EXCLUSIVE: Merkel ‘told Hollande of plans to keep Greece in eurozone at all costs’

A tangled web in Berlin, Brussels, Athens and Washington as the Surgeons take on the Physicians

Spanish auction costs rise dramatically as cash withdrawals hit Iberia as well as Greece

I try as much as possible in writing The Slog to stick to the commonsense ‘PAC’ principle of listening to sources in the light of events taking place. The acronym stands for Provenance (Who are these people and can they be trusted?) Agenda (Why are they telling me this and what are their aims?) and Corroboration (Who else agrees and do events confirm the allegation?)

The Greek crisis within the eurozone is a brain-hurting nightmare at the moment for anyone trying to stick to this approach. First off it isn’t a crisis within the eurozone, it’s a cultural question mark against the entire EU project, with potentially disastrous consequences for the West as a whole. And second, most of the national players directly involved have their own serious splits on the issue. And finally, powerful influences outside government – ranging from Hedge Funds to global sovereign credit players – are exerting what is at times a bewildering array of influences to get this, that or the other result.

So when first told by my Bankfurt Maulwurf yesterday that “Merkel has decided to go all out for her Fiskal Pakt and keep France on board by bribing Greece to vote yes to the eurozone and the Troika”, I was both knocked out (it’s a potentially huge story) and sceptical (he would like to get Merkel out of the Chancellery, and Germany out of its increasingly alarming debt obligations in the eurozone).

However, first indications from usually reliable sources in Paris were that the subject had indeed been frankly discussed by Hollande and Merkel at their first meeting earlier in the week. One informant specifically suggested that Merkel (who is inflexible, but not stupid) tried to take the wind completely out of Hollande’s sails “by appraising him of her Grand Plan to keep Greece in the eurozone FiskalPakt group come what may”. Another said, “I get the impression that she more or less told him ‘In the end we will save face but give the Greeks what they want’ because to do otherwise would be a bad idea from every possible angle.”

Much as I find it difficult to put any praise at all in the German Chancellor’s direction, to be fair she has stuck firmly to precisely the public position (Greece stays) right from the start. The question is, does she really mean it?

I’ve been of the opinion for some months now that Angela Merkel’s position in Germany is far more precarious than most observers realise. And I think events have proved me right: the Bundesbank director Jens Weidmann’s perpetual off-message jibes, the Karlsruhe Court judgements, poor midterm election results, the FP taking her on about not appointing Joachim Gauck President, and the truculent alarm expressed about German debt exposure by Bankfurt as a whole all bear witness to the truth of it. So as often as not, it is less a question of whether Merkel means it (I think, sadly, that she probably does) as to whether she could ever get away with it in the German cultural context.

When it comes to Greece, Angela Merkel is a sort of deranged physician: she hopes that administering pills to create Germanist ways in Greece can solve the problems there in the medium term. As usual with the Fuhrerin, none of the cultural realities support her view: the Hellenic economic ministry observes that the annual cost of graft in Greece exceeds the measures adopted for 2012 for cuts in pensions and salaries, according to recent official figures and reports.  The total illegal economy (tax evasion and bribes) is worth  €65 billion, and a further €4-7 billion is involved in kickbacks demanded by everyone from councillors and lawyers to ministers and bankers to any private business trying to expand or start up.

Set against this Alchemy approach is that of the Surgeons: that Greece must be amputated, and thus help keep any and all actual or perceived contagion away from the eurozone. Those holding this view have thus far included Washington, Holland and the northern members, Frankfurt’s private banking community, the Bundesbank, and some (although not all) elements within the German Finance Ministry.

So we see, for example, Andreas Schmitz  telling Reuters yesterday, “More than two years after the first aid package for Greece it is hard to imagine how the country will escape its unfortunate situation. It is therefore right to think about alternatives and particularly whether Greece would not be better able to solve its problems using its own currency, supported by a ‘Marshall Plan’ from the European Union.” (Schmitz represents the Bankfurt view also held by the Slog’s Maulwurf there.)

Schmitz’s remarks also take note in turn of the growing view among the Surgeons that Greece could be just as dangerous outside the tent as in it, and thus is still going  to need help as an EU member. This line was also planted in Der Spiegel yesterday, which not only expects and supports a Greek exit from the eurozone, but also sticks to the Party line that Greece would continue to get aid just like every other member state.

The vast majority of German newspapers and websites  now take the view that June’s Election II in Greece will really be a referendum on whether the country should remain in the euro zone. This too, I suspect, is orchestrated by those with an interest in kicking out the Hellenic Republic, because such a conclusion flies in the face of the facts: there is an overwhelming anti-Troika majority among the Greeks, but even Alexis Tsipras the leader of Syriza has made it clear that the goal remains to stay in the eurozone. The objective of German media spin, by contrast, is to equate a win for Syriza (now very much on the cards) as the Greeks giving Berlin-am-Brussels ‘permission’ to boot them back to the drachma.

At the same time, there is another more geopolitical reason why the  ‘support for Greece post exit’ school is gaining ground: it is increasingly dawning on the uncommercial dullards in Brussels that Greece is sitting on a mountain of raw materials – and in a place, what’s more, that is strategically vital for the defence of the Middle East against Turkey in particular, and Islamism as a whole…..aka, maintaining access to oil. Here, obviously, the American agenda comes into play.

Since the abortive, stillborn attempt by Geithner, Wall Street and the White House to engineer a Greek amputation via default during March, there’s been much rethinking of strategy in the States. Although the decision to ‘bet the farm on Germany’ in US foreign policy was a good call given the election of Francois Hollande, some in Washington and at State now see the relative frailty of Merkel (and her growing megalomania) as potentially very destabilising for American interests in the region.

The Pentagon in particular would like to see Greece outside the eurozone without support – to maximise US military influence – but at the same time, it views the likely election of left-winger Alexis Tsipras as very bad news indeed. Wall Street remains sanguine about such things, and the Black Dude in the White House doesn’t care either way so long as the eurozone survives intact until end November. Secretary of State Hillary Clinton, meanwhile, is at pains to point out to Nodrama that the chances of that are getting slimmer by the day….and in this, she is being supported by Secretary Geithner.

The latter has been privately pessimistic about the eurozone’s chances since he departed the Polish debacle. So at the moment, the prevailing view in Washington is that the eurozone is more likely to go bang as a result of Iberian and Italian meltdown than because of events within the Greek soap opera. The President apparently also finds it impossible to envisage the circumstances in which Mitt the Mormon Moron might give him a run for his money. There is much policy muddle, but perhaps because of this the presence of US agents on the ground in Greece and Berlin has been upped. The possibilities for SNAFU are thus almost infinite.

Sitting slap bang in the middle between the Physicians and the Surgeons is Mario Draghi, doing his best as ever to keep in with everyone. Given that Goldman Sachs is his almer mater, his country Italy is being harmed by the Greek melee, and his bank is running out of ways to keep bond shoppers buying, Draghi was always likely to hedge his bets. He looks like a surgeon when (as he did this morning) Mario says that the European Central Bank will temporarily stop lending to some Greek banks, in order to limit its risk. But he also sounds like a physician when he says that growth plans must now take an equal place alongside austerity in any future treatment of Greece. And then he sounds like a surgeon again when he admits that  Greek euroexit is now a very real possibility.

As to growth, by the way, it says pretty much everything you need to know about the Brussels mindset that, while talking to the media about “growth projects” yesterday, Herman Van Rompuy’s grab-bag consisted entirely of public works, roads going to nowhere, and “community development projects”. Not once did even ideas like subsidising subaqua exploration or retraining in hitech pass his lips. None of these wombats have the first clue what they’re about.

Is there a clear direction in this story? Not really, no: there can’t be until Berlin and Brussels make some kind of clear statement of intent – which they won’t do until the very last moment. What the Greeks do will depend on who wins the election, what the Americans do will depend on further lunacy from Recep Erdogan or his chums in Tehran, what Merkel does will depend on opinion polls and Frankfurt demands, what Hollande might do is anyone’s guess, and the Sprouts in Belgium – having no idea at all what to do – will await orders that are highly unlikely to arrive.

The only way I would choose a balance tip one way or the other at the moment might be (1) if Mario Draghi, for instance, followed his namesake and countryman Monti by advising that money intended for Greece should be used instead to save the larger ClubMeds, or (2) Germany – in the shape of the increasingly invisible Wolfgang Schäuble with Merkel’s approval – made a major suprise move. But for the time being, I can’t see either happening.