Euro crisis is melting support for 'Iron' Merkel

The Germans now believe they were conned into the single currency, reports Tony Paterson from Berlin

Inside the vast and soulless concrete and glass box that serves as Angela Merkel's Berlin Chancellery, David Cameron looked a bit like a freshly appointed public school head boy come to pay his respects to matron.

He beamed with the enthusiasm of new office and tasks yet to be fulfilled. His hostess, the woman until only recently hailed as the most powerful leader in Europe, looked exhausted. These days, the strain lines are beginning to show prominently on the drawn face of 56-year-old Angela Merkel.

The two were meeting in the German capital last Friday for the first time since Cameron's appointment as Prime Minister. Their body language may have radiated polite bonhomie, but the underlying differences between the two leaders could hardly have been greater.

Mr Cameron is regarded even by conservatives in Germany as an arch eurosceptic who would like Britain to have as little to do with the European Union as possible. Angela Merkel, by contrast, is seen and sees herself as "Mrs Europe" – a woman on a lone mission to rescue the single currency and the vast eurozone construct that it serves.

This week's Stern magazine identified what Germans see as the main threat to the hallowed yet controversial euro. A cartoon depicted the market as a giant and ferocious cigar-smoking bull. It was being reluctantly tethered by hundreds of Lilliputian politicians equipped with chains.

In an emotional address to the German parliament on Wednesday, Ms Merkel tried to do her bit of bull tethering. Stepping up her crusade to save the euro she announced a unilateral partial German ban on naked short selling in a move that shocked her European counterparts. "I'll boil it down to the core: the euro is in danger. If we don't deal with this danger then the consequences for us in Europe will be incalculable."

The measure intended to calm German fears about the currency not only took Ms Merkel's European partners by surprise: it also caused global stock markets to nosedive and pushed the euro to a four-year low against the dollar.

Christine Lagarde, the French Economics Minister, was not the only European minister to be miffed. She remarked tartly that the German ban ought to have been imposed in concert with Ms Merkel's other European partners. She flatly contradicted the German leader: "The euro is a solid and credible currency," she said. " I absolutely do not think that the euro is in danger."

Ms Merkel has every reason to look shattered. Despite her desperate efforts to restrain the market bull, the Germans have turned against her over the euro because she is widely seen as having failed to deal with the crisis. "It is becoming difficult to believe in the euro project," said Jörg Eigendorf, a conservative commentator.

What was perceived as Ms Merkel's dithering over the Greek debt crisis helped to lose her party a crucial election in Germany's most populous state earlier this month.

The upshot is that her "dream team" government of conservative Christian Democrats and pro-business liberal Free Democrats has now lost its majority in Germany's upper house of parliament, the Bundesrat. From now on, her coalition will face difficulties finding enough political backing to enact its reform programme.

Observers are already starting to ask whether Germany's government will last its full term, which expires in autumn 2013. If that were not enough, Ms Merkel's popularity ratings, which six months ago made her Germany's most popular post-war leader, have slumped dramatically from 70 to 48 per cent. A survey published on Thursday showed that 60 per cent of Germans thought Ms Merkel had "lost control" of the euro crisis.

She was once considered the boldest of German leaders. At the height of the 2008 global financial crisis, she was hailed as the saviour of the country's economy after she issued generous government guarantees to safeguard the savings of every German citizen. But the tide turned against her as the Greek crisis began to unfold.

Germans began to sense that the wound psychologically inflicted on them by the insistence of the previous Christian Democrat leader, Helmut Kohl, that their mighty mark be replaced by the untried euro, had started to reopen. Sensing the public mood, the German media began printing highly critical reports about Greece.

The most critical organ was Germany's mass circulation Bild newspaper, normally a pro-conservative publication. For weeks during the Greek crisis, the paper harangued its readers and the government with charges that the corrupt Greeks had "duped" their way into the single currency by "lying". The Germans, who felt that they had made a huge sacrifice by taking on the euro in the first place, were left feeling that they had been conned.

With opinion polls showing that up to 80 per cent of Germans were opposed to their country contributing to a Greek bailout package and an important regional election looming in early May, Ms Merkel tried to delay. By the time Germany was forced to respond, the euro crisis was in full swing and Germans chose to vent their anger over her handling of the crisis by inflicting a humiliating defeat on her party in elections in the 13 million-strong state of North-Rhine Westphalia.

Ms Merkel has not recovered. Her unilateral decision to ban naked short selling in Germany provoked immediate criticism from her European allies and caused the euro to plummet. The move merely strengthened the impression that the German Chancellor had lost control.

Joschka Fischer, Germany's former Green foreign minister and an ardent pro-European, accused her of making a "complete mess" of the crisis. "I can't think of a situation since 1949 that has been handled so badly," he said.

On Friday, the German parliament reluctantly approved the country's €148bn contribution to the €750bn rescue deal for the eurozone, but all the main opposition parties abstained because the package did not enforce tighter finance regulations.

Ms Merkel is now desperately trying to rescue the situation by backing a global tax on bank transactions and proposing a radical shift in the rules governing the euro by permitting struggling eurozone countries to restructure their debts. Some of these changes would require reopening the EU's Lisbon treaty and would require the assent of all 27 EU member states. This would present eurosceptic David Cameron with the option of holding an EU referendum in Britain.

The jury is still out on whether Ms Merkel will succeed. But she is unlikely ever to give up on the euro: apart from the huge benefits it has provided for German exports, she and most of her party have a near-religious reverence for the controversial currency. It was Kohl, Germany's "unification" chancellor, who was her main mentor. For him, German reunification and the euro, the tangible symbol of Europe's unity were two sides of the same coin. Merkel wouldn't have got where she is if she did not subscribe to that article of faith.

Geitner's grand tour to study euro

The US Treasury Secretary, Timothy Geitner, will visit Berlin and London next week to discuss Europe's debt crisis, following another rollercoaster week for stock markets in the region.

Mr Geitner will meet with the Chancellor, George Osborne, in London on Thursday and the embattled European Central Bank chief, Jean-Claude Trichet, on Friday.

He visits Berlin on Saturday where he will speak with the German Finance Minister, Wolfgang Schaeuble, who will present details of a plan for dealing with failing economies within the euro area.

Stock markets rebounded on Friday, after a volatile five days, when Germany's parliament gave its support for a €750m package of measures to bail out the region's ailing economies.

The euro rallied from its four-year low point, hit early last week, while equities jumped across the globe.

However, Friday's bounce couldn't mask what was a terrible week for the markets.

The fallout from the Greek crisis has now firmly spread beyond Europe's borders prompting the US Dow Jones index of leading US stocks to briefly slump below the 10,000 point level.

London's FTSE 100 index mirrored the fall as it fell below the 5000 mark on Friday, bouncing back to end the week at 5062.9.

Germany's Dax index shed more than 3 per cent over the week, despite the country's regulator, BaFin, introducing a ban on speculators from betting on company prices falling through so-called naked short selling.

The unilateral ban, which was poorly received in Paris and London, relates to 10 banks and insurers in Germany as well as credit default swaps, a type of insurance product, on already battered Euro-area government bonds.

Shares in Asia fell on Friday too, with Japan's Nikkei 225 Index losing more than 2 per cent.

Investors will be bracing themselves for further volatility this week.