* Financial markets sceptical EU can resolve crisis
* Germany at odds with EU partners, makes own proposals
* EU Institutions act slowly, doubts over Belgian presidency
By Timothy Heritage
BRUSSELS, May 28 (Reuters) - Three weeks after it agreed a $1 trillion safety net to protect the euro, the European Union is struggling to convince financial markets it has got what it takes to save the currency.
Since the safety net was agreed early on May 10 to appease markets worried that Greece's debt problems could be contagious, countries such as Spain, Italy and Portugal have announced austerity plans to head off any crisis.
But new divisions, above all a rift between Germany and nearly all the other 26 member states, have renewed doubts about the EU's ability to unite behind the painful reforms needed to hold the 16-country euro area together.
Concerns are also growing because Belgium is unlikely to have a government in place when it takes over the EU presidency on July 1 and markets are worried the EU's institutions and leaders are ill-equipped to handle a crisis of this magnitude.
"We are at a crossroads today. Either we take determined and joint action for Europe's economic and political revival or we face economic stagnation and political irrelevance," EU Economic and Monetary Affairs Commissioner Olli Rehn said this week.
It would be easy to assume such apocalyptic visions would reassure markets that the EU has grasped the gravity of the situation. But a decline in the value of the euro and falls on stock markets this month suggest otherwise.
A ban imposed by Germany last week on certain financial transactions to quell the market "speculators" it blames for the euro's problems has caused particular alarm.
Berlin compounded the problem by saying this week it would extend to other transactions its ban on some naked short-selling -- the sale of financial instruments without first borrowing the security or ensuring it can be borrowed.
Economic analysts say markets have seen this move as a sign that Germany, Europe's biggest economy, may still think the markets are to blame for the crisis, rather than structural problems and imbalances between the EU states' economies.
GERMAN MOVES LIKELY TO AGGRAVATE MARKETS
"This is the worst possible message they could be sending the markets because it suggests they are still not acknowledging what the underlying problem here is," said Simon Tilford, chief economist at the Centre for European Reform think-tank.
"Far from reassuring the market and stabilising market sentiment, this will further undermine confidence in the ability of euro zone governments and policymakers to get on top of the crisis. It will aggravate the situation further."
Germany has, with France, long been the engine driving the EU towards closer political and economic coordination. That is changing because German taxpayers now fear they will have to bail out one profligate euro zone member after another.
In efforts to satisfy a public that seems less pro-Europe than in the past, the German government has become isolated in Europe and faces a battle with the executive European Commission over reforms of the budget rules that govern the EU.
Germany says the Commission's plans do not go far enough and has made its own nine-point proposal, leading to unusually bitter squabbles with Brussels.
European Commission President Jose Manuel Barroso described Germany's calls to change the EU treaty to enact reforms as "naive" this week, using unusually tough language to criticise the most powerful member state.
Chancellor Angela Merkel may have won over some of her domestic critics, and has shown she wants to shake the EU into action by taking a tough stance on the budget rules, but she has alienated her EU partners and upset the markets.
"This has obviously created instability on the markets because markets do not really like Germany acting on its own. They would much rather there is an agreement across the EU," Sharon Bowles, head of the European Parliament's economic and monetary affairs committee, told Reuters.
Germany's spat with the Commission, and increasingly with France, augurs badly for prospects of a quick agreement on reforms to boost growth, reduce unemployment and make the flagging European economies more competitive.
French President Nicolas Sarkozy hardly helped Merkel by declaring the May 10 agreement a victory for France.
CONCERNS OVER GERMANY BASHING
"If this Germany bashing continues, Germany will become an even more problematic actor in EU politics and it will be harder to find compromises in the EU," said Janis Emmanouilidis of the European Policy Centre think-tank.
"You won't get the old Germany back. You need to accommodate this new player, this changed player."
Rehn said this week the failure to carry out tough reforms could set Europe back a decade.
He said average annual growth in EU output would be at best around 1.5 percent, instead of the target of more than 2 percent, and unemployment would be 7 to 8 percent instead of the target of about 3 percent by the end of the decade.
Investors are also concerned it will take months to agree on the reforms and that they will either prompt labour unrest in some countries or be watered down during negotiations because of fears they could cause strikes.
A task force set up by EU President Herman Van Rompuy has given itself several months to make proposals, reinforcing the view that the EU cannot act swiftly.
The fall of Belgium's government, and the likelihood that lengthy coalition talks will prevent it forming a government quickly after the June 13 election, also complicates matters.
The impact of this may be limited by the fact that Spain, which holds the presidency until June 30, has often seemed a bystander during the euro zone crisis and the big member states are likely to continue to pay the lead roles in the crisis.
Spain's government has also had to focus on its own economic problems. It won parliament's approval for its austerity plan by only one vote on Thursday and talks with business and unions on overhauling rigid labour laws are going badly.
Van Rompuy has been criticised for his low profile but supporters say much of his work is done behind the scenes and he will be vital as his task force presses on with its work.
The Commission has also been criticised for showing a lack of leadership, but its ability to act quickly has been hindered by the disagreements among the member states.
"The crisis has not been handled adequately and things went wrong but this has a lot to do with the magnitude of the crisis," Emmanouilidis said.
"Would things be done better with a different institutional setting? Well, the EU is not a state. You always need to come up with a consensus and at a time of crisis this is hard." (Editing by Jon Boyle) (timothy.heritage@reuters.com; +32 2 287 8632; Reuters Messaging: timothy.heritage.reuters.com@reuters.net))