The German government has historically extended massive funding to poorer member states, including Greece, in part by being the biggest net contributor to the European budget. In 2008 alone, it contributed €8.8 billion more than it received. This largesse has served the dual purpose of promoting European integration while at the same time creating markets for German exports. But the resulting trade imbalances between Germany and peripheral economies such as Greece's are at the core of the current situation: For many years, Greeks were consuming above their means, thanks to easy access to credit made possible by eurozone membership -- a situation that also benefited Germany's export-driven industry. During this period of abundance, little attention was paid to Greece's mounting budgetary imbalances.

Now, however, with Greece's debt endangering the common currency and the eurozone economy, Berlin is pushing Athens to enact substantial spending cuts in lieu of a bailout. During a recent finance ministers meeting in Brussels, Germany -- along with Austria and Sweden -- blocked efforts to reach an agreement on financial aid measures.

Bailing out Greece with German taxpayers' money could be politically costly for the government of Chancellor Angela Merkel, which is already feeling pressure from German opinion. The heavily export-dependent German economy has suffered significantly from the economic downturn, with exports falling 18.4 percent in 2009 and unemployment currently at 8.7 percent. In this context, the general mood is not one of solidarity toward Greece, and providing financial aid could mean political suicide for the Merkel administration. Moreover, there is no guarantee that her coalition partners in the market-friendly Free Democrats Party would accept a bailout.

Berlin's tough approach is causing tensions between the two countries, aggravated by German press reports describing Greeks as "cheats" for wasting German taxpayers' money. In return, Greek Deputy Prime Minister Theodoros Pangalos accused Germany of keeping gold stolen from Greece during World War II. Greek newspapers announced that "economic Nazism" was threatening Europe and denounced an ongoing "racist frenzy and calumny against Greece."

Merkel faces the dilemma of choosing between a highly unpopular bailout or leaving Greece to its own devices, an option that could have dire consequences for the eurozone and ultimately catastrophic effects on the German economy. The proposal currently being discussed is to help Greece by indirect means. Berlin appears willing to encourage German banks to buy Greek bonds by using the public bank KfW as guarantor. Such a solution could prove less politically toxic than a direct bailout and could send a clear message to the markets that the EU is ready to help Greece. Although Merkel denied such plans in a TV appearance, it is widely acknowledged that Berlin is examining diverse contingency plans to help Athens. Another idea is to accelerate payments of the EU's structural funds for the period 2007-13.

But if domestic politics are constraining the Merkel administration, the situation in Greece is even more worrying. In protest to the planned spending cuts, a recent strike brought 60,000 people into the streets and the country to a halt. Resulting clashes between anarchist groups and the police resembled the riots of December 2008. 

Like Merkel, Papandreou faces a nasty dilemma. His administration is trapped between, on the one hand, the imperatives of the markets as well as other EU member states demanding fiscal austerity, and on the other, a large portion of the Greek population unwilling to accept a decrease in living standards. If the government pushes too far for changes, it runs the risk of a social breakdown, a possibility that prompted French officials to oppose further pressing Athens for additional budgetary measures.

So far, however, the German position has prevailed. Papandreou's government announced additional spending cuts on Wednesday that would allow savings of €4.8 billion. Following the announcement, though, Papandreou made what amounted to a veiled threat to EU governments, stating he was open to negotiate with the IMF if Greece did not receive proper support from the member states. That puts pressure on European leaders who consider IMF intervention to be a capitulation to Washington -- one that could ultimately damage the euro's credibility. Jean-Claude Juncker, chief of the Eurogroup, already toned down the rhetoric directed toward Athens, saying that the "program to correct fiscal imbalances is now credibly on track." Similar positive remarks were heard from officials from other member states.

Although Papandreou has emphasized the need for sacrifices to be equally shared by all Greeks, cutting back the privileges of powerful interests groups -- such as government workers, unions and the Greek military -- is likely to be challenging. That makes low- and medium-income households the most likely targets of the austerity measures, which could in turn lead to further public discontent and social disorder, putting the Papandreou administration in a perilous position.

Meanwhile, discussions in Brussels have now widened to include the need for centralized EU supervision of member states' budgets, something Jean-Claude Juncker and the president of the European Council, Herman Van Rompuy, have been pushing for. An EU delegation has already visited Greece to closely supervise the mandated budgetary cuts. For some Europhiles, this is seen as a step toward an EU-led "economic government." Such a development, however, will face strong opposition from many member states that are unwilling to let others interfere with their budgets.

**Nicolas Nagle is a freelance journalist based in Brussels. He has worked for a number of Latin American news outlets and for the International Crisis Group.