Germany's resistance to expanding a euro zone bailout fund and easing Greece's debt burden seems to be softening as it scents a grand bargain in which European states would commit to tough German-style economic reforms.
Berlin officials still insist in public there is no need to increase the size of the European Financial Stability Facility (EFSF), and reject the possibility that Greece may be forced into some form of debt restructuring.
But in private they are setting out the negotiating position for what Berlin sees as a package deal to be agreed in March, ranging from altering the terms of Greek debt to ambitious reforms of European pay and pensions.
Senior German officials tell Reuters the government is now actively discussing practical options for expanding the role of the EFSF to alleviate Greece's debt dilemma.
One option would be to empower the fund to lend Greece money to buy back its own bonds in the market at a discount.
"But we have different opinions in the government. Some want it, some don't," said one official, who asked not to be named.
In a sign of Berlin's evolving position, Finance Minister Wolfgang Schaeuble repeatedly declined in a weekend television interview to rule out the possibility that Greece might need to reschedule its debt.
Many investors believe Greece cannot sustain payments on debt projected to reach 158 percent of economic output in 2013 under a 110 billion euro EU/International Monetary Fund bailout.
Since the crisis reignited due to fears about Greece's ability to avoid a debt restructuring and about EFSF's ability to cope with possible contagion to Portugal, Spain and beyond, Berlin has again been accused of dragging its feet.
Chancellor Angela Merkel attacked the European Commission for publicly seeking an increase in the EFSF, which can actually lend far less than its 440 billion euro headline figure due to the need to hold money in reserve to ensure a top credit rating.
So far, Berlin has spoken only about ways of maximising the existing sum, but ministers hint privately they may be prepared to go further if assured it will be a "one shot" solution.
NO "SALAMI SLICING"
The government has warned euro zone partners against a "salami-slicing" approach because, with seven state elections this year, it cannot afford to go to parliament repeatedly to ask for additional aid, senior EU sources say.
"We must address these goals in one comprehensive package so we don't have to readjust it every few months," Schaeuble told WirtschaftsWoche business magazine.
One factor in the background is horse-trading over who will succeed Jean-Claude Trichet as head of the European Central Bank late this year, although no one suggests openly that support for German central banker Axel Weber is part of the euro bargain.
It may be no accident that Weber has floated a plan to ease Greece's debt burden without a default by extending the rescue loans for 30 years, casting himself as an architect of the possible solution to the euro zone crisis.
Merkel has said repeatedly that Germany will do "whatever it takes" to save the single currency, reiterating that message last week in Davos after France's Nicolas Sarkozy.
In a drive to lower the political cost of rescuing the euro and shed her role as a nay-sayer at EU summits, she has gone on the offensive, demanding a major shakeup of Europe's retirement and wage-bargaining systems and of divergent corporate taxes.
A paper from her office sets out reforms that, if imposed on Europe, might convince Germany's voters and constitutional court — due to rule on the legality the EU rescue fund this year — that Merkel is not throwing good money after bad. [ID:nLDE70R1XX]
It calls for euro zone states to emulate Germany's "debt brake" constitutional amendment for fiscal discipline and move towards its retirement age goal of 67, which would be difficult for many European leaders including Sarkozy, whose more modest pension reforms aroused huge protests last year.
Spreading such measures across Europe would "inspire investor confidence and have the advantage of making it easier for us politically", said one German source.
The paper seems influenced by less pro-European advisers than Schaeuble, a 68-year-old veteran of Merkel's Christian Democrats (CDU), whose stern but flexible approach to the crisis contrasts with that of cabinet hardliners.
"GOOD RESULTS"
After her re-election in 2009, the centre-right chancellor's popularity fell last year amid voter anger at the Greek bailout in May and the creation of a rescue mechanism for other states.
Those moves contributed to the CDU's defeat in a state election in North Rhine-Westphalia that cost Merkel her majority in the Bundesrat, the upper house of parliament which represents the 16 federal states.
Fresh losses in regional elections such as in conservative industrial bastion Baden-Wuerttemberg on March 27 would further hinder Merkel's ability to legislate.
Officials say tentative proposals to bring forward a euro crisis summit by a few weeks from late March respond not to complaints about German "procrastination" but to worries about the impact on regional elections. [ID:nLDE70R26G]
Domestic politics is shaping the argument within the German government over the content as well as the timing of the response, with Merkel keen to avoid taxpayers feeling they are being sacrificed for European largesse.
One coalition party in particular, the Free Democrats led by Vice-Chancellor and Foreign Minister Guido Westerwelle, publicly opposes expanding the EFSF, striking a tough stance in hopes of reviving flagging support in state elections.
But even Westerwelle, after being lobbied by fellow liberal European Monetary Affairs Commissioner Olli Rehn, told a newspaper that expanding the EFSF was "no taboo" for his party, and Germany's reticence was a negotiating position.
"I want good results. You don't get that if you declare your price in public beforehand or draw lines in the sand," he said.
