BERLIN - Germany's Chancellor Angela Merkel has insisted repeatedly that "if the euro fails, Europe fails."
Now the crisis in the 17 countries that use the euro is coming back to the boil, with Spain admitting it needs help to rescue its banks and voters in Greece deciding whether to back a party that could pull out of the single currency. And all eyes are on economic powerhouse Germany to see what it will do to save Europe's union from collapse.
There's no denying Merkel's commitment to keeping the common currency together. But that doesn't mean she's ready to take the politically difficult measures many say are needed to save the day. She appears torn between freeing funds to rescue a wider European dream and pressures from her narrower power base at home.
Which way she turns will be critical to Europe's future — and the fate of the global economy.
The two sides of the leader who can make or break the common currency have been on prominent display at crucial moments of the crisis.
— As Europe's No. 1 budgetary hawk, Merkel was the architect last year with former French President Nicolas Sarkozy of a strict set of fiscal rules designed to put a lid on the chaos of too many governments holding too much debt.
— But she also has a pragmatic side. Notably, she has shown flexibility in signing up to rescue packages she initially resisted — starting with the initial bailout deal for Greece in mid-2010.
It's certainly in Germany's economic interests to ensure the euro has a future. Of Germany's €276 billion ($346 billion) in exports in this year's first quarter, nearly €110 billion went to other eurozone countries. The full 27-nation EU accounted for more than half of its exports. So Germany desperately needs a stable market close to home.
It's also clear that Europe needs Germany: The nation's GDP of €2.6 trillion is 30 per cent larger than that of France, the second biggest eurozone economy, meaning Germany alone has the funds to bail out the struggling bloc.
Still, absent a threat of immediate disaster, Merkel has shown little sign of budging from her insistence that help comes with strings attached, that thrift is a fundamental virtue and that there's no magic wand to save the euro. At the recent G8 summit of leading economic nations at Camp David, Merkel cut a lonely figure fending off pressure from fellow leaders to ditch austerity and jump-start growth.
When the global financial crisis first flared in 2008, Merkel famously invoked the "Swabian housewife" — the traditional personification of Germany's prudent housekeeping named after a region in the southwest of the country.
"She would have told us a piece of worldly wisdom," Merkel said: "You cannot live above your means in the long term." The image stuck.
Polls consistently show Merkel at or near the top of the list of Germany's most popular politicians. Her hard line on the crisis has a great deal to do with that popularity.
Merkel led calls to saddle Greece with tough austerity measures, such as cuts in public sector pay and pensions, as part of its two multibillion-euro rescue packages. Germans see it as just desserts for years of profligate spending, while they kept their finances in order.
But the spending cuts have left the Greek economy mired in a deep recession. Angered by the seemingly endless pain, Greeks have turned away from the two traditional parties in elections last month. They voted instead for more radical parties that have vowed to pull the country out of its bailout and austerity agreements. This weekend Greece faces another election. And if it backs a radical left party that promises to ditch its bailout terms, it's hard to see Merkel allowing Greek aid payments to keep flowing.
That could lead Greece to default and force it out of the euro, a move into uncharted territory that could undermine the entire global financial system.
The threat has held little sway in Germany. A poll by the Forsa agency released last week found that 62 per cent of Germans want Merkel to stick to her tough line on Greece. And they favour — by 49 per cent against 39 — a Greek exit from the common currency.
"I think her commitment to keep the euro alive is very strong, but I think it's not that strong to keep Greece within (it)," said Carsten Brzeski, senior economist at ING in Brussels. "They would like to keep Greece in but ... if Greece wants to go out as a result of the elections, then so be it."
The fact is, the direct effect of a Greek exit on the German economy would be small. Germany's €1.2 billion of first quarter exports to Greece amount to only a tiny fraction of what it sold to Europe as a whole. But Brzeski argues that there are broader risks: there would be a probability of losing billions of euros in German-guaranteed loans for Greece and the heightened danger of bailouts to other troubled countries such as Spain and Italy if Greece pulled out, neither likely to go down well with Germans.
And Merkel faces increasing criticism abroad for over-emphasizing austerity, notably from her longtime partner in fighting the economic crisis: France, which has a new Socialist president. Francois Hollande has rapidly become one of the strongest voices among European leaders pushing measures to boost growth.
One of these measures has been "eurobonds"— jointly issued debt that could be used to fund anything and could eventually replace an individual country's debt. Eurobonds would protect weaker countries by insulating them from the high interest rates they now face when they raise money on bond markets. Those high interest rates are ground zero of the crisis: They forced Greece, Ireland and Portugal to seek bailouts.
In the face of such pressure, Merkel has already shown signs of her other notable trait: pragmatism. She has started to soften her tone lately on promoting growth, hinting she'd be willing to do more as long as it means deeper European integration in the long run.
And there is a possibility that she will make further concessions. Ahead of elections due in Germany next year, the centre-left opposition — from which Merkel needs support for her cherished European fiscal pact to be approved by Parliament — has begun demanding pro-growth measures.
Merkel's coalition recently proposed fostering growth by increasing the capital of the European Investment Bank, a development bank that lends money for public projects, using existing EU funds more efficiently and implementing structural reforms — but no more stimulus money.
Concessions aren't likely to include Eurobonds any time soon. They're politically toxic to Merkel's centre-right coalition, unloved by other prosperous countries and could run into trouble with Germany's highest court, which has guarded parliament's control over the German budget.
More feasible may be a so-called debt redemption fund along lines proposed last November by the German government's panel of independent economic advisers. That would see a country's debts above 60 per cent of GDP transferred to a common redemption fund with joint liability. They would be obliged to pay them off over 20-25 years and would have to pledge part of their foreign exchange or gold reserves as security.
Germany's opposition backs the idea. Merkel's spokesman, Steffen Seibert, said last week that "significant constitutional and legal concerns" need to be discussed.
Merkel herself cautioned last week against expecting a revolutionary "big design" to emerge from an EU leaders' summit at the end of this month. She made clear that she is still playing a long-term game to strengthen the eurozone through more centralized control of how governments run their economies. That will provide little comfort to Greeks hoping for a quick resolution as they head to the polls.
"We need not just a currency union; we also need a so-called fiscal union, more common budget policies. And we need above all a political union," she said. "That means that we must, step by step as things go forward, give up powers to Europe as well."