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Eurozone crisis

Europe, Merkel and the German parliament

It was one of the greatest challenges of 2012: Saving the euro as a common currency in the EU. For Germany, that challenge took center stage both at home and in Brussels, seriously testing its negotiating skills.

"If I were to make things easy for myself, I could tell myself that the worst is over," began German Chancellor Angela Merkel at the CDU party congress in Hanover in early December 2012. But Merkel always errs on the side of caution, especially where the euro crisis is concerned. "I say explicitly that we should be careful," she continued.

Merkel is at pains to emphasize that overcoming the financial crisis will be a long, exhausting process. However, not even the Chancellor knows for sure how far down the road to recovery Europe has actually traveled. What is certain is that saving the euro has become significantly harder for the federal government over the course of 2012.

Part of the reason for this was the ratification of a new law by the Supreme Court on February 28, which stated that all new euro rescue missions needed to be sanctioned by the German parliament - even in urgent situations that called for swift action. Even at the European level, the German chancellor now had to wait for the parliament in Berlin to agree on any further euro rescue packages.

German Chancellor Angela Merkel addresses a session of the Bundestag, German lower house of parliament (c) REUTERS/Fabrizio Bensch

Merkel: 'I say explicitly that we should be careful'

In February, one day before this Supreme Court decision, the parliament gave its support to a second rescue package for Greece worth 130 billion euros ($172 billion).

But although it was passed by a majority, not all the representatives from the ruling parties voted in favor. Even within the governing coalition of Christian Democrats (CDU/CSU) and pro-market Free Democrats (FDP) there was considerable doubt as to whether more aid packages would actually be able to save Greece.

Sticking to the course

On the day of the vote, Angela Merkel looked tired. Even she had started to wonder whether there really was a way out for Greece. Perhaps it might be better for Athens to exit the eurozone after all? What effect would that have on the rest of the common currency union? Would it create a domino effect on the financial markets, causing other euro states like Spain and Italy to topple, too? Or would the eurozone be better off if it were to shed some of its excess baggage?

But whatever her doubts may have been, Merkel couldn't voice these concerns. Her job was to spread confidence - and the hope that the new financial loans to Greece really would help.

A cut in some of the Greek debt was agreed with the banks, and the International Monetary Fund also came on board. Merkel was determined to stick to this course; she wanted at all costs to avoid having to relax the agreed austerity measures.

Image of a euro coin with the image of Angela Merkel

Some eurozone countries think Germany wants too much of a say

But European discontent remained strong - and 2012 has made clear that austerity alone isn't the key to success.

The southern European countries sank deeper into recession, resulting in an increase in debt rather than financial improvement. Outside Germany, Merkel's stance was increasingly called into question, especially by France's new socialist president, François Hollande.

Unlike her European neighbors, the Chancellor strongly opposed the idea that Europe should shoulder individual countries' debts by issuing joint European state loans, or "eurobonds." It was only after lengthy wrangling with France, Italy and Spain at the EU summit in late June 2012 that Merkel finally agreed to back the European Stability Mechanism (ESM), established a few months later, to provide easier access to financial aid for countries in need.

Back at home Merkel won parliamentary support for the ESM by also agreeing to support a European stability and growth pact. However, opponents of these measures had already lodged a complaint with the Supreme Court in Karlsruhe. They warned that Germany would be taking on an incalculable risk. The court started investigating their complaint in July - leaving Germany's European partners worried that the ESM would fail at the last minute.

Comparisons with Nazi Germany

Meanwhile, the European financial crisis continued to worsen.

In July, Spain announced that it too needed help. The euro group eventually approved emergency loans of more than 100 billion euros ($132 billion), despite protestations from Madrid that it could manage with less. At the same time it became apparent that Greece was going to need more time to implement its austerity measures - and that it would need yet another aid package in order to survive financially. This was the point at which leading politicians, especially in Germany, began openly discussing the scenario of Greece leaving the eurozone, creating a rift among financial experts and policy makers.

But when, at the end of August, Greek Prime Minister Antonio Samaras eventually visited Berlin in person in order once again to publicly underline his willingness to see through necessary reforms at home, Merkel's reaction showed surprising goodwill and solidarity.

"We know that great sacrifices are being asked, especially of the Greek people," Merkel announced sympathetically, choosing her words with great consideration. The federal government was shocked by how muchGermany's - and Merkel's - image had suffered abroad. It was no longer unusual for people at demonstrations to compare Merkel to Hitler, or a heartless robot.

A demonstrator holds a poster depicting Adolf Hitler and German Chancellor Angela Merkel during a protest in front of the Parliament building against new austerity measures in Athens (c) dpa - Bildfunk

Greek protests in October 2012: Demonstrators compare Merkel with Hitler

Making way for the ESM

In mid-September the Supreme Court finally overruled objections and declared German participation in the ESM to be legitimate - under certain conditions. One is that Germany's contribution to the rescue scheme should remain limited to a maximum of 190 billion euros ($251 billion), despite the ESM technically asking for further funds if other countries should be unable to pay their share - for example, if they themselves need to access ESM aid. The court also further strengthened the position of the parliament: It still has to sanction any changes to the ESM treaty.

WIth new figures painting an even gloomier picture of the financial and economic situation in Greece, at the end of November the euro group and IMF decided that Athens should be given another two years - until 2016 - to decrease its deficit.

This extension was accompanied by measures including a lowering of the interest rate on the loans granted in the first aid package, as well as an extension of the loan contract times and delayed interest payments.

Greece also agreed to buy back some of its heavily devaluated government bonds, thereby reducing its debt by more than 30 billion euros ($40 billion).

But at the end of 2012, no one really believes that this is the end of the story. Just before Christmas, the international donors agreed to free up almost 50 billion euros ($66 billion) in aid, to be transferred to Athens in 2013 - and more is likely to follow.

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