Merkel praised in Germany for hard line on Greece debt crisis

German Chancellor Angela Merkel received wide praise at home ahead of May elections for negotiating a bailout package for Greece that limits the costs to Germany.

By , Correspondent

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    German Chancellor Angela Merkel speaks during a media conference at an EU summit in Brussels, Friday.
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German Chancellor Angela Merkel received widespread praise across Germany today for insisting at a meeting of EU officials that her country alone should not shoulder the Greece debt crisis.

In recent days Ms. Merkel faced down critics from within her coalition government and from other European allies, who sought to keep the bailout package within the eurozone. Yet, before leaving for Brussels yesterday to conduct final negotiations, Merkel said Greece would be helped only if all other options were exhausted and if the International Monetary Fund (IMF) provided financial backing. Merkel got her wish.

"It's simply a fact that because at present the handling of deficit procedures isn't sufficiently regulated, Europe isn't in the position to solve such a problem on its own," she told reporters today at the end of the two-day summit of EU leaders in Brussels. They hatched a bailout plan containing all of the provisions she demanded, including veto power for Germany over any financial aid.

Recommended: What would happen if Greece exited the eurozone?

It remains unclear how, or even if, the IMF might step in, and Greece's central bank chief later said Athens was unlikely to need help from either the European Unon or the IMF.

IN PICTURES: Top 10 things Greece can sell to pay off its debt

It's a political victory for Merkel as she prepares for May elections. A newspaper here today called her Germany's "iron chancellor."

Yet this praise shields the fact that Merkel, under political and economic strain, had softened her stance on the bailout in recent weeks. Agreeing to any bailout plan, no matter the provisions, is an about face from her earlier stance that any IMF involvement in the eurozone would be an embarrassment, and that Greece should bear responsibility for its own debt.

Internal pressures force Merkel to change course

As the severity of the crisis emerged in January, the immediate reaction from Greece and other EU members was that Germany, as the largest economy in the eurozone, should publicly assure investors that Berlin would provide assistance to Athens if necessary. This guarantee would calm investors and allow Greece to raise money through bond issues, they argued.

No such assurance came. The German public was opposed to providing help to what they considered a corrupt Greek government with lavish social welfare spending. Merkel, citing a clause in the European Constitution that prevented one member from bailing out another, repeatedly dismissed calls for German action.

In the following weeks, however, economic and political realities forced Merkel to change her position. Greece needed to raise $26.6 billion in April and May to make loan refinance payments – money that could not be raised without some kind of guarantee of an outside party. If Greece were to default, it would drag down the value of the euro and undermine confidence in the euro zone. The German economy would in turn suffer.

Yet a German-backed bailout was politically risky. Parliamentary elections in the industrial western state North Rhine-Westphalia, an area where a bailout is unpopular, are set for May. A bad showing by Merkel's Christian Democratic Union or her coalition partner, the Free Democratic Party, could upset her center-right majority in the upper house of German parliament and derail her political agenda.

"The real question isn’t what Merkel wanted but why she wanted it," says Erik Jones, a European Studies professor at Johns Hopkins School of Advanced International Studies in Bologna. "She has to be able to present a credible case to the North Rhine-Westphalia electorate that they have not bailed out Greece."

In recent weeks, Merkel recognized that a bailout of some kind was inevitable. The IMF presented Merkel with a political out.

"We wasted a huge amount of time because a number of politicians including Merkel thought the IMF was unacceptable," says Charles Wyplosz, a professor of international economics at the Graduate Institute in Geneva.

"The precedent has now been set that Germany would have to [back bailouts of] other countries," Professor Wyplosz says, referring to countries like Portugal and Spain, which also carry dangerous amount of debt. "Germany is now forced to make the same promises elsewhere."

Challenges looms

Even with limited German involvement in the plan, challenges here have begun. The first comes from four German professors challenging the plan on the grounds that it violates the EU’s no-bailout clause. In a Financial Times editorial today, economics and law professors Wilhelm Hankel, Wilhelm Nölling, Karl Albrecht Schachtschneider, and Joachim Starbatty said that Greece’s blatant flaunting of EU budget rules shows it is not worthy of a bailout and should be expelled from the euro zone.

"Removing Greece from the euro provides a way of preventing a drama from becoming a tragedy – and of ensuring the survival of monetary union," they wrote.

IN PICTURES: Top 10 things Greece can sell to pay off its debt

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