A Greek Test: Euro Fears Force Merkel To Act

By and

Knowing a bailout for Athens would be unpopular, Chancellor Angela Merkel wanted to postpone taking action on the Greek crisis until a key state election on May 9. But financial markets don't care about domestic German politics. Her delay could end up costing the country billions.

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After weeks of hesitation over the German response to the Greek crisis, Chancellor Angela Merkel is suddenly calling for swift action.

"It is clear that the negotiations must now be accelerated," she said Wednesday at an appearance with Dominique Strauss-Kahn, the head of the International Monetary Fund (IMF), in Berlin. A serious-looking Merkel called for an agreement to assist Greece "within the next few days," adding: "We will not back out."

Observers were surprised by Merkel's strong words. Until now, the chancellor has not exactly come across as a driving force when it comes to action on the Greek crisis.

Sitting Out the Crisis

Merkel has long been reluctant to promise the Greeks billions of euros in European aid, something which has earned her the nickname "Madame Non" in the European Union. At home in Germany, however, she has been feted by the tabloid press as the "Iron Chancellor" because she had rebuffed the "bankrupt Greeks."

Merkel thought she could sit out the crisis, postponing any unpopular promise to give aid to the Greeks at least until after key state elections in North Rhine-Westphalia on May 9. The vote is crucial to Merkel because it will determine whether her conservative Christian Democrats and their coalition partner, the business-friendly Free Democrats, are able to maintain their majority in the Bundesrat, Germany's upper legislative chamber which represents the interests of the states.

But Merkel's calculation that the markets could be kept calm until then with vague promises did not work out. After all, global economic forces do not care about a German state election.

Hectic Pace

Greece is not only looking shaky; it is positively tumbling. A national bankruptcy is getting closer. And after Portugal's credit rating was downgraded on Tuesday, followed by a downgrade for Spain on Wednesday, the prospects for other euro-zone members are also looking bleak. Observers fear a wildfire could break out in the euro zone. The stability of the European single currency is at stake.

Now things are moving at a hectic pace, and the chancellor is acting like there's no tomorrow. The government has drafted a concise law authorizing Berlin to provide cash injections for Athens. Merkel's cabinet could approve the draft as soon as next Monday, and Germany's two legislative chambers, the Bundestag and Bundesrat, could pass it before the North Rhine-Westphalia election.

On May 10, an EU summit could formally release the aid, and the first billions could be flowing to Athens by May 19, the date on which Greece must float a new bond on the market.

Merkel also discussed the Greek debt crisis in a telephone call on Wednesday evening with US President Barack Obama. According to the White House, the two leaders talked about "the importance of resolute actions by Greece and timely support from the IMF and Europe."

'A Problem for Germany'

In Berlin on Wednesday, one crisis meeting followed another, as the chancellor, Finance Minister Wolfgang Schäuble and members of parliament met with the heads of the European Central Bank (ECB) and the IMF to get briefed on the seriousness of the situation -- a situation that has seen Greece's credit rating disintegrate to junk status.

"This is not a problem for Greece, it is a problem for Europe, and therefore also a problem for Germany," Schäuble said Wednesday after his meeting with ECB President Jean-Claude Trichet and IMF Managing Director Dominique Strauss-Kahn. Just a few weeks ago, Schäuble was still publicly stating that Germany should not "pay for Greece's problems." But on Wednesday, Schäuble said that action has to be taken "extremely quickly." Strauss-Kahn, standing next to him, noted that the situation in the EU is getting "worse and worse" with "every day which is lost," something that could have "consequences far away." His comments could easily be interpreted as a criticism of the German government's policies in recent weeks.

Others were more explicit in their criticism. "The indecisiveness and dithering of the European Union, instigated by the chancellor, have exacerbated the crisis and driven the consolidation requirements sky-high," complained Jürgen Trittin, who leads the Green Party in Germany's parliament. "Angela Merkel's policy of hesitation is in ruins," said Udo Bullmann, a member of the European Parliament for the center-left Social Democrats, referring to the election in North Rhine-Westphalia. Left Party co-leader Oskar Lafontaine accused the chancellor of having acted irresponsibly: "With her tactics ahead of the election in North Rhine-Westphalia, she has driven the Greeks' interest rates way up."

In other EU member states, too, some are now angry that the timing and conditions for Greek aid have been dictated by Merkel. Andreas Schieder, a senior official in Austria's Finance Ministry, told the German business daily Handelsblatt that it was a pity that the "forthcoming state elections in Germany are apparently more important than European stability." Meanwhile, sources close to the French government said that "it is clear that Germany's attitude is based on domestic political considerations."

Expensive Strategy

On Wednesday, Merkel refused to tolerate criticism of her crisis management. But her previous reluctance to act has indeed proved to be an expensive strategy. If the German government had taken an immediate and clear stance in support of Greece and in favor of a speedy implementation of aid, things would not have come so far, said Martin Faust, a professor at the Frankfurt School of Finance and Management. Tito Boeri, an economist at Milan's prestigious Bocconi University, told the Handelsblatt newspaper: "The longer Merkel hesitates, the more expensive the assistance to Greece will be -- especially for the German taxpayer."

So far it has been assumed that Germany would shoulder an €8.4 billion ($11.1 billion) credit guarantee for Athens this year. But that will not be the end of the story. Finance Minister Schäuble's draft law already provides for sums in the billions over the next two years -- without, however, specifying exact figures.

But on Wednesday, other people were happy to provide concrete numbers. According to Green Party floor leader Jürgen Trittin and senior SPD politician Thomas Oppermann, Strauss-Kahn and Trichet said behind closed doors that Greece could need as much as €120 billion over three years. The EU would provide two-thirds of that sum, with Germany in turn paying 20 percent -- in other words, around €16 billion.

Totals Get Higher and Higher

Meanwhile, German Economy Minister Rainer Brüderle came up with even higher totals. The aid package for Greece from the EU and IMF will probably amount to €135 billion ($179 billion) over the next three years, Brüderle announced Wednesday while on a visit to the Brazilian city of Sao Paulo. Under the current arrangement, Germany is supposed to contribute €8.4 billion annually to the package. But, according to Brüderle, the figure could go much higher. "I can't exclude the possibility that the amount will be higher," he told reporters. Brüderle said he was in constant telephone contact with Finance Minister Schäuble and Chancellor Merkel regarding the Greek crisis.

In which case, he should also have known that his open words would not come across well with Merkel, as she was bound to interpret them as a spanner in the works. It's true that Merkel herself on Monday in a meeting of her party's executive mentioned a possible total of around €24 billion. On Wednesday evening, however, when asked about Brüderle's statement, she made clear with a painful smile that she wants to wait for the ongoing negotiations between the IMF, EU and Greece to be completed. "I have repeatedly asked that numbers not be mentioned, as long as figures are not in conjunction with a completed program," she said.

Despite her newfound thirst for speed, the chancellor still doesn't want things to move too quickly, it seems.

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