What Is Merkel's Role in This Greek Tragedy?

BERLIN (April 29) -- In the Greek tragedy playing out in Europe, which role has German Chancellor Angela Merkel taken on: hero or villain?

Merkel had been holding out against an expensive bailout of debt-hampered Greece, apparently hoping she could put off any decision until after a crucial state election May 9. But as financial markets gyrated and the euro swooned this week, Merkel was forced to back down at a meeting in Berlin on Wednesday with key officials from the International Monetary Fund and the European Union.

She was pressured from the IMF, her European allies and even an 11th-hour phone call from U.S. President Barack Obama before she agreed after the meeting that Greece needed help in the next few days.

"We will not hold back," Merkel said. "Clearly, the negotiations must be carried out quickly."

The stakes are high, of course.

Politically, Merkel is walking a tight-rope. For weeks the mass daily Bild tabloid, the paper most widely read by average Germans, has run blaring banner headlines such as "The Greeks Want Our Money" or "The Greeks Want More of Our Money."

The election in North Rhine Westphalia, Germany's most populous state, is critical. If Merkel's party loses, her coalition government in Berlin will also lose its thin majority in the upper house of parliament, which must approve some two-thirds of bills passed by the lower house. That means Merkel can't afford to have the influential Bild fanning public opinion against her ahead of the election.

Many German politicians and euro critics have repeatedly insisted that Greece should be forced to introduce painful reforms before receiving a single euro cent from German taxpayers. Some have urged booting Athens out of the euro zone -- a move that is not possible under the Maastricht Treaty on monetary union. Even after Merkel caved in to pressure this week, the chorus of those wanting to punish Greece continued.

"Any debtor in a restructuring process must be prepared to sell its silver," said Josef Schlarmann, an economic expert in Merkel's Christian Democratic Union party. "That means selling anything that can reduce its debt: state industrial holdings, real estate, even islands."

German commentators, ranging from the toxic language in Bild to the more conciliatory, generally jumped to Merkel's defense against criticism from abroad.

"Supposedly we have no money for tax cuts, no money for school upgrades, no money to maintain parks, no money to fix our streets ... but suddenly our politicians have billions of euros for the Greeks who have deceived Europe," Bild wrote.

The conservative daily Die Welt dismissed suggestions that Merkel's reluctance to dip into German coffers for Greece was a sign of German nationalism.

"No, Angela Merkel is no Mrs. No only because she refuses to immediately stuff billions in taxpayer's money down the throats of the bankrupt Greeks," the paper wrote in a commentary. "And the German government is not anti-European or nationalist minded, but finally truly European, because it is being realistic, and no longer putting German interests last and standing humbly, willing to pay."

Some commentators are saying that the criticism of Merkel misses the real issue: that the Greek debt crisis demonstrates that differences between the member states of the European Union are much greater than previously thought. In a thoughtful commentary, the Frankfurter Allgemeine Zeitung says it is time to rethink the European project.

"The Greece crisis demonstrates unabashedly that over the past few decades the E.U. has overextended itself," the paper wrote. "When the current problems are solved -- one way or another -- Europe needs to take a real pause for reflection."

In Germany, opposition parties sought to make political hay with an eye to the state elections next week.

"The back-and-forth in Europe, instigated by the German chancellor, has made the crisis worse," said Jurgen Trittin, a leader of the environmentalist Green Party.

Outside Germany, some European government officials expressed what many have been keeping to themselves.

"It is a shame that the upcoming state elections in Germany seem more important (to the German government) than stability in Europe," quipped Andreas Schieder, deputy finance minister in Austria, in an interview with the German business daily Handelsblatt.

So, while the rest of Europe sees Merkel as the villainous "Madame Non," many Germans are pleased that their heroic "Iron Lady" in the chancellery is standing up for their hard-earned euros.

Merkel's tactics have unsettled financial markets. The uncertainty about which way Europe's most important member will come down on the issue of a Greek bailout is causing investors to panic and drive yields on Greek bonds into the stratosphere.

Her waiting game is not only making Greece's problems worse and causing the euro to weaken against the dollar -- causing the Americans to worry about their exports. It also threatens to make any rescue more expensive for European taxpayers -- including the Germans -- and could even hit German state-owned banks, which are heavily exposed to Greek debt.

German banks, insurers and investment funds hold 28 billion euros ($37 billion) in Greek bonds, according to a study by Barclays Capital based on IMF data. Now the danger of the contagion spreading is growing after a rating agency downgraded the bonds of Spain, Portugal and Greece this week.

Axel Weber, president of the German Bundesbank, said allowing Greece to go bankrupt would have unforeseeable consequences for financial markets and the global economy. He said a rescue package that also forces Greece to drastically cut its deficit and practice fiscal discipline is best for everyone involved. He also urged using the current crisis to strengthen European financial regulations.

"To make sure this remains an absolute exception and that in the future things don't reach this stage in the first place, we have to significantly tighten the rules in the EU," he said in an interview published in the Bild newspaper today.