Bundesbank Warns Greece as E.U. Leaders Meet

Germany’s Bundesbank warned Greece on Wednesday that if it failed to carry through with reforms it had previously agreed to, it would jeopardize any further aid funds. The hard line came even as Chancellor Angela Merkel of Germany prepared to stand firm against a wave of opposition to her commitment to austerity, with “taboos” such as joint euro bonds on the table at a summit meeting of European leaders.

Reuters reported Wednesday that the Bundesbank’s monthly report talked tough about Greece, saying that the situation there was “extremely worrying” and that Athens would have to suffer the consequences of any refusal to adhere to previously agreed-upon measures. At the same time, however, the report said that should such a situation come to pass, the euro zone would be in for challenges that it termed “considerable but manageable.”

The report also took a shot at European leaders, warning them not to ease up the pressure on Greece in order for the struggling country to have continued access to funding. In part, it said, “A significant dilution of exiting agreements would damage confidence in all euro area agreements and treaties and strongly weaken incentives for national reform.”

Saying that providing liquidity to Greece had resulted in “considerable risks” for the Eurosystem of central banks in the eurozone, the Bundesbank warned, “In light of the current situation, it should not significantly increase these risks.” The report continued, “Instead, the parliaments and governments of the member states should decide on the manner in which any further financial assistance is provided and therefore whether the associated risks should be assumed.”

The Bundesbank also took a stand against any stimulus for Germany, saying that growth fueled by construction and consumption would continue in the second quarter, and that manufacturing would “probably only make a comparatively small contribution.”

It continued, “In light of all this, calls on German fiscal policymakers to loosen their fiscal policy stance in order to stimulate the economy appear inappropriate. Attempting to kick-start the economy in the short term and putting off consolidation efforts in the long term are not conducive to regaining lost confidence.”

While that tough stance was echoed in Merkel’s resistance to joint euro bonds, according to the Financial Times, she will be hard pressed to resist calls from numerous countries at the Brussels summit on Wednesday when they are led by France’s new president, Francois Hollande, who has been a strong advocate for them. And Hollande is far from the loudest speaker about them.