Angela Merkel will play a crucial role in solution if Grexit occurs

The Greek problem can no longer be kicked down the road as it is now threatens a contagion of markets and confidence.

In the early hours of the morning in a Brisbane hotel last November German Chancellor Angela Merkel was doing her own version of “shirt fronting” with Russian leader Vladimir Putin.

Tired after a night of talks, Putin, the focus of world criticism following the Russian-sponsored move into the Ukraine, felt it ­prudent to leave the G20 meetings early.

Now, Merkel’s role as one of the world’s most powerful leaders has become more critical as the Greece debt situation reaches crisis point this week with its official default on its debt repayments to the International Monetary Fund.

While the negotiations with Greece are being done with ­European finance ministers, it is clear that Merkel, who has led ­Germany for a decade, will call the final tune, and play a key role in whatever solution is crafted ­following Sunday’s referendum in Greece.

Merkel, who grew up in eastern Germany and trained as a scientist before entering politics in post-unification Germany, is now the longest-serving leader of a major EU nation having witnessed changes of leadership in Italy, France and Britain.

There is no doubt that Merkel and most other European leaders have a deep-rooted belief that Greece should remain within the eurozone and will do whatever they can to continue its membership.

A month or even a week ago one could have argued that a Greek exit from the euro was an impossibility — not so much because Greece would have got its ­financial act together but that Merkel and other European leaders believed that European unity was essential.

But patience is wearing thin in Europe, particularly in Berlin, which is now the main banker to Greece. The euro is moving into uncertain territory and Greece’s problems threaten to infect the confidence in the broader EU, which has been steadily clawing ­itself back from the depths of its own financial crisis of recent years.

The German public themselves have had enough of the Greek situation and the idea of a Greek departure from the euro, once considered unheard off, is now gaining more popular support in the country. Polls released in Germany this week are clearly opposed to the idea of further EU concessions to Greece. They believe Greece has no understanding for the worries of Germany and other EU nations and the sentiment is now shifting towards a support for a Greece exit from the euro over the long-term. Merkel is furious at the role played this week by Greece’s left-wing Prime ­Minister Alexis Tspiras. European leaders had what they thought were constructive talks with Tspiras in Brussels at the weekend, only to find out later that not only was he putting what Merkel believed was a good financial deal to a referendum on Sunday but that he was personally going to support a “no” vote.

While Athens has made new approaches this week for a third bailout as the country defaulted on its IMF payment on Tuesday night, Merkel poured cold water on the idea of any emergency ­negotiations in current days, ­declaring coolly: “We’ll negotiate absolutely nothing before the ­referendum is held.”

What happens from here ­depends on what the Greeks ­decide to do on the weekend.

What is clear is that Tspiras is dead meat as far as Merkel is ­concerned. If the Greeks support him, voting “no” on Sunday, Merkel will refuse to deal with him. That will set in train a series of events with the next deadline being July 20 when Greece is due to make a repayment to the European Central Bank.

If they vote “yes”, Tspiras will have to go as the Greek leader and Merkel will do her best to try to talk reason and negotiate with his successor. Officially Germany’s negotiations with Greece are being overseen through the EU by its Finance Minister, Wolfgang Schauble, who officially takes a harder line than Merkel. But the two are working closely together with the Finance Minister playing the “bad cop” while Merkel prefers to stay a few steps away from the day-to-day negotiations giving herself more political space for compromise.

Merkel has won her role as a world leader by steadiness, determination, a strong no-nonsense work ethic and a steely pragmatism. She is not one to grandstand and has the inclination and the stamina to keep on talking with different sides of politics to achieve negotiated outcomes. Germany has gained the most from its membership of the eurozone with its efficient economy benefiting from a relatively low currency and a broader open ­market. It’s jobless rate is down to 6.4 per cent compared with Italy’s 12.4 per cent and rates of 20 per cent plus in Greece and Spain.

When Merkel took over Germany its economy was struggling. Unemployment had reached a post-war high of 12.1 per cent, growth was a weak 0.7 per cent compared with the eurozone average of 1.7 per cent (Greece’s economy was growing at 2.3 per cent at the time) and Germany’s budget deficit was so large (due to the ­expenses of reunification) that it was about to breach EU debt limits for the third year in a row.

Now all that has changed, with Merkel producing a budget surplus last year off the back of prudent fiscal policies and a much stronger economy and falling unemployment levels. Its economy is not as strong as Australia’s, growing at about 2 per cent, but it is a lot better than most of its neighbours.

But Germany also has the greatest exposure to the Greek debt crisis. What has happened over the past few years since the debt crisis of 2010 is loans by the banks have been replaced by bailout loans from the IMF and European governments. And Germany is by far the largest creditor.

It has a total of €68 billion ($88bn) outstanding to Greece, the bulk of which is loans from the government through bailout plans. Only about €20bn is through loans from German banks. France has €44bn (more than 90 per cent from government bailout funds), with Italy and Spain at €25bn each.

The IMF’s exposure is about €21bn. The debt crisis has shifted from the banks to the governments with Germany and thus Merkel the chief banker.

As Europe and the rest of the world awaits a decision from the Greeks on the weekend several things are clear.

The Greek problem can no longer be kicked down the road as it now threatens a contagion of markets and confidence in the broader eurozone.

Merkel would much prefer continued negotiations to keep Greece in the tent. But there is a realisation that the situation needs to be managed and cannot be left for the Greeks to muddle through.

In Europe this week a range of options and scenarios are being debated on what could happen and how the situation can be ­managed. The eurozone is a European creation. No country has ever left the union, but the Europeans themselves can refashion the rules as they see fit.

No one knows exactly how events will unfold. Merkel may agree to a Greek exit but if it happens she will find a middle way to cushion the damage. She is hoping she won’t have to do that. But she is a tough, experienced, respected politician, on the top of her game and closely linked with European political and financial leaders.