Dissension over Greek bailout weakens Merkel

Chancellor Angela Merkel – the driving force behind Europe's often-controversial response to its economic woes – is facing increasing domestic criticism about her eurocrisis management.

The German parliament on Monday solidly backed the second bailout package for Greece. But for the first time since she took office in 2005, Mrs. Merkel did not get the so-called chancellor’s majority, the absolute majority from within her own coalition of three center-right parties. The vote is seen as a defeat for Merkel and her policies, which are focused on austerity and budgetary discipline as measures to solve the sovereign debt crisis in the eurozone.

While no one is yet questioning her de facto eurozone leadership, an extended crisis could become a decisive factor in Merkel's political future. 

“This second bailout won’t do,” says Manfred Kolbe, a member of Merkel’s Christian Democrats, one of 20 members of Merkel's camp who refused to back her. “There is already a third one on the horizon. We are throwing good money after bad. Unless Greece becomes an economy that can compete with other eurozone members, we are wasting German taxpayers’ money.”

The chancellor conceded there was no guarantee this bailout would actually work, but warned that a Greek default could have unpredictable consequences for the financial security of Germany, the eurozone, and even the global economy. “I have to weigh risks,” Merkel said during the debate, “but I must not embark on adventures.”

For Peter Bofinger, one of Merkel’s economic advisers, the vote indicates a growing doubt about the rescue operation. “The problem is in large parts a communication failure by the government,” he says. “While it sets up billions of financial aid, the cabinet fails to impress on the public the gigantic efforts Greece makes to solve its debt problem. You cannot call Greece a bottomless pit in an attempt to meet voters’ sentiments, and still ask parliament to approve more and more credit.”

The second bailout for Greece since 2010 was approved by European leaders and the International Monetary Fund (IMF) last December, after it became apparent that a first package worth €110 billion ($148 billion) would not be enough to prevent the highly indebted country from going bankrupt. Following weeks of intense negotiations, EU finance ministers last week confirmed that Greece had fulfilled the tough conditions linked to the bailout – deep cuts in the state budget, a reduction of the minimum wage, and the lowering of pensions, among other things – and released the second package of €130 billion ($175 billion), pending the ratification of national parliaments where required.

The exact shares for each creditor country will be agreed to at another meeting of finance ministers later this week. But Germany will have to shoulder the largest part, a fact that is causing unease among a growing number of Germans. “Stop going down the wrong way,” Germany’s top-selling newspaper “Bild” told parliamentarians on Monday, and bolstered the front-page headline by a poll in which 62 percent of those surveyed said there should be no second bailout for Greece.

Ministers break ranks and talk about a Greek exit

The debate about Merkel’s euro policy has finally reached her own cabinet. Until now, she has successfully stifled criticism in her own ranks through the dictum that a “failure of the euro means a failure of the European Union.” But a day before the vote in the Bundestag, Interior Minister Hans-Peter Friedrichs broke the taboo and told Der Spiegel magazine that Greece might have better chances to recover economically if it left the common currency. “I don’t want to kick out Greece,” the minister said, “I’d rather create incentives for them to leave.”

“Friedrichs only voiced what many of us think,” says Thomas Silberhorn, a conservative parliamentarian who voted against the bailout package. “A return to the drachma would be better for both, Greece and the eurozone.”

But in her insistence on keeping the eurozone intact at all costs, Merkel still has strong support, including Mr. Bofinger, her economic adviser. “A Greek exit would be a fundamental change in the character of the eurozone," he says. "It would be a sign to the financial markets that the euro is not really a common currency, but rather a fixed exchange rate system from which other countries like Spain or Italy could soon depart.”

Such a perception would lead to higher interest rates for the concerned countries, argues Bofinger, and eventually to a chain reaction that could reach the core countries like France and Germany.