Much has been written about the need to build a firewall around the healthier part of the euro zone to protect it from a crippling debt crisis that has already devoured a number of countries. Much has also been said about Germany’s reluctance to commit additional financial resources to help create such a firewall. In a speech on Monday this week, the Managing Director of the International Monetary Fund (IMF), Christine Lagarde, once again reminded Germany of the dire consequences of inaction: “What we must all understand is that this is a defining moment. It is not about saving any one country or region. It is about saving the world from a downward economic spiral. It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand. The longer we wait, the worse it will get.” She even suggested that the Eurozone should introduce Eurobonds as a sign of its unwavering commitment to the common currency. Officially at least, Germany has resisted both requests so far.

In fact, in a first reaction, the German Government shrugged off the suggestion that the cap for the combined forces of the current bailout fund, the European Financial Stability Facility (EFSF) and its successor, the European Stability Mechanism (ESM), be doubled to at least a trillion from its current 500 billion Euro level. The apparent rebuff was considered by many observers as a further sign that Berlin is determined to stick to its strategy of fiscal austerity.

However, Germany’s public posturing should not be taken at face value. There may be more flexibility in Berlin than immediately meets the eye.

Firstly, Germany needs to stand firm in its stance as negotiations heat up around the shape of the new fiscal compact. The European summit on January 30th is designed to finalize the compact, which Germany has turned into the cornerstone of the euro zone’s path to safety. In fact, some members of the governing coalition in Berlin have suggested that the fiscal compact is the price for Germany’s increasing financial assistance. Nevertheless, European governments are still struggling to find a compromise. Germany openly criticized a draft circulated in European capitals just a few days ago as a watered down version of the agreement reached last December by twenty six EU countries. Although a new draft appears to take Germany’s concerns into account, discussions are ongoing. Berlin’s negotiating position would be weakened dramatically if it were to agree to any additional funds for the bailout funds now.

Secondly, Germany has begun to broaden its argument away from exclusively focusing on fiscal rectitude. In a speech in Washington late last week, Foreign Minister Guido Westerwelle openly admitted that “budget cuts alone won’t do the trick.” He also suggested, however, that erecting a firewall too early might jeopardize structural reforms in some peripheral countries such as Spain and Italy, in particular. “From the very beginning we have focused on a double track strategy”, he said, “linking solidarity with partners under pressure with a firm commitment to fix the euro zone and put all members on a path of fiscal responsibility.” Importantly, he did not rule out strengthening the bailout funds. Instead, he concluded by saying: “The key is therefore to strike the right balance between easing the short term pain and laying the foundations for long term gain.”