In Greece bailout, trouble brews for Germany's Merkel

As Greece's financial woes make a raucous return, so, too, does the political pain for Germany's Chancellor Angela Merkel.

Ms. Merkel, whose country is shouldering a large part of last year's bailout package of 110 billion euros ($155 billion), is fearing public anger over plans for a second bailout package for Greece, a large part of which would be paid by the German taxpayer.

This time around, Merkel is insisting on involving private creditors in a Greek rescue. Other European governments and the European Central Bank want private involvement, too, but to a lesser degree.

A meeting tomorrow between Merkel and French President Nicolas Sarkozy is expected to address this stumbling block, possibly clearing the way for another bailout package of up to 120 billion euros ($170 billion). But Germany may prove to be more demanding this time around to ensure Greece does not falter again.

Already, Greek Prime Minister Georges Papandreou is facing protests over his radical austerity plan as he tries to lead the country out of a financial crisis that threatens to end in sovereign bankruptcy. In the end, conditions for further financial help would probably mean Greece would have to implement severe belt-tightening.

“The German government sticks to certain principles of financial regulatory policy,” says Ferdinand Fichtner, chief economist at the Berlin-based German Institute for Economic Research.

“They believe that the common European currency, or any market economy for that matter, can only work if we stop the practice of socializing losses while privatizing profits. And there is of course a concern the German public might see any permanent financial transfer to Greece very critically.”

Before approving yet more financial aid, Germany’s finance minister tried to convince his European colleagues that private creditors should be asked to swap mature Greek bonds they are holding for new ones with a seven-year maturity. His plan was rejected at a ministerial meeting in Brussels Tuesday that ended without concrete results.

The public reaction in Germany to the first bailout package last May was unusually strong. Greeks were depicted as lazy and deceptive. Greek immigrants who had lived happily in Germany for decades reported they were suddenly the target of xenophobic remarks, and a national news magazine carried a picture of Aphrodite making an obscene gesture to the Germans on its front page.

And only a few weeks ago, Merkel was accused of tapping into this kind of sentiment when she complained that people in some southern European countries took retirement earlier and had more leave than Germans.

It is not just voters the chancellor needs to worry about. There is dissent within her coalition government.

Frank Schäffler, financial spokesman for the Free Democrats, the junior partner in Merkel’s government, is openly critical of any aid for the Greek economy. “I voted against the first Greek bailout because I think bailing out banks or governments is wrong, it’s perverting the principles of the free market,” says Mr. Schäffler. “We need the option of a regulated sovereign default. And we need a change in the eurozone contract. Countries like Greece should be able to leave the euro, at least temporarily.”

“Greece is caught in a downward spiral of debt,” says Mr. Fichtner, the economist. “So both public and private creditors have no alternative but to accept a haircut. Rather sooner than later.”