Remove the paneling.You might find pristine plaster or drywall underneath it.

It could be that the panelling moves a bit too and that movement is causing the spackling in the grooves to crack. Some panelling is fairly flimsy and there may also be a tongue and groove connection in those gaps that shifts around too which can cause the spackling to crack. I would fill over the cracking with some drywall compound if you don't want to remove the panelling. If the cracks are pretty small, I would probably just caulk them. Caulk is more flexible than drywall mud so using caulk would give the cracks a better chance at not returning. The method used for caulking the cracks would be to have a very small hole in the caulk tube, apply the caulk on top of the crack and then push it into the crack with a wet finger. Then wipe away excess with a damp rag or sponge. Wipe it away lightly so that you do remove the caulk that you just applied.

For a smooth wall finish, you can get self adhering fiberglass mesh in 3' wide rolls similar to the mesh tape that some drywall tapers use on seams. After the mesh is applied, it's simply a matter of top coating with your first coat being joint compound,( it has adhesives in it), followed by 2-3 coats topping compound. You might consider having a pro finisher do this as it's a practiced trade if you dont feel confident, but applying the mesh is pretty straight forward. It would be similar to wall paper hanging, less critical cosmetic wise, you just want to make sure your edges line up close, but dont overlap. If you have trouble with adhesion, I've had good luck using spray adhesives. You can get the rolls at most drywall/masonry suppliers or possibly special order at a big box store.

I had this problem w/ some painted tongue & groove panelling on 2 walls in a Craftsman bungalow. We first just mudded the V grooves but after a month or so the mud began to crack and come loose in the grooves. I thought maybe there was too much movement so we cleaned out the grooves, put a bead of caulk in there, and then mudded. Same result. I then discovered that the problem was not of our making at all - apparently beneath the latex top coat was oil base paint, and the moisture in the mud and caulk soaked through, causing the paint to come loose, taking the mud w/ it. We ended up just covering the walls w/ 1/8" tempered Masonite, floating the nails and joints like sheetrock. It was thin enough that it did not detract from the mouldings.

Bill/Memphis

I just covered my low popcorn ceiling with thin wall board. I love the result. Because of the snmooth finish,it doesn't attract attention and makes the ceiling seem higher. I would think this would be a good answer for your situation too.
gramma jan