The 16-nation euro zone is divided over whether and how best to provide financial help to Greece, whose struggles to cope with soaring debt and deficits have plunged the currency bloc into the deepest crisis of its 11-year existence.
Chancellor Merkel, who faces a key state election in May, is keenly aware that the German electorate overwhelmingly opposes a bailout for Greece and has hardened her line against the EU making a concrete pledge of financial support.
An FT/Harris poll to be published in Monday's Financial Times shows a third of Germans think Greece should be asked to leave the euro, while 40% believe Germany would be better off outside the currency bloc.
Merkel's stance pits her against Brussels and major European partners, who favour strong action to end a speculative assault on Greek assets that has made it twice as expensive for Greece to borrow as for Germany.
On German radio Merkel denied Greece had any "acute financial needs" and rejected suggestions by European Commission President José Manuel Barroso that EU leaders agree a standby aid package for Athens at a summit this week.
"I don't see that Greece needs money at the moment and the Greek government has confirmed that. That's why I'd urge us not to stir up turbulence in the markets by raising false expectations for Thursday's council meeting," Merkel said, referring to the 25-26 March summit.
"Aid will not be on the agenda at the meeting on Thursday because Greece says itself it doesn't need help right now."
Barroso urges EU to agree loans
Barroso told Monday's edition of the Handelsblatt newspaper that the European Union urgently needed to resolve the Greece problem "regardless of the political agenda in member states".
"Securing the stability of the currency union is in Germany's interest," Barroso told the German daily. "I'm sure Germany will make a constructive contribution to resolving the current crisis."
On Friday (20 March), the Commission president said the 16 countries that share the euro currency should be ready to make coordinated bilateral loans to Greece.
"The European Commission is ready to make a proposal for an instrument for coordinated assistance for Greece," the head of the European Union's executive said in a statement in Brussels.
"Such an instrument will be constituted by a system of coordinated bilateral loans and will be compatible with the [euro zone's] no bailout clause and with strict conditionality."
Shortly after Barroso's comments were released, the German government took the unusual step of issuing a statement saying Merkel had spoken to Greek Prime Minister George Papandreou on Sunday and he told her Greece does not need financial help.
"The Greek prime minister reaffirmed that Greece does not need any financial assistance," the statement said.
Berlusconi 'absolutely in favour' of giving aid
Italy has long been considered one of the weak links in the euro zone but Prime Minister Silvio Berlusconi told Reuters at an election rally in Bologna on Sunday that he was "absolutely in favour" of the EU providing aid to Greece.
He later hardened his stance, saying the European Union had "no reason to exist" if its members were not ready to help a crisis-hit eurozone country.
Italy's debt-to-GDP ratio is projected to hit 117% this year, compared to 120% forecast for Greece, though Rome has kept a lid on its budget deficit and has weathered the financial crisis better than others in Europe.
Uncertainty over European support for Greece pushed the euro as low as $1.3502 on Friday, its weakest level in more than two weeks. The spread between Greek and benchmark German bond yields ended the week at 325 basis points, the highest level in nearly three weeks.
IMF aid not ruled out
Some eurozone members believe the bloc itself should help Greece sort out its problems but Germany and others are not ruling out a role for the International Monetary Fund (IMF).
Berlin fears direct aid could set a precedent for other eurozone members and be challenged in Germany's Constitutional Court, because EU rules expressly forbid a bailout of a single currency member by its eurozone partners.
Greece has not formally asked eurozone members for funds, keen to see if its austerity plans restore confidence in its finances. But Papandreou warned on Friday that Greece was "one step from being unable to borrow".
Barroso refused to elaborate on what might happen if Greece were to snub the Europeans and turn to the IMF if it does not receive financial assistance from the EU (EurActiv 19/03/10).
"What I want to remind people is that Greece and all the member states of the EU are members of the IMF," he told the France 24 TV channel in an interview. "In fact the EU member states are by far the biggest source of revenue for the IMF. So it's not a question of prestige, it's a question of seeing what is the best way to respond to the situation."
Dithering and bickering
Unicredit economist Marco Annunziata said in a research note that with debt redemptions looming in April and May, Greece would likely require aid pledges soon.
"There is no shame in calling in the IMF, indeed it is the most efficient solution. The shame is having failed to ensure fiscal discipline and then spent months dithering and bickering on how to react - this will likely prove to be a further blow to the euro."
Greece's Deputy Finance Minister Philippos Sachinidis told Mega TV that Athens wanted the euro zone to "send the proper message to markets so that the next time Greece goes out to borrow in international markets it will face interest rates that price the Hellenic Republic in a better way".
He said a standby support mechanism could be a pool of funds set aside by other eurozone countries which can borrow at much lower rates. Athens could turn to this pool if markets fail to lower the rates at which they lend Greece money.
"What is lacking right now is not the mechanism to help Greece but the political will," Sachinidis said.
Angel Gurria, secretary-general of the Organisation for Economic Cooperation and Development, told a Greek newspaper on Sunday that joint EU and IMF support would be the best solution to the country's debt woes.
"I consider the best way is a combination of support, funding and guarantees," he told Kathimerini. "In this combination I see the IMF as well."
(EurActiv with Reuters.)
