PARIS (Reuters) – A possible European bailout of Greece could stabilize the euro zone’s financial markets for now but would probably do little to ease investors’ long-term concerns about economic tensions in the zone.

Euro zone countries were holding intensive talks on Wednesday about a possible rescue for Greece, whose debt crisis has dragged down the euro, regional banking stocks and many government bond prices this year.

But since news emerged from sources in Germany’s ruling coalition on Tuesday that a rescue was on the cards, the euro has rallied only weakly from eight-month lows. It stood at $1.3702 on Wednesday afternoon, almost unchanged from its level just before the German news.

Emergency aid to Greece, and conceivably Portugal and Spain, which are also struggling with debt, might involve debt guarantees, a bailout fund or other options.

Few analysts doubt that if they felt decisive action was urgently needed, the rich states of the EU could muster the financial strength to avert a funding crunch in the south of the zone this year.

Economists at the Bruegel economic think tank in Brussels have suggested that Greece might need emergency support in a range of 12-24 billion euros.

That is only about one or two tenths of a percentage point of the euro zone’s gross domestic product last year; if Portugal and Spain were included in an aid package, costs would rise, but the fiscal plight of those countries does not appear as serious as Greece’s so they would probably not require huge sums.

Therefore, if the EU’s rich states overcome political and legal obstacles and announce a clear, detailed support package for Greece, euro zone markets can be expected to stage a quick, sharp rebound.

In anticipation of this, the spread of the 10-year Greek government bond yield over the benchmark German yield narrowed dramatically to about 285 basis points on Wednesday from around 320 bps on Tuesday. It was well down from last month’s peak of 405 bps.

DOUBTS

But the spread remained far from the levels below 100 bps seen for relatively healthy countries in the north of the zone.

One reason for this is concern that any bailout of Greece could actually lead to more fiscal problems down the road.

The EU has been pressing Athens hard to cut its budget deficit with austerity measures; if Greece were now given aid, domestic political pressure to take those steps might weaken.

Conditions could be attached to the aid, but it is unclear whether the EU, whose members have repeatedly broken budget rules for years, could threaten sanctions harsh enough to compel fiscal discipline. The EU would almost certainly shy away from the harshest sanction, expelling Greece from the euro zone.

Also worrying the markets is the risk that a rescue of Greece, which would be the first such bailout in the euro zone’s 11-year history, could set a precedent: the zone’s most powerful member, Germany, might end up having to support weaker states for years.

So far, the spreads of German bonds against U.S. Treasuries have not been seriously affected by the Greek crisis. But that might change if it started to appear that Germany had to assume an extended commitment to Greece.

“Unfortunately, the price of this in the shorter term — six months, 12 months, two years, who knows — is a re-evaluation of Germany by investors,” said Simon Derrick, a currency investment strategist at Bank of New York Mellon.

“In the long run, confidence will return, especially if Germany starts cracking the whip, but first they need to deal with the problems in Europe as they currently stand.”

ECONOMIC STRAINS

Another source of worry is the diverging economic performances between euro zone powerhouses such as Germany and the weaker countries such as Greece — divergences that any bailout would probably do little to change.

A European Commission report last month found the real effective exchange rate for Greece, Spain and Portugal was overvalued by more than 10 percent — an indication of how much wages there would have to fall, or productivity rise, to make those countries competitive within the euro zone.

“The persistence of large cross-country differences jeopardizes confidence in the euro and threatens the cohesiveness of the euro area,” the EC said.

Austerity measures could narrow those differences over a period of years. But to address the root cause of imbalances within the euro zone, Germany might have to shift its export-led economic model more toward domestic consumption, which would be challenging politically.

“Unless these questions are answered, we still face the prospect of a less dynamic, more debt-ridden euro zone, which equates to a sell recommendation on the euro,” said Marco Annunziata, chief economist at UniCredit bank in London.

REFORMS

The Greek crisis could conceivably benefit the euro zone in the long run if it prompts the group to reform its management — by, for example, giving Brussels new powers to monitor statistical data from the zone’s members — and to coordinate the economic policies of individual states more closely.

So far, however, there is little sign of this happening, partly because the zone has become so large and unwieldy, and partly because countries such as Germany fear any loss of sovereignty over economic policy.

German Chancellor Angela Merkel has made it clear she blames the fragmentation of the euro zone economy not on weaknesses in the EU treaty underlying it, but simply on the failure of certain member states to respect the rules.

Another reason not to expect the Greek crisis to lead to reform is that, for the moment at least, the weakness of the euro caused by the crisis is probably welcome to some states. Countries including France have complained since last year that a strong euro was hurting their exporters.

“If the cost of preserving political union is a weaker currency over time, then perhaps this isn’t that great a cost to bear. At least the French will be happy,” said Derrick.

(Editing by Andrew Torchia)

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