that for some countries, the medicine - cutting budgets as part of excruciating austerity programs - may be worse than the disease. This can also be seen in the success at the polls of former opposition leaders, who are rising to power as voters reject austerity and call for a new way forward that generates growth and jobs for Europe and eradicates fears of a domino effect if Greece leaves the euro.

The nightmare scenario involves Greece being unable or unwilling to implement the cuts it needs to keep using the euro. Investors, fearful that Portugal, Ireland, Spain and Italy will follow Greece's path, would then pull their money out of those countries as well. That would likely be disastrous for the global economy - although it is so unprecedented that nobody really knows.

"If fears grow that Greece will be the first of potentially several economies to leave, then clearly that could have massive ramifications for the rest of the eurozone," said Ben May of Capital Economics in London.

"Clearly there's a risk that if policymakers dither and don't implement measures to reassure markets that there are sufficient firewalls to protect those larger economies, then in the event of a breakup that involved Greece and perhaps Portugal and Ireland, there could be pressure on Italy and Spain."

Having a plan in place to prevent contagion if Greece fails to comply with terms for its bailout is of vital importance, said Rui Barbara, asset manager at Portuguese financial group Banco Carregosa.

"Portugal and the other southern European countries would be the most affected by fears about another country's eurozone exit," he said. "Portugal, whether rightly or not, is widely regarded as the next in line after Greece. The perceived market risks about Portugal could bring a run on banks and massive capital flight. That would also affect southern European countries."

One immediate fix, analysts suggest, could come from Europe's central monetary authority, the European Central Bank. It could start heavy purchases of Spanish and Italian bonds to force their borrowing rates down - thereby giving the governments breathing room to pay their bills.

"The ECB has to just buy Spanish bonds without limits until the markets get tired, and they have to do it soon," said Gayle Allard, an economist and labor market specialist at Madrid's IE Business School.

The heightened concerns surrounding some of the eurozone countries are also being focused on those countries' retail banks. Analysts and market watchers are concerned that once confidence in a country's economy starts to decline, the banks are caught up in the panic and savers rush to withdraw their savings.

Many Greeks have been gradually withdrawing their savings over the past two years as the country's financial crisis deepened. Times of heightened political instability have seen the outflows spike, with some money later returning.

Spain got a taste of potential bank panic Thursday when shares of Bankia SA plunged after a newspaper reported it had suffered deposit withdrawals worth (EURO)1 billion in the week since the government announced a plan to effectively nationalize it and clean up its heavy load of toxic property assets and loans. The shares rebounded Friday after the bank and the government denied a run happened, but customers were rattled.

That came just hours after Moody's issued its downgrade of Spanish banks, and just days after the agency did the same for 26 Italian lenders struggling with the effects of the country's weak economy and austerity measures.

Allard, an American who has lived in Spain for decades, said she was surprised recently when Spaniards started asking her what currencies besides the euro might be a good place to park their money if they sense they need to move money abroad.

Increasingly testy Spanish government officials insist they have put in place a litany of unpopular austerity measures since January that have raised taxes, forced regions to impose deep budget cuts, clean up an antiquated labor system by making it easier to hire and fire workers, and required banks to raise the amount of money in place to cover problematic assets and loans.

New conservative Prime Minister Mariano Rajoy warned bluntly this week that Spain risks being locked out of financial markets, creating "a serious risk that (investors) will not lend us money or they will do so at an astronomical rate.

He's expected to drive those points home when he meets Sunday in Chicago with German Chancellor Angela Merkel on the sidelines of a NATO summit, and in a Paris visit next Tuesday with newly-elected French President Francois Hollande.

In Lisbon, lunchtime shoppers expressed bewilderment and dismay at the latest twists in international finance, predicting bad times ahead for Portugal, in recession for the third time in four years with unemployment at a record 15.3 percent.

"Who knows what's going to happen next. Every day, it seems, there's just more bad news," said Augusto Paulinho, a retired metalworker who said it's hard to make ends meet on his monthly pension. "I can't see who's going to solve this mess. But we can't keep going on like this. It's terrible."

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Barry Hatton in Lisbon, Daniel Woolls and Harold Heckle in Madrid and Elena Becatoros in Athens contributed to this report.

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