Euro crisis welcomes Merkel back from holiday

German Chancellor Angela Merkel returned from holiday yesterday to face a dramatically deepening euro crisis and threats from her senior ministers that Germany would veto the next Greek aid package at the start of what was billed as the most decisive 12 months of her political career.

Merkel had tried to escape the euro's interminable problems by going hiking in the Austrian South Tyrol, visiting the Bayreuth music festival and spending a few days at her cottage in the east German countryside.

But on her return to Berlin yesterday she was brought back to reality by a reminder of the worsening crisis and her Government's growing doubts that Greece can remain in the eurozone.

Michael Fuchs, her party's deputy parliamentary leader, put the writing on the wall in an interview with the Handelsblatt newspaper. He said Germany would veto the next aid package if Greece proved unable to keep to its reform agenda.

"Germany has a right to veto. If we are convinced that Greece is not meeting its obligations, we will make use of that veto," he insisted.

Fuchs suggested Greece could remain within the European Union even if it left the single currency bloc and said the EU could then set up a "sort of Marshall Plan" to help Athens cope with the reintroduction of the drachma. He firmly rejected the idea of further European Central Bank (ECB) help for Greece because it could weaken the incentive to reform and created problems in other eurozone crisis countries.

His comments echo public opinion. According to the latest polls, 54 per cent of the German electorate opposes further aid for ailing eurozone countries. Within Merkel's ruling coalition, opposition to further aid for Greece has also been growing steadily.

Philipp Roesler, the leader of Merkel's coalition partners, the liberal Free Democratic Party, recently declared there were no longer "any great fears" about Athens leaving the eurozone.

A political grouping of Free Democrat finance experts yesterday published a paper outlining plans for a Greek eurozone exit. Markus Soeder, the Bavarian Finance Minister and a senior member of the Bavarian conservatives, the sister party to Merkel's Christian Democrats, raised eyebrows by demanding that Germany "make an example" of Greece and banish the country from the eurozone. Further aid for Athens would be like "pouring water on to the desert", he said.

The mounting hostility towards Greece was compounded by figures published yesterday which showed its economy had contracted by 13 per cent in the past two years. There were also reports that all major German banks had made preparations for a Greek eurozone exit.

"The big banks did their homework some time ago," said Bernd Richter, a banking expert with Capco. "For any bank that is not prepared, the consequences would be painful."

Many analysts believe the Greek crisis will move into its most critical phase next month when the so-called "Troika" of representatives from the International Monetary Fund, the EU and the ECB returns to Athens to assess the reform progress. Their conclusions will determine whether Greece obtains its latest €30 billion tranche of rescue funding.

Next month, Germany's constitutional court will deliver a crucial verdict determining whether the terms of the euro rescue fund known as the European Stability Mechanism are consistent with German law. A "no" verdict could seriously undermine attempts to save the single currency.

- Independent