LONDON May 18 (Reuters) - The now familiar European cycle of crisis followed by political action, temporary respite, then another crisis enters that crucial second stage next week when leaders of the 27-member European Union seek solutions in Brussels.
Investors will also be concerned with how hard the crisis is hitting the euro economy, with flash estimates of business activity due from the latest purchasing managers' surveys, and with the view from Bank of Japan policymakers meeting in Tokyo.
The potential for a Greek euro exit and the deteriorating health of the Spanish banking system have fueled a growing sense among investors that the crisis in the 17-member currency bloc is nearing new heights.
"This whole European situation has been managed via crisis," said Didier Saint-Georges, a member of the investment committee of Carmignac Gestion, which has about 50 billion euros ($64 billion) under management.
"You only make progress each time after getting pretty close to the cliff."
"The key thing is whether a crisis will be big enough that it derails the global picture. That is the question and the one that matters the most," he said.
Fears that the euro zone disruption will upset global growth were behind a worldwide shift out of riskier assets in the past week that drove global stocks, as measured by the MSCI index, to their lows for the year and the dollar to four-month highs.
The selloff spread to areas of the world where growth prospects still inspire hope, with emerging market equities at their lowest since December 2011 as they post their longest loss-making stretch since 2008.
Like many global asset allocators, Carmignac Gestion has adopted a defensive investment strategy in the current environment, hedging euro risks with the dollar and Japanese yen, and selecting stocks that are not exposed to the current macroeconomic risks to drive performance.
"We do anticipate when we have these short term crises that they will have an impact on the market, but if they don't have an impact on the real economy then over time we can still do pretty well in China or the U.S.," Saint-Georges said.
Muddling through is potentially the most likely outcome from the informal EU leaders' dinner, but markets will be looking for some reassurance that a credible policy response is going to emerge at the formal EU Council summit in late June.
"The leaders will speak about growth measures, but major concrete measures are unlikely at this stage," said Thomas Costerg an economist at Standard Charted Bank.
Europe's leaders are still at odds over the role of the new permanent euro zone bail-out fund, the European Stability Mechanism (ESM), while France's new president, Francois Hollande, is leading a dispute with Germany over the bloc's 'fiscal compact' to enforce government budget discipline.
While the politicians discuss a response to the crisis, investors have sought comfort in the idea that the European Central Bank will act to prevent any major financial accident.
But after it pumped over a trillion euros ($1.27 trillion) into the region's banks so far this year, the threshold for further action from the central bank could be quite high.
"The more they look at what they've done thus far, the more they're finding they've just shoveled money into a never ending hole," Jeff Sica, president and chief investment officer of SICA Wealth Management, an independent wealth manager said.
"The ECB has to look at the French election (outcome) and what's going on and say 'nobody is willing to do anything except stand there and wait for us to give them more money'," he said.
The Bank of Japan may shed some light on how policymakers are gauging the repercussions of the euro zone crisis.
The central bank is not expected to make any change in its current asset purchase plan after the programme was extended at the last meeting but it could hint at a future response if it judges the global outlook is worsening.
Japan's Nikkei index shed 3 percent on Friday to log a seventh straight week of losses, its longest such run since the third quarter of 2001.
Flash estimates of the latest Purchasing Manager's indexes (PMIs) for Germany, France and the euro zone on May 24 are expected to show troubled economies in the euro south still shrinking sharply but that Germany, the region's dominant economy, remains on track for growth.
The influential German Ifo survey of business sentiment for May, also due on May 24, will provide further clarity on whether Germany is at risk of losing momentum because of the crisis.
Economists polled by Reuters in the past week said they expect the euro area's total GDP to contract modestly in the second quarter after it stagnated in the first three months of the year.
With signs of weakness in the north of the region and recession in the debt-weary peripheral economies, investors see a critical need for near-term policy action.