Merkel faces toughest test yet with so much still at stake

When Alexis Tsipras meets Angela Merkel today in Brussels, the German leader may like to remind her mythology-loving Greek counterpart of the fate of Pyrrhus.

Tsipras won a symbolic victory on Sunday over the German leader, who bet that voters would go against him.

But, with banks empty and a humanitarian crisis looming, the Syriza leader might recall Pyrrhus’s remark about the heavy losses his army sustained to beat the Romans: “Victory like that in one more battle and we shall be ruined.”

For Merkel, today’s crisis meeting is about granting Tsipras his moment of victory while sounding out his interest in a face-saving political deal to avoid an expensive defeat for all.

Merkel will hope the afterglow of the Athens referendum will have begun to pale, given the deteriorating situation in Greece.

The euro crisis annals are filled with men who believed they had beaten the German leader, only to learn differently later. These include François Hollande’s election promise to rewrite Europe’s austerity playbook, a promise yet to be kept, and Mario Monti’s proclamation of victory over Merkel on bank recapitalisations that have yet to materialise.

But Tsipras is seen in Berlin as more mercurial and flighty than even Nicolas Sarkozy. Can Merkel do a deal with him? Her officials don't know.

Rebellion

Complicating matters is a difficult domestic situation. Talk of a third Greek bailout has started rebellion simmering in the back-benches of Merkel’s

Christian Democratic Union

(CDU).

Her centre-left coalition partner Sigmar Gabriel, meanwhile, is going rogue. Five months ago the centre-left Social Democrat (SPD) leader demanded an end to the "downward spiral" of austerity with new EU investment rules as binding as deficit rules. After the Greeks voted against further austerity, however, a very different Gabriel accused Athens of having "torn down the last bridges" of compromise and "cancelling the rules of economic monetary union".

Emergency liquidity

Also on the warpath is

Bundesbank

president

Jens Weidmann

, Merkel’s one-time economic adviser. Given ECB emergency liquidity to Greek banks, he has warned her to forget the €2.5 billion profits his bank forecast for the coming few years.

Of course, it does no harm to Merkel’s negotiating position to play up domestic difficulties her advisers believe are manageable. With a lick of the whip, CDU backbenchers have, to date, done as they’re told on bailouts. Her coalition has a comfortable two-thirds majority and Gabriel, his SPD flat-lining in polls, is not at the EU negotiating table nor has he an interest in elections.

Cut through Germany’s post-referendum noise, however, and even the less excitable economists are warning of disaster. Post-referendum Greece now lacks two essentials for a functioning state, they say: money to pay its bills and time to borrow it.

The German leader now faces her most difficult mission yet. After the Greek leader’s speeches about humiliated national pride, she has to convince Tsipras that they need each other to prevent what always comes after pride: the fall.