French Support for Berlin: Merkel May Emerge Victorious in EU Battle over Greece

By and

For weeks, Merkel has stood mostly alone with her insistence that the International Monetary Fund be seen as a savior of last resort for Greece. Now, though, she has received support from Paris and may emerge the winner in the most recent round of Greece poker.

French President Nicolas Sarkozy has indicated that he supports Chancellor Angela Merkel's plan for allowing the IMF to assist Greece, should the need arise. Zoom
AP

French President Nicolas Sarkozy has indicated that he supports Chancellor Angela Merkel's plan for allowing the IMF to assist Greece, should the need arise.

She has been called "Madame Non" -- sometimes "Madame Nyet." The "Iron Chancellor," an allusion to former British Prime Minister Margaret Thatcher, had also become popular. No matter what people called her in recent weeks, however, it had become clear by early this week that Chancellor Angela Merkel's reputation in Europe has suffered recently. She had taken up a lonely position in her fight against demands from the rest of the European Union to promise financial assistance to cash-strapped Greece should the need arise.

But, suddenly, there is new movement in the ongoing poker game over Greece. And it seems likely that Merkel will emerge as the victor.

Shortly before the summit meeting of European heads of state on Thursday and Friday in Brussels, it is seems likely that the EU will accommodate the chancellor on a key issue in the matter of assistance for Greece: The French government says it is open to including the International Monetary Fund (IMF) in an emergency plan for Athens, an idea Merkel has repeatedly brought up recently. Given the prevailing reservations about a euro-zone country turning to the IMF, the chancellor could chalk up Paris's concession as a resounding success.

France and most other EU countries had long rejected the idea of IMF intervention. But now that Merkel apparently has the support of French President Nicolas Sarkozy, as the Süddeutsche Zeitung reports on Wednesday, the rest will likely be easier to convince. Should help for Greece become necessary, some EU countries could contribute bilateral loans in addition to a financial injection from the IMF. In government circles in Berlin, there was cautious optimism about "initial signals from various capitals" that officials there could imagine financial assistance coming from the IMF.

Last Minute Agreement

Diplomats are still busy working out the details of a compromise, and it is possible that it will be unveiled before the official summit program begins. A spokesman for European Council President Herman van Rompuy said there could be a separate meeting of the 16 euro-zone countries on Thursday, the goal being to achieve the final breakthrough. The proposal stemmed from French President Sarkozy and his Spanish counterpart, Prime Minister Jose Luis Zapatero.

This separate summit meeting would also represent an accommodation of the chancellor. She has long been saying that aid for Greece would not be discussed at the EU summit, and the extraordinary meeting of euro-zone countries would allow her to keep her word. Greece, on the other hand, would receive the public pledge of support it has been asking for to calm financial markets. Indeed, a last-minute agreement would avoid what had seemed to be a looming conflict, allowing European leaders to feign routine at the summit and concentrate on the EU's "Europe 2020" economic strategy.

The German government had long balked at discussing Greece at all in Brussels. Athens has not requested aid, officials in Berlin said, so there was no need to discuss it. But the Greek government had little sympathy for this position. "If it is not on the agenda, we will put it on the agenda," Greek Prime Minister Georgios Papandreou warned.

Despite a successful bond offering earlier this month, the country is not out of the woods yet. It must still refinance €50 billion ($67 billion) in debt this year, and its poor credit rating means that borrowing money has become very expensive for Athens. The Greek government insists that it doesn't want money from the EU. Rather, it claims to be merely interested in a political show of solidarity so as to deter speculators from betting on a Greek bankruptcy and thereby driving up interest rates.

Domestic Political Calculation

The Germans, on the other hand, referring to the general statement of solidarity issued by the EU in February, remained strictly opposed to new promises of aid -- for several reasons:

  • First, there is the domestic political calculation. While unpopular in the EU, Merkel's stubbornness is popular at home. Most Germans believe that the Greeks should help themselves, particularly after having deceived the other euro countries for years. Shortly before the important state elections in the country's most populous state, North Rhine-Westphalia, Berlin is unwilling to offer up German taxpayer money for stability in Greece, particularly given the mountain of debt Germany is already facing.

  • Furthermore, last June, a German high court ruling showed that the court is skeptical of the Lisbon Treaty and the amount of sovereignty it transfers to Brussels. Berlin now fears that the court could step in and put a stop to aid for Athens. For one, the EU prohibits member states from providing direct financial assistance to others. For another, such a move would further blur the boundaries of nation states within the EU. The German Justice and Interior Ministries believe there is considerable risk of a lawsuit.

  • Instead of aid packages, Merkel has shown a preference for new instruments to ensure compliance with the European Stability and Growth Pact. Those instruments would include a harsh penalty for countries that exceed the euro zone's debt rules, including possible expulsion from the common currency area. That, though, would require amending the Lisbon Treaty, and the years of wrangling over the most recent treaty show just how difficult that would be.

  • Finally, Merkel believes that the only option is to involve the IMF. She feels that Finance Minister Wolfgang Schäuble's proposal for a European Monetary Fund is still a long way off.

Admonishing Berlin

By sticking to her concept of IMF involvement, Merkel triggered a new escalation in her struggle against the rest of Europe. Most EU governments -- and her finance minister, Schäuble -- have argued that intervention by the Washington-based IMF would represent a failure on the part of the EU. Instead, they want Greece's debt problems to remain in the family. The European Central Bank (ECB) is likewise concerned that, should the IMF gain influence over European budget policy, it could lose some of its independence.

Concerns like these prompted European Commission President Jose Manuel Barroso to intervene recently, calling repeatedly for the 27 EU heads of state and government to agree on a mechanism for a Greek bailout at the summit. The current situation, he said, could just not be allowed to continue. "I am confident that Germany will make a constructive contribution to the solution of the current crisis," he told the German business daily Handelsblatt on Monday.

Such a direct message to Merkel was noteworthy primarily because many see Barroso as being little more than a mouthpiece for Berlin. Indeed, he rarely dares to oppose the chancellor publicly. But, by admonishing Berlin, he demonstrated how displeased the EU partners have become over the German government's economic course. Only the Netherlands stood fully behind Merkel, while the rest of the EU -- particularly Italy, France and Spain -- were more or less against her.

Now a solution is in sight. However, it also seems clear that a special Greece summit will not reach a final decision on aid for Athens. Merkel was unwilling to back down from this position on Tuesday. In a meeting of her Christian Democratic Union's parliamentary group, she mentioned the "last resort situation" that would transpire if Greece were unable to drum up fresh funds on the capital market. And, in the Frankfurter Allgemeine Zeitung, Finance Minister Schäuble stressed that "the fact that a monetary area is solving the problems of a portion of its monetary zone through the IMF can and must remain an exception."

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