Published in Business Spectator (Melbourne), 9 July 2015

With the exception of Prime Minister Alexis Tsipras, the Greek referendum did not produce any winners. But it had one big loser: German Chancellor Angela Merkel.

Merkel’s strategy to deal with the Greek problem has failed Greece. It has left Germany exposed to massive liabilities. And it has led the European Union into the worst crisis of its history.

The question is not only how Merkel could have got all this so wrong; it is how she was able to get away with it while remaining popular in Germany and respected (or feared) abroad.

To understand Merkel’s role, it is worth going back to the beginning of the Greek crisis in early 2010.

On 21 March 2010, she denied the possibility of a Greek default and added that a forthcoming EU summit would not discuss the issue. Only four days later, Merkel declared that in a worst-case scenario Greece might receive help from the EU and the International Monetary Fund.

A month later, Merkel tried to sound tough again. On 26 April 2010, she demanded that Greece presented an austerity program first before appealing for any help. Then, on 1 May 2010, she threatened Greece with cancelling its voting rights in the EU, and three days later even raised the option of introducing some kind of insolvency law for countries.

With all of these statements, it is important to remember the German domestic context. North Rhine-Westphalia, the most populous state, was going to the polls on 9 May 2010, just six days after the signing of the first Greek bailout package and only a day before the EU started its first €500 billion rescue fund, the EFSF.

Initially, Merkel was inclined to allow Greece to leave the eurozone but when that turned out to be unfeasible internationally, she at least had to appear tough. In opinion polls at the time, more than 80 per cent of the Germans rejected any kind of assistance to Greece. Merkel therefore emphasised the harsh conditions on Athens, the needs for austerity, cut-backs and reforms, and she stressed that all money paid to Greece were loans that would, over time, be repaid. Yeah, right.

As it turned out, Merkel’s party lost the state election in North-Rhine Westphalia regardless of her efforts. However, the legacy of that state election was Merkel’s general strategy in the euro crisis. It has not changed since.

Politicians are generally susceptible to opinion polls, and Merkel is no exception. Quite to the contrary, as newsmagazine Der Spiegel revealed last year, in her second term Merkel’s government commissioned more than 600 opinion polls to inform policy — on average three a week. These were immediately classified and only eventually saw the light of day following a freedom of information request and a court battle.

As an avid poll user, Merkel therefore would have known how hostile public opinion was towards bailing out Greece and other countries. However, letting any of them fail and risk contagion in the eurozone would have been equally damaging to Merkel’s reputation. She certainly would not have wanted to enter history as the chancellor who allowed the European Union to fall apart.

In fairness to Merkel, it must have been a tightrope exercise for her to navigate public opinion. But it worked, at least politically. In September 2013, one of the government’s secret opinion polls revealed that 55 per cent of the Germans believed Merkel’s position on the eurozone was right, 32 per cent saw her as too lenient and 9 per cent as too harsh.

In the design of her eurozone policies, Merkel had delivered what the Germans wanted: Keeping the eurozone together while demanding austerity and reforms from the recipients of the bailout packages. There was only one problem: economically, Merkel’s strategy was a disaster.

As it turned out, at least for Greece the so-called rescue packages were placing too much emphasis on budget cuts and too little on genuine economic reforms. Besides, they did not address the underlying cause of the Greek problem, which was the country’s lack of competitiveness (hard to solve while Greece remains in the eurozone).

To make matters worse, it may have been an approach that was popular in Germany but it destabilised Greece politically. Merkel’s approach ignored the fact that Greece would never, ever be able to repay its debt.

Despite these problems, Merkel was at least able to keep her government’s double narrative alive: That help would only be granted in return for austerity. And that Germany had only guaranteed loans to Greece and not provided any aid.

Greece’s radical-left government saw straight through Merkel’s strategy and tried to exploit it. It correctly realised that having given substantial guarantees to Greece, it is now Germany (not Greece) that has to fear a Greek default the most. The Greeks also understood that Merkel’s repeated pledges to save the euro at all costs made it possible to blackmail her into giving more concessions.

Since January this year, the Greek government played an aggressive game against Germany safe in the knowledge that Merkel would not dare to let them fail. Or would she?

Over the past weeks, something remarkable has happened in German opinion polling. Germany’s most popular politician is no longer Angela Merkel. It is now her even tougher-talking finance minister Wolfgang Schäuble. His public sympathies for a Greek exit from the eurozone and an end of support for Athens have made him more popular than ever before in his decades-long political career.

If Merkel once again followed opinion polls, she might feel tempted to let Greece fail. It could even give her polling results another boost, even if meant a radical departure from her previous strategy.

But it would also be an admission that Merkel’s policy on Greece has failed. And it would come after wrecking the Greek economy and saddling German taxpayers with dozens of billions of liabilities, thanks to Merkel’s previous efforts.

Amazingly, even such incompetent and reckless behaviour can still make you popular in a democracy. If German voters were just a little bit more logical, they would force Merkel to resign.