If Greece is to be rescued, the German taxpayer will be forced to find the money.
Yet if Greece is not rescued, it is the German banks that are first in line to take the losses, and again it will be the German taxpayer that will have to pick up the bill.
Meanwhile, if Greece is left to its fate, then Germany will have to carry the opprobrium for breaking down European solidarity: it will show once and for all that Germany will indeed put its perceived national interest above that of the wider European Union, which pretty much ends the idea of Germany signing up to ever closer union. In other words it would be a major change in German policy towards the EU- and if it were to be changed, there could be some widespread and unexpected changes in other countries policies towards Germany. There are some potential significant foreign policy risks for Berlin here.
Yet, it is for precisely this reason that the Germans may decide to take a step towards the transfer union that is potentially risky internal ground for the Merkel government. The German constitutional court has made it plain that there is a limit to the financial support that the German treasury can give, and, more to the point, there is a limit to the level of sovereignty that can be pooled. So a European Treasury would very probably be vetoed by the German constitutional court. This is why the ideas of permanent capital backing of government bonds in the Euro zone has been expressed in such nebulous terms: a "transfer union" might be politically unpopular in Germany, but it would probably be OK with the Court. So, in addition to calculations of foreign policy, the German Chancellor has also to make some fine judgments on domestic policy too.
Yet in one area Mrs. Merkel has already tripped up. By delaying discussions on the problems of private sector firms in the financial sector until after the government crisis has been addressed, she shows that she does not understand the interconnected nature of the crisis. The issue is not whether the problems of state liquidity and structural reform take precedence over those of the private sector: it is how to address the general crisis of over-leverage. It seems frankly outrageous that taxpayers are being penalized in order to payout a full return to the shareholders of the banks. Yet by separating the public and private sector restructuring, that is precisely what is set to happen, not just in Greece, but across the Euro zone.
The calls for a default and an exit from the Euro by Greece- mostly from die-hard anti-Euro commentators- miss the point. It is indeed already obvious that Greece must dramatically reduce its debt burden, but an exit from the Euro would not only lead to a crisis of confidence in Greece. In any event securing support for a New Drachma would be exceptionally difficult, and would still leave the Greek government owing a vast sum of Euros- it does not solve Greek problems, which can now only be addressed by a major restructuring anyway. What it could do is force other states out the Euro. Essentially that would been a major devaluation by several significant markets for German goods.
In other words the break-up of the Euro zone is also a significant crisis for Germany. Not only would the Germans get the blame, but they would now face much greater competition and a significant reduction in export earnings too. The German competitive advantage, arrived at with the pain of restructuring may now be over, as other countries face up to a period of spectacular instability and are forced to match or better the efficiency of Germany. Indeed whatever happens, the German competitive advantage must erode, or else the unbalanced Euro economy will enter a still greater crisis. Yet how to sell this to the German electorate?
So, as the Greek Prime Minister George Papandreou sweats through the passage of legislation and struggles to restructure his government in the face of a fierce blast of protest, it is not just in Athens that nerves are fraying.
In Berlin the lights are also burning late into the night. Germany too is facing its moment of truth.