Berlin warns bailout at risk as Greece faces new election

GREECE FACED the wrath of Germany as talks to form a pro-bailout government in Athens came to a standstill, threatening a new election next month and raising fresh questions over the country’s membership of the euro.

Despite clear signs of progress only two days ago, the latest attempt to strike a deal to implement the EU-IMF rescue plan broke down yesterday amid rancour between Greek leaders.

The fraught political situation is stoking anxiety in Europe as officials increasingly question whether any consensus to work the bailout is feasible.

Greek parties opposed to the austerity plan tied to the rescue won the most votes in the election last Sunday and opinion polling since then points to rising support for them.

In pointed remarks yesterday, two senior German ministers stressed that Greece’s membership of the euro is on the line if it does not execute the rescue plan.

Foreign minister Guido Westerwelle told the Bundestag Greece’s future in the euro zone was in its own hands. “We want to help and we will help Greece, but Greece has to be ready to accept help,” he said.

“If Greece strays from the agreed reform path, then the payment of further aid tranches won’t be possible. Solidarity is not a one-way street.”

Finance minister Wolfgang Schäuble went further still, telling the Rheinische Post that it is now within the power of Europe’s leaders to contain market contagion if Greece leaves the euro.

“We have learned a lot in the last two years and built in protective mechanisms,” Mr Schäuble said. “The risk of effects on other countries in the euro zone have been reduced and the euro zone as a whole has become more resistant.”

The warnings from Berlin were seen as a rebuttal to claims within the leftist Syriza party in Greece that Europe would never cut the country loose from the euro due to the risk of contagion. Diplomats and EU officials say any Greek exit would present very big risks to the single currency.

Rating agency Fitch said the implications of an exit were highly uncertain and would lead to ratings downgrades of other weakened countries, Ireland among them. “A Greek exit would break a fundamental tenet underpinning the euro – that membership of economic and monetary union is irrevocable,” Fitch said.

The German pressure on Greek leaders was echoed within the EU institutions. European Council president Herman Van Rompuy said Greece was facing a defining moment. “I appeal to the sense of national responsibility of all political leaders to reach an agreement respecting the country’s engagement and ensuring its European future,” he said.

As EU economics commissioner Olli Rehn forecast slow recovery in the second half of this year from Europe’s “mild recession”, he too called on Greek leaders to reach an accord. “I trust that the Greek political forces will aim at soon forming a coalition government that can ensure that Greece will indeed return to a sustainable footing and return to growth and competitiveness,” Mr Rehn said.

The Democratic Left party in Greece had signalled its willingness to enter government with the Pasok socialist party and the centre-right New Democracy but yesterday it demanded Syriza’s involvement in any unity government. Syriza leader Alexis Tsipras refused to join any alliance which would work the bailout.

The latest polls suggest Syriza would come first in any new election.