German Chancellor Angela Merkel: Stimulus Now an Option for Greece

This is a big change. Perhaps Hollande's got a little pull over at the Chancellery.

See the New York Times, "Softening, Merkel Says She Is Open to Stimulus for Greece":

BERLIN — Chancellor Angela Merkel of Germany said Wednesday that she was ready to discuss stimulus programs to get the Greek economy growing again and that she was committed to keeping Greece in the euro zone, signaling a softer approach toward the struggling country.

The fierce rhetorical salvos out of Germany in the past week gave way to conciliatory gestures by Ms. Merkel, who throughout the crisis has shown a propensity for managing through brinkmanship. “I have the will, the determination to keep Greece in the euro zone,” she said in an interview on CNBC on Wednesday, in what appeared to be an attempt to relax an increasingly tense situation.

If Greek officials are looking for “stimulus to be pursued for growth in the euro zone, which we could pursue in the interest of Greece, we’re open for this,” Ms. Merkel said. “Germany is open for this.”

Europe was shaken anew this week by the chaos in Greece, where a bank run threatened to hasten the country’s exit from the euro and jeopardize the Continent’s financial stability. While the impact of a country’s leaving the euro is hard to predict, economists fear the crisis could spread to much larger countries like Spain and Italy if financial markets bid up borrowing rates to unsustainable levels.

Ms. Merkel is preparing to head to Camp David in Maryland for the Group of 8 meeting beginning on Friday, and she is likely to be pressed there by the leaders of other industrial nations, in particular by President Obama, to find a way to quell the turmoil. On Tuesday night she met for the first time with France’s newly inaugurated president, François Hollande, who campaigned on the need for more growth-promoting policies.

In recent days Ms. Merkel has signaled a growing openness to additional growth measures as long as they do not interfere with the fiscal compact to cut deficits in the euro zone in the long run. “On the one hand we have the pillar of sound fiscal policy, and the second pillar will then be the growth component,” Ms. Merkel said in the CNBC interview.

That support could come in the form of money from existing European Union funds that would be redirected for use by crisis countries, said Fabian Zuleeg, the chief economist with the European Policy Center. That approach had been championed by Mr. Hollande.

But it will take more than technical adjustments to calm the growing political opposition to austerity in Greece, Spain and other hard-hit countries in the euro zone’s periphery, Mr. Zuleeg added. “We need to put together a package that looks convincing. It can’t just be rhetoric; it has to have some real elements to it,” he said. “The real element that certainly has to be in there is money.”

Continue reading.

Plus, at the Wall Street Journal, "Experts Try to Chart Path for Exit From Currency":

BRUSSELS — Returning to a national currency after more than a decade of using the euro and having its money managed by the European Central Bank would catapult Greece into a financial, legal and political no man's land.

Countries have defaulted, devalued, or even withdrawn from a broader monetary union in the past. But none has done it all at once—and certainly not an economy so deeply integrated into global financial markets.

Greece would have to remake its monetary system and rebuild its economy after a likely sharp devaluation that would have delivered a severe confidence shock to the population, undermined its banks and triggered likely defaults on debts to foreigners.

The consequences of an exit from the euro for Greece and the rest of Europe would likely be so tumultuous that policy makers have been reluctant even to speculate on how it could work. And even though the taboo of mentioning a euro exit has fallen away in recent months, going back to the drachma would likely be messy, with many steps having to be improvised overnight.

Until recently, policy makers usually smothered any questions on a potential euro exit with a simple answer: It's impossible to leave the common currency under European Union law. There is no provision in the EU treaties for exiting the euro zone without also dropping out of the broader 27-country bloc.

Leaving the EU would also mean an end to billions of euros in farm and development subsidies, as well as easy access to a large internal markets—a threat that Austrian Finance Minister Maria Fekter voiced Monday.

"It's impossible to leave the euro zone—one can only leave the European Union," she told reporters at a meeting with her counterparts in Brussels. "After that, Greece would have to apply for re-accession and we would hold accession talks and look very closely whether Greece actually fulfills the accession requirements."

Ms. Fekter's comments reflect mounting frustration in some European countries with Greece, but also the idea that if a clear exit route is established, other countries may be encouraged to take the same course.

"Too much policy clarity on the questions raised by a Greek exit could be counterproductive," says Mujtaba Rahman, an analyst with Eurasia Group. "If too smooth a pathway were designed, it could encourage other struggling sovereigns to contemplate a similar fate in the medium to longer term."

On the other hand, making things difficult could heighten the strains on the Greek economy, and increase the economic fallout on other members of the EU. "It would be in the interest of the others to make sure that things aren't absolutely dreadful," says Roger Bootle, managing director of Capital Economics in London, who has written a 150-page paper on the practicalities of a Greek euro exit.

Obviously, that's why Merkel's softening her position.

But it doesn't look good either way.

See James Pethokoukis, "Don’t fool yourself, a Greek euro exit would be a fiasco."

I'm reminded of Pat Condell's video from last December, "The Gathering Storm."