greece may still have to quit euro: merkel ally

(Reuters) – Greece remains the biggest risk for the euro zone despite a calming of its economic and political crisis and may still have to leave the common currency, a senior conservative ally of German Chancellor Angela Merkel said.

Alexander Dobrindt, general secretary of the Christian Social Union (CSU), the Bavaria-based sister party of Merkel’s Christian Democrats (CDU), has long argued that Greece would be better off outside the euro zone.

But German conservatives’ criticism of Greece has eased since the conservative-led government of Prime Minister Antonis Samaras accelerated harsh austerity measures demanded by Germany and the EU as part of its bailout program.

“The greatest risk for the euro is still Greece… I still believe that Greece’s exit would be a possible long-term alternative, for Europe and for Greece itself,” Dobrindt told Die Welt am Sonntag newspaper, according to advance excerpts of the interview released on Saturday.

“We have created a situation that gives Greece a chance to return to stability and restore competitiveness. But I still hold that, if Greece is not able or willing to restore stability, then there must be a way outside the euro zone.”

Dobrindt urged the European Commission, the EU’s executive arm, to prepare the legal ground to allow for the legal bankruptcy of a euro zone member state and its exit from the currency union.

Dobrindt’s comments contrasted with those of the CSU chairman and Bavarian state premier, Horst Seehofer, who expressed solidarity with Greece and said it was on the “right path” when Samaras visited Munich last December.

Seehofer’s conciliatory tone echoed that of Merkel who, for all her frustration with the slow pace of Greek reforms, has decided that a “Grexit” would be far more costly for Germany and Europe than pressing on with the bailout program.

Merkel is also keen to avoid renewed market turbulence in the euro zone ahead of Germany’s federal election in September. Bavaria also holds a state election in the autumn which the CSU is tipped to win.

Dobrindt made headlines last summer when he suggested Greece should start paying half of its pensions and state salaries in drachmas – the national Greek currency before the euro – as part of a gradual exit from the euro zone.

With Athens now enjoying relative political stability, German lawmakers have recently been more focused on how to rescue Cyprus, which is negotiating a bailout after its banks suffered big losses due to their heavy exposure to Greece.

Italy, the euro zone’s third largest economy, also poses a bigger challenge after a majority of voters there rejected German-backed austerity policies in an election last month that has left no party with a clear majority to govern.