Germany will not be ‘blackmailed’ into renegotiating Greek rescue

Germany has said it will not be "blackmailed" into renegotiating Greece's rescue programme should a new hard left government take office after elections later this month.

The euro dropped to a nine-year low after a report in Der Spiegel magazine on Monday that Berlin was no longer opposed to Athens leaving the currency bloc.

While German officials disputed the tone of the report, and insisted Berlin had no new stance on Greece, German economics minister Sigmar Gabriel said he expected existing agreements to be honoured by a new Greek government, "whoever forms it".

Mr Gabriel, head of the Social Democratic Party (SPD), said Germany and the EU were anxious to see Greece remain in the currency bloc, but that structural reforms left it “more robust than at the height of the euro crisis”.

“For that reason we are not susceptible to blackmail,” said Mr Gabriel. Fears of a fresh round in the euro crisis were sparked when Greece called a snap election last week, to be held on January 25th, which could bring the anti-bailout Syriza party to power. It has pledged to write-off much of Greece’s debt and renegotiate the terms of its bailout with the EU and IMF.

While chancellor Angela Merkel remained silent on Monday, close allies in her Christian Democratic Union (CDU) fanned out across the German media to take a tough line towards Greece.

"If the Greeks are not ready to continue the path of savings and reforms then they have to leave the euro area," said Michael Fuchs, CDU floor leader in the Bundestag, in "Die Welt" daily.

“In this I share completely and totally the position of the chancellor and finance minister.” The robust tone from the Berlin government quarters has surprised - and alarmed - the German opposition, as well as members of the ruling grand coalition.

Carsten Schneider, finance political spokesman for the SPD, said the tough line on Greece was not agreed within his party.

He disputed claims in the CDU that Europe could shoulder the costs of a Greek exit: Germany would face a €60 billion loan write-down.

“If Greece were to leave the euro area the speculation would begin about the next wobbly member, something we cannot allow,” he said, warning of higher interest rates.

According to Der Spiegel, Chancellor Angela Merkel is more confident that the euro area would survive a Greek departure than in previous years, particularly as Ireland and Portugal have completed and exited their reform programme.

Fears about preventing a “domino effect” in the currency bloc, the magazine said, has been replaced by new “weakest link” thinking.

"If the weakest link drops out of the chain, the rest is stronger as a whole," the magazine wrote, summarising this thinking. Seasoned political observers see Berlin's move as pre-election megaphone diplomacy, a timely shot across the bow of Syriza leader Alexis Tsipras.

But, with an eye, on the plunging euro exchange rate on Monday morning, leading German economists warned Berlin about over-doing the rhetoric. Prof Lars Feld, economics professor at the University of Freiburg, agreed that the post-crisis euro bloc is better protected against the prospect of financial market contagion.

“But one can imagine political contagion that euro critical parties or movements, such as in Italy, could get a shot in the arm from such a step,” he told German radio. German officials take the opposite view: that concessions to a Syrzia-led government would dampen the appetite for reform in Italy and France.

“This would damage the credibility of Europe,” said Mr Fuchs of the CDU. “For the Greeks, the time for poker is over.”

While CDU officials pushed a hard line, a German government spokesman denied Berlin had changed its line and said it assumes “that Greece will continue to meet its obligations”.

The mixed signals from Berlin pushed the euro down the euro as much as 1.2 per cent against the dollar in early trading to $1.1864 - its lowest level since March 2006. Later the decline narrowed to a four-year low.

Germany’s euro critical Alternative für Deutschland (AfD) party seized on the renewed talk of a Greek exist and urged Athens to “pull the emergency brake and leave the euro”.

"I welcome this belated insight from Dr Merkel and from Schäuble that a Greek exit from the euro would be bearable," said AfD leader Prof Bernd Lucke. Amid the renewed talk of a so-called "Grexit", Greek deputy prime minister Evangelos Venizelos said German finance minister Wolfgang Schäuble suggested such a move in 2011.

Mr Venizelos said the German politician said the EU would assist Athens with a “friendly” transition back to the Drachma.

In Kathimerini newspaper, Mr Venizelos said he warned Dr Schäuble that not all dangers of such a move were "visible to the naked eye", and the idea was dropped.