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Merkel firmly behind euro, but will she act?

Thursday - 6/14/2012, 10:17am  ET

GEIR MOULSON
Associated Press

BERLIN (AP) - Germany's Chancellor Angela Merkel has insisted repeatedly that "if the euro fails, Europe fails."

Now the crisis in the 17 countries that use the euro is coming back to the boil, with Spain admitting it needs help to rescue its banks and voters in Greece deciding whether to back a party that could pull out of the single currency. And all eyes are on economic powerhouse Germany to see what it will do to save Europe's union from collapse.

There's no denying Merkel's commitment to keeping the common currency together. But that doesn't mean she's ready to take the politically difficult measures many say are needed to save the day. She appears torn between freeing funds to rescue a wider European dream and pressures from her narrower power base at home.

Which way she turns will be critical to Europe's future _ and the fate of the global economy.

The two sides of the leader who can make or break the common currency have been on prominent display at crucial moments of the crisis.

_ As Europe's No. 1 budgetary hawk, Merkel was the architect last year with former French President Nicolas Sarkozy of a strict set of fiscal rules designed to put a lid on the chaos of too many governments holding too much debt.

_ But she also has a pragmatic side. Notably, she has shown flexibility in signing up to rescue packages she initially resisted _ starting with the initial bailout deal for Greece in mid-2010.

It's certainly in Germany's economic interests to ensure the euro has a future. Of Germany's (EURO)276 billion ($346 billion) in exports in this year's first quarter, nearly (EURO)110 billion went to other eurozone countries. The full 27-nation EU accounted for more than half of its exports. So Germany desperately needs a stable market close to home.

It's also clear that Europe needs Germany: The nation's GDP of (EURO)2.6 trillion is 30 percent larger than that of France, the second biggest eurozone economy, meaning Germany alone has the funds to bail out the struggling bloc.

Still, absent a threat of immediate disaster, Merkel has shown little sign of budging from her insistence that help comes with strings attached, that thrift is a fundamental virtue and that there's no magic wand to save the euro. At the recent G8 summit of leading economic nations at Camp David, Merkel cut a lonely figure fending off pressure from fellow leaders to ditch austerity and jump-start growth.

She stuck by her hard line Thursday in a speech to parliament ahead of this weekend's G-20 summit in Mexico.

"We can only overcome the crisis," she said, "when we tackle it at its roots: the massive debt level and the lack of competitiveness in some member states."

When the global financial crisis first flared in 2008, Merkel famously invoked the "Swabian housewife" _ the traditional personification of Germany's prudent housekeeping named after a region in the southwest of the country.

"She would have told us a piece of worldly wisdom," Merkel said: "You cannot live above your means in the long term." The image stuck.

Polls consistently show Merkel at or near the top of the list of Germany's most popular politicians. Her tough stance on the crisis has a great deal to do with that popularity.

Merkel led calls to saddle Greece with tough austerity measures, such as cuts in public sector pay and pensions, as part of its two multibillion-euro rescue packages. Germans see it as just desserts for years of profligate spending, while they kept their finances in order.

But the spending cuts have left the Greek economy mired in a deep recession. Angered by the seemingly endless pain, Greeks have turned away from the two traditional parties in elections last month. They voted instead for more radical parties that have vowed to pull the country out of its bailout and austerity agreements. This weekend Greece faces another election. And if it backs a radical left party that promises to ditch its bailout terms, it's hard to see Merkel allowing Greek aid payments to keep flowing.

That could lead Greece to default and force it out of the euro, a move into uncharted territory that could undermine the entire global financial system.

The threat has held little sway in Germany. A poll by the Forsa agency released last week found that 62 percent of Germans want Merkel to stick to her tough line on Greece. And they favor _ by 49 percent against 39 _ a Greek exit from the common currency.

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