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A German Bailout for Neighbors?

Merkel Hints at German Aid for Euro Zone

German Chancellor Angela Merkel on Thursday backed euro zone solidarity, giving her clearest hint yet that Europe's biggest economy may dip into its pockets to help struggling neighbors. Ahead of Sunday's emergency EU summit, Merkel called for a "frank" debate.

When 27 European Union leaders talk about the economic crisis on Sunday, their opinions will likely be as diverse as their mother tongues. Thorny questions are circling, like whether bigger and more stable countries, such as Germany, need to aid weaker nations like Ireland and Greece, to safeguard European monetary union.

Speaking at an event for foreign journalists on Thursday evening in Berlin, German Chancellor Angela Merkel signaled, for the first time, that her government is considering helping other nations. "We have shown solidarity and that will remain so," Merkel said, responding to a question about Germany's willingness to offer assistance to its euro zone contemporaries. "But this must be on the basis of commitments that form the foundation of our common currency," she added.

Merkel also made special mention of Ireland, one of the euro zone countries facing a growing bill to finance debt, reflecting investors' preference for more financially stable nations like Germany. "A country like Ireland that has been hit quite hard by the banking crisis is clearly in a different situation than a country like Slovakia with fewer banks and where the distorting forces at work are weaker," Merkel said.

Her comments follow growing speculation that Berlin may act under article 100 of the Maastricht Treaty, which permits financial assistance for countries experiencing "difficulties caused by natural disasters or exceptional occurrences beyond its control." Foreign Minister Frank-Walter Steinmeier said last week that Germany was considering ways in which economically stronger euro zone countries could help other states, but he fell short of naming any specific measures. SPIEGEL reported last week that German Finance Minister Peer Steinbrück had asked his staff to draft scenarios for possible rescue measures including bilateral bonds that could see Germany borrowing at more attractive interest rates to raise money for hard-up countries.

Steep Political Cost?

German politicians are all too aware that their country's export-driven economy is interlinked to the fortunes of the country's EU neighbors, for better or for worse. But enthusiasm for a rescue deal is tempered by the potential political costs of footing a large bill, especially in the light of September's general election.

Germany, meanwhile, has repeatedly signaled its opposition to a joint euro bond issue. Such a move would have the effect of shrinking the cost of debt for countries like Italy, Greece and Ireland, while Germany's bill would climb -- as high as €3 billion per year for tax payers, according to one estimate.

But, speaking to foreign journalists, Merkel insisted that honesty would have to form the crux of this weekend's meeting in Brussels: "We will have to discuss the situation in each individual country. It all depends on whether we are able to speak openly and honestly about the situation because there are a lot of rumors flying around."

And Germany's apparent willingness to support its neighbors reflects a change in direction for the leadership. Until now Germany, which has kept close tabs on its finances, has been reluctant to offer to help pay for what it sees as other countries' lack of discipline in national spending. As a result, it is expected that extensive strings will be attached to any assistance offered, a point made clear by president of Germany's Bundesbank, Axel Weber. Speaking to German daily Die Welt, he said "targeted aid for individual member states" may be "unavoidable" but any such moves would have to be accompanied with "strict demands and conditions."

Among the "frank" discussions Merkel forsees in Brussels, will likely be banking problems in eastern and central Europe. Asked about the region, she insisted that having the euro was the biggest help on offer to eastern European economies. Germany, however, was seen teetering on a diplomatic tight rope in its eastward international relations. "If we help too much, we're accused of being too forceful, but if we do too little it's not right either," she said. "The time phase within which we can do the right thing is, at best, nano-seconds long."

jas -- with wire reports