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Jeremy Glaser is the markets editor with Morningstar US

The market was very sceptical this past week of the deal to create a fiscal union among eurozone members hatched at the previous week's European Union (EU) summit. And rightfully so. Creating a new fiscal union outside of the EU framework isn't going to happen overnight. There are a huge number of political and technical obstacles that are going to pop up during the course of 2012 and many opportunities for the deal to be derailed. However, behind the chatter about the new fiscal union was another European story that might have as big of an impact on the final outcome of the crisis: Greece is falling short in its reform efforts and remains a threat to European stability.

Of course, given Greece's short- and long-term track records, it shouldn't be a huge shock that the country is falling behind, but the International Monetary Fund (IMF) report released last week highlights the gap between the official line on reform and what is actually happening on the ground. The IMF sees a number of problems in Greece. Among them, the economy has taken a turn for the worse and the recessionary woes continue to escalate. Authorities are having trouble implementing the austerity measures that they have already passed, and privatization plans have been sidelined as market conditions are making it almost impossible to divest of anything even at fire-sale prices. The IMF believes that the new government is committed to following the plan, but so far it isn't working.

In isolation, this shouldn't cause too many waves in Europe. Greece is a small economy, and it could keep getting bailed out by the rest of Europe as long as everyone else stays above water. However, the problems that Greece is facing implementing its rescue package now could be a canary in the coal mine for the rest of Europe. There are a few ways in which a further escalation in problems in Greece could continue to have a serious impact on Europe and the world.

Greece as a model?


Time and time again, European leaders have said that their actions in Greece shouldn't be seen as a special case. In some ways they are right. Greece's debt load is high even by European standards, and its economy is much less competitive than those of other eurozone nations. But even if the scale of change is bigger, Greece's bailout was supposed to serve as template for how to deal with economies on the brink. The plan involved short-term infusions of liquidity, voluntary bond write-downs, and severe austerity measures.

Unfortunately, this plan isn't really working in Greece. The country needs even more liquidity, no firm agreement has been reached on the bond write-downs, and the austerity measures are not really being implemented. If this standard prescription fails in Greece, is raises the question about how successful it is going to be for other countries if and when they need help. This is not a good omen.

It could derail the euro


The only reason Germany is even considering bailing out Greece is because the two nations share a common currency. If Greece were on its own, it would have long ago devalued the drachma or defaulted on its debt and been done with it. However, the euro makes things much more complicated. If Greece were to spiral out of control and the rest of the EU choose not to step in, the country could abruptly be forced to leave the euro. The truth is, no one knows exactly what would happen if Greece left. It could put incredible pressure on other debt-laden countries (paging Italy and Spain) and could have all sorts of other knock-on effects. If Greece is unwilling or unable to implement the austerity controls imposed by Germany, then Greek leaders could suddenly find themselves without a lifeline, and that wouldn't bee good for anyone.