ANALYSIS:In a meeting with foreign journalists, the German leader cast aside lingering doubts about tinkering with the legacy of her political mentor, Helmut Kohl, and conceded that there is an urgent need to reform the euro zone, writes DEREK SCALLYin Berlin

After Ireland last year and now Greece, growing fears that another euro-zone crisis lies around the corner has prompted a moment of clarity in Berlin.

Thus the idea of a European Monetary Fund (EMF) floated by finance minister Wolfgang Schäuble on Sunday was yesterday given the Merkel imprimatur.

“We have realised that we are in a situation where our instruments are not adequate, so we have to think about what the euro zone can do in such a situation again if necessary, without any legal difficulties,” said Dr Merkel.

The legal barrier she is referring to is the no-bailout clause, article 125 of the Maastricht Treaty. For Germany, this clause remains as valid and non-negotiable now as when it was demanded by Helmut Kohl two decades ago. Berlin says it can afford neither politically nor financially to be seen as an easy touch for potential euro-zone basket cases.

But conscious of criticism that Germany has failed to do enough in the Greek crisis, Dr Merkel declared yesterday that she is not opposed to supplementing the existing euro rules if it helps the stability and reputation of the single currency.

“We’re saying we want to solve our problems ourselves,” she said.

Though the details of the EMF have yet to be agreed, the fund as envisioned by Berlin would require a change of EU treaties. Though the Lisbon Treaty came into force just four months ago – to sighs of relief in Berlin and elsewhere – Dr Merkel made clear she is prepared to begin fresh negotiations.

“Treaty changes aren’t easy but the entire EU system would seize up – something I don’t want – if we said we cannot change a comma or a full stop in the treaty in the next 20 years,” she said.

Germany’s insistence on retaining the existing euro-zone rules did not stop Dr Merkel criticising their efficacy, in particular the punitive measures for member states in breach of the stability and growth pact.

Greece is in breach of the pact, Dr Merkel pointed out, and is thus subject to the corresponding fines. But the prospect of fines did not prevent the Greek crisis, she pointed out, nor is the prospect of a fine alone likely to discipline a country in the future. Thus the attractiveness of a European Monetary Fund to help cash-strapped capitals – with strings attached.

The Germans say their proposals are less about the current Greek crisis and more about the future. Dr Merkel said she is prepared to lift German opposition to greater reporting of economic data to Brussels if it helps act as an early warning system in the future.

In short, she wants to close off avenues for euro-zone members to cook their books.

“Germany said in 2005 that we didn’t want this as we thought it was out of keeping with the subsidiarity principle to allow Brussels too much access to national data and facts,” said Dr Merkel. “In hindsight and looking ahead, I say that we should change our position. Germany is prepared to extend the competences of Eurostat.”

Germany is anxious, too, to see concerted European action to curb financial speculation on Greece and other euro-zone members, in particular through credit default swaps (CDS).

“We can’t fully ban them but we need more transparency,” she said, emphasising her wish to end a practice where CDS traders can bypass the principle of insurable interest and receive payouts if predicted negative events hit assets the trader doesn’t even own. After waiting and watching the Greek crisis unfold, Angela Merkel has got down to work.

The New Fund: What Is Being Discussed

What is under discussion?

The European authorities, led by Germany and France, are discussing the development of a European Monetary Fund (EMF), a scheme that would be used to prop up euro-zone or other EU members that are threatened with sovereign default.

Details as to how such a fund would work and be financed remain patchy, although the very title of the projects suggests similarities with the International Monetary Fund (IMF).

Whatever about the specific operation of the fund, the key point at this stage is that the most powerful governments in Europe have decided to go down this road at all.

Why not revert to the IMF?

The IMF makes special loans to distressed government, attaching alongside them drastic policy conditions.

A European fund is likely to operate in a similar way. For the EU, there would be two key advantages to pursuing this course. First, avoiding the sense the European authorities are reduced to impotence in the face of a euro crisis.

Second, ensuring management of the scheme remains within Europe. This is important from a political and optical perspective, as certain IMF board members come from countries whose currencies compete with euro.

Is this simply a bailout for Greece?

No, insists the office of EU economics commissioner Olli Rehn. This scheme is conceived as a mechanism available throughout the euro zone or EU at large to prevent a repeat of the Greek drama.

The scheme would be pre-emptive and permanent. Greece may yet need external aid, however.

Under discussion recently was the possibility of loan guarantees to the country.

Why now?

Greece’s financial woes have heightened pressure on the system through which the European authorities manage the single currency.

A month after EU leaders pledged exceptional aid to Greece “if needed”, the proposal now under discussion is being framed as part of a wider package of measures to deepen economic co-ordination and intensify EU surveillance of euro members’ public finances.

In return for the protection offered by a nascent EMF, governments would have to agree to subject their public finances to more thoroughgoing scrutiny by Brussels.

Together, these developments would deepen economic integration in the euro zone.

So the moment of truth has arrived for the euro?

The currency’s problems don’t end with Greece. Poor public finances in Spain and Portugal are causing concern in Brussels, just as anxiety about Ireland came to the fore a year ago.

The EMF proposal and tighter central surveillance are designed to boost the capacity of the euro-zone’s managers to take robust action to protect the system at large from its weakest members.

What considerations arise?

Uncertainties abound in respect of an EMF.

First, questions arise as to whether such a scheme could be developed without breaching the “no bailout” clause enshrined in the EU treaties.

While not in keeping with the spirit of the clause, the sense in Brussels is that legal ways would be found to override the bailout ban if there was political will to do so.

Is the political will there?

As the biggest likely contributor, Germany has long resisted such a development.

However, chancellor Angela Merkel declared her support yesterday.

With Europe’s most powerful economy on board, the way is now clear to hone the plan.

Whether that requires a change to the EU treaties remains to be seen.

Given their experience with the Lisbon reform treaty, EU leaders would be keen to avoid any repeat of that messy process.

High level sources say it may be possible to establish an EMF by rewriting the regulations that underpin the stability and growth pact, as the euro rulebook is known.

What next?

Euro group finance ministers will discuss the plan at their monthly meeting next Monday.

The issue will also loom large at the next EU summit a fortnight from Thursday.

EU leaders may decide to postpone key decisions until a later summit as they are keen to avoid Greece’s problems being seen to dominate their work agenda.

That said, the situation is very fluid and events are rapidly unfolding. Whatever happens, officials say the objective is to have a political agreement in place by the end of Spain’s six-month presidency of the EU in June.