BERLIN — German Chancellor Angela Merkel's upcoming re-election battle is shaping Europe's response to bailing out debt-ridden Greece.
Her strategy: Do just enough to keep Greece afloat but spare German voters – for now – the news that even more of their money will be required to get the Greeks back on their feet.
Merkel has led Europe's biggest economy since 2005. The greatest risk to her re-election bid, pollsters and analysts say, is a dramatic worsening of Europe's debt crisis – such as Greece exiting the eurozone, or a Greek debt write-off costing billions in German taxpayer money.
A deal reached Tuesday by the 17 nations that use the euro is a patchwork of measures to plug new shortfalls in Greece's budget and trim its debt load over the coming years. But it stopped short of forgiving some of the country's debt – having eurozone creditors like Germany take a so-called "haircut."
"Greece's debt is not sustainable, even with the new measures, so the problem will be back in 2014 at the latest," said Christoph Weil, an economist with Commerzbank.
But losing more money on rescuing the Greeks and other economically weak European Union nations could be politically toxic in Germany, where Merkel faces a national election in September. So far, Merkel's hard-nosed approach to Europe's debt crisis has bolstered her popularity at home.
"Ms. Merkel doesn't want to stand in front of her voters and tell them that the Greek rescue will cost taxpayers a couple of billions," Weil added.
Many economists say that Greece's debt burden – forecast to reach some 190 percent of gross domestic product next year – can only be managed by writing off more government loans. But Merkel and German Finance Minister Wolfgang Schaeuble were the most outspoken opponents of such a step, instead insisting on austerity measures and structural reforms.
"A haircut is urgently necessary. This constant strategy of muddling through instead of tackling the problem won't work in the long run," Weil said.
Greece is currently heading into its sixth consecutive year of a deep recession with unemployment hovering around 25 percent.
Tuesday's deal forecasts that Greece's debt will shrink to 124 percent in 2020 and "sustainably less" than 110 percent only two years later. Many private economists call those projections wishful thinking, saying they are based on overly optimistic budget and growth assumptions – especially with the overall eurozone now in recession.
Recent German public opinion surveys consistently show Merkel's conservative bloc as the country's strongest party, though her junior coalition partners, the pro-business Free Democrats, are struggling, possibly jeopardizing her ability to form a new coalition government.
Neither Merkel's coalition nor the two main opposition parties are currently seen as winning a clear majority to form a government.
Analysts have estimated that a full-fledged haircut on Greek rescue loans could cost Germany, the main contributor to the bailouts, up to (EURO)17 billion ($22 billion) – more than 5 percent of Berlin's annual budget.
The mass-circulation daily Bild, never a fan of bailing out Athens, asked in a headline Wednesday: "Will this never stop? Yet more billions for Greece."
"I say that a haircut hasn't been avoided – it has been delayed until a time after the parliamentary election," said Frank-Walter Steinmeier, a leader of the main opposition Social Democrats.
He says Merkel's government was concealing the truth for fear of being punished at the polls. Other German lawmakers agreed.
"One must get the impression that the German voting schedule was more important here than the basics of math," said Priska Hinz of the opposition Greens party. "It remains unclear how Greece can return to financial markets and how that is to be financed."
In rejecting of a debt write-off, the government "shies away from telling its people the truth and clearly say that keeping Greece in the eurozone does not only make sense but will also have a cost," she added.
Still, Germany's opposition is expected to join the government in approving the Tuesday deal to make sure Greece doesn't go bankrupt and abandon the euro. Parliament is expected to vote on Friday.
For his part, Schaeuble rejected the claims that Germany's response to the Greek crisis was being driven by the election calendar. Instead, he defended the Tuesday deal, saying it leaves no doubt that Greece must first implement austerity measures and structural reforms for the bailout to work.
But Schaeuble acknowledged that the new measures for Greece not only consist of loans but might cost Germany up to (EURO)730 million ($950 million) next year alone.
Ulrich Kater, the chief economist of Germany's DekaBank, said it was understandable that the German government didn't want to make far-reaching decisions ahead of an election.
"That shows how difficult it is to manage the eurozone, with its 17 nations where there's always an election looming somewhere," he said.