-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --
By Paul Taylor
PARIS, Feb 25 (Reuters) - Peer Steinbrueck is a changed man. The German Finance Minister played the grumpy nationalist when the financial crisis struck Europe last year, rejecting any European bank rescue fund or bail-out of countries in trouble.
Now Steinbrueck has broken a historic German taboo by accepting in principle that euro zone countries would provide aid if a fellow member state had serious financial problems.
Furthermore, he has relented on granting the European Central Bank a greater role in cross-border banking supervision, reversing Berlin's long-standing opposition to an EU regulator.
And his ministry is in talks on ways to help west European banks keep credit lines open to their east European subsidiaries to avert a potential collapse in the new EU member states.
The sharp fall in currencies and markets in several east European countries and market pressure on the debt of peripheral euro zone states have concentrated German minds.
It has slowly dawned on Berlin that a financial meltdown in eastern Europe or in the euro zone would be deeply damaging to Germany's interests as the EU's biggest exporter to both areas. German GDP is already set to fall more than most west European states' this year.
A break-up of the euro zone -- however unlikely -- would be a disaster for Germany, leaving it with an uncompetitively hard currency and a collapse of key export markets.
"You can assume that we will support in every way the cohesion of Europe, the success of European integration, and the cohesion of the euro," German government spokesman Ulrich Wilhelm said on Wednesday.
Berlin's objective is to try to deter a speculative run on European assets and currencies by signalling to markets that it accepts the principle of a bail-out as a last resort, while making clear there is no German blank cheque for countries in difficulty to avoid painful retrenchment.
To achieve that, it needs to combine "jawboning" to frighten speculators that they could get burned, with warnings that governments would face more severe austerity if they seek a bail-out than if they tighten fiscal policy now.
Its rescue hints have prompted a slight shrinking of the risk premium on euro zone countries' debt, coinciding with concerted verbal intervention by central European central banks to shore up their currencies and restore market confidence.
DRIVER'S SEAT
The change of heart also reflects a shift in the balance of power in the EU that puts Germany in the driver's seat.
Last October, the Germans felt unfairly pressured and upstaged by French President Nicolas Sarkozy, who used his EU presidency to call summits and set the agenda without consulting Berlin, and by British Prime Minister Gordon Brown, who acted alone with a sweeping bank rescue and a drastic sales tax cut.
Paris, London and their media hectored Germany to loosen its wallet and boost public spending to combat looming recession.
Steinbrueck's reaction was to refuse to bail out others with German taxpayers' money and to publicly rubbish Brown's VAT cut.
Now Sarkozy has lost much of his European leadership credit by announcing a national car industry rescue plan widely criticised as protectionist, while Brown's influence has sagged as bad news continues to pile up for the City.
Everyone is turning to Germany as the ultimate saviour of the European economy. The trick for Berlin, in a politically sensitive general election year, is to use the power which that role confers to avert a meltdown in eastern Europe or the euro zone, preferably without having to bail anyone out.
The crisis gives the Germans leverage to force countries in trouble to pursue stricter fiscal consolidation as a condition for help if the worst came to the worst. It can do that by working visibly with the countries most affected -- say Hungary or Bulgaria in the east or Ireland and Greece in the euro zone.
While the EU treaty ruled out a direct EU bail-out of a euro zone member state at Germany's insistence to avoid rewarding profligacy, there is wiggle room for other support measures.
Options range from bilateral financial assistance or aid by a group of EU countries, possibly in conjunction with the International Monetary Fund, to bolder ideas such as issuing common euro zone bonds or creating some sort of European stability or monetary fund.
The bolder ideas are so controversial and legally fraught that they are unlikely to be feasible during the present crisis. Nor is a sudden waiving of the treaty conditions for joining the euro zone.
Germany should make known it is working with a group of like-minded European states -- perhaps France, Austria, Sweden, Belgium and Italy -- in conjunction with international financial institutions, to support the weakest links in both eastern Europe and the euro zone.
And it should publicly endorse a further doubling of the EU's recently increased 25-billion-euro contingency fund for balance of payments assistance to non-euro zone countries in difficulty. The European Commission raises this money on capital markets at best rates and lends it on to the member state in difficulty without extra charge, on strict conditions.
That would signal to markets that Berlin is serious about avoiding financial contagion in Europe. It could save German taxpayers a lot of money in the long run. (editing by David Evans)