Margareta Pagano: Merkel is caught on the horns of a Greek dilemma

Chancellor faces an imminent election – and an unpopular bail-out decision

In Rochdale, the 66-year-old grandmother who infuriated the Prime Minister by asking what his plans are for controlling our national debt, as well as a spicier question about the flow of east European immigrants, spoke for much of Europe when she expressed her fears about the country's growing tax bill.

Taxpayers further south in Berlin are even more worried as they react with fury to Germany's proposed bail-out of Greece, which now looks as if could be tied up any day now. Chancellor Angela Merkel is under great pressure because she faces her own critical local election – next Sunday – in North Rhine-Westphalia, one of the richest, most industrial areas of Germany. Germans are furious that Merkel wants to use public money to pay out billions for Greek pensioners – on better pensions than the ones they themselves get – and welfare payments, while all the German political parties, including her own Christian Democratic Union party, are arguing that Merkel must force the banks to take their share of the pain.

Then there is continued unrest in Athens itself. There, workers are still striking, not so much about tax rises, but about the huge cuts in jobs and pensions which are inevitable if the bailout is to be agreed, and go through.

And further west, across the Mediterranean, there are storms brewing in Spain and Portugal, which both had their debt downgraded last week. Unemployment in Spain hit 20 per cent last week, triggering worries of social unrest, particularly in the poorer south, to levels not seen for decades.

It seems the peoples of Europe have more in common than they think. They are all sitting uncomfortably on this fault line of debt travelling from Rochdale down to the Med and which could, at any moment, blow up into a new sovereign debt crisis every bit as dangerous as the sub-prime one which erupted two years ago.

Professor Nouriel Roubini is one of the few economists who really did spot the financial crisis, and who is now warning that Greece is the tip of the iceberg, and that the contagion could spread down to its southern partners, Spain and Portugal, as the sovereign debt builds up its own head of steam. Roubini is right to warn of the dangers, but Merkel can't afford to let Greece be the Bear Stearns of Europe – and certainly not the Lehman – as that would pull the plug.

It's going to be tricky for her because a big chunk of the Greek debt held by German banks is held by the very same banks which have already been bailed out by the state, and now belong to the taxpayer anyway. So, either way, it's the taxpayer who pays.

Merkel's critics say that she has been holding out, prevaricating about the Greek rescue package, because she wants the election out of the way first. It's an important one, because if her coalition parties fail to win, they could lose control of Germany's second chamber. But the reality is that, despite the media frenzy in Germany, it looks much more likely that Merkel will risk more anger as voters go to the polls, and push through the Greek package, assuming the Greeks agree to the austerity measures as part of the rescue plan. The crisis is all the more hairy because there is only a small window of opportunity as the first Greek bond repayment is due on 19 May. The risk of Greece defaulting is perhaps a greater one than the risk of the eurozone falling apart.

Greece only has three options – a default, deflation or devaluing, none of which it can do within monetary union. That's why Merkel, and ultimately the German public, will have to sign off a Greek bailout; their own future depends on it. However, what this latest crisis shows once again is the fragility of monetary union. When the architects dreamt their European dream, they forgot a vital part of the infrastructure: the power to tax. You can't have countries bound into one currency zone without their spending and taxation also being controlled; it's like a house without electricity, and a move which no voters would stomach from Berlin to Madrid.

The Greek crisis is not likely to see the end of the euro, for now, but when the future Homers come to write their epic stories, they will show that this is where the end began. As with Gordon Brown and Gillian Duffy, perhaps.

Goldman Sachs is burning, and the politicians want to build more bonfires

Goldman Sachs is being tossed onto the fire like a medieval witch.

Even more fuel was thrown on the flames when seven Goldman bankers were toasted by the Senate sub-committee for their part in the selling of mortgage securities. It wasn't a pretty sight, watching the Goldman bankers squirm as they tried to defend themselves against betting against their clients, selling them packages of sub-prime mortgages and then going short.

Whether Goldman told those investors it was going short is at the centre of the fraud action by the Securities and Exchange Commission. It's difficult to believe that the investors, ACA or IKB, didn't know what the bank was doing, and if they didn't, then they probably should. There's another point – Goldman was also only doing what every other bank on Wall Street was doing. In fact, Goldman was a tiddler compared to the big mortgage players, such as Bank of America.

This doesn't excuse what Goldman got up to, but it does put last week's Senate grilling into some sort of context. Neither side comes out of this well; Goldman failed to get across its basic message that market-makers don't have a fiduciary duty to tell clients how they are trading, while the inquisitors got themselves muddled over what banks can and can't do. But, even if Goldmans had managed to explain this it wouldn't have washed with the people on Main Street. They prefer the analysis made by Phil Angelides, chairman of the Financial Crisis Inquiry Commission, who compared it to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars". This is not correct, as selling financial products is different to cars as there is always a risk, and you can't blame the seller if the stock doesn't go where you want it to. No one wants to hear this as the politicians want their bonfires, and Goldman is just the first.

I bet it won't be long before the SEC gets all banks involved in mortgage selling to agree a big settlement, just as Eliot Spitzer did over research; that's why US bank shares collapsed with Goldman's on Friday.

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