“Nein! Nein! Nein!” roars today’s headline on Ta Nea, Greece’s largest circulation daily, over a caricature of Angela Merkel controlling a map of Greece with puppet strings. This is not just the usual Greek rage against the EU’s austerity measures: Last Friday the Financial Times made public a German proposal to take over Greece’s finances so extreme as to look like parody. In order to receive the next tranche of its bailout, the document explains, Greece would have to agree a “transfer of national budgetary sovereignty” to a European commissar, “preferably through constitutional amendment,” making an absolute commitment to service its debt before spending public funds on anything else

Merkel has since backed off from the document, but whoever leaked it obviously wasn’t aiming at a warm, candle-lit atmostphere between Greece and Germany at the ongoing negotiations for a write-down of Greece’s private sector debt, or at today’s European summit in Brussels (where there’s also a general strike in progress against austerity measures). Once again, the Greek crisis is at the heart of the talks, though it’s not on the published agenda. The official business on the table includes the new European fiscal compact, due to be signed in March, which would punish states that exceed fixed deficit and debt levels and has been described by one official as a plan to outlaw Keynesianism; and measures to promote growth and create jobs, especially for the young, who are now being tagged as a “lost generation.”

If that sounds a bit schizophrenic, that’s because it is: the tensions at the heart of the Eurozone, between German-style take-no-prisoners fiscal discipline and a more growth-oriented Gallic approach, are being pulled to breaking point. Germany, as Europe’s engine, still holds most of the cards. But with all the southern countries now in crisis (the bond markets are dropping Portugal; Spanish unemployment is at 22 percent, and 51 percent for the young; Italy will be in recession at least until the end of 2013 even though Mario Monti’s cuts have made him the darling of the Eurocrats; Greece’s economy is in meltdown), it’s become obvious to almost everyone else that austerity isn’t working. Financiers tend to speak softly: when IMF chief Christine Lagarde acknowledged earlier this month that austerity “could strangle growth prospects”, and when the ratings agency Standard & Poor’s pointed out that reform “based on…fiscal austerity alone risks becoming self-defeating,” what they really meant was, Wake up and smell the coffee, we’re heading for the cliff.

Will the Germans bend? According to the International Herald Tribune, the hope is that a treaty on fiscal discipline will make it possible for them to countenance “far reaching efforts to end the debt crisis,” whatever those might be. But such bargaining is worryingly reminiscent of the trade-offs made to keep Germany happy in the early days of the Eurozone, which left economic “convergence” between richer and poorer countries in the lap of market forces. Nor is it clear how Europe’s poorer countries would ever be able to meet Germany’s fiscal targets, or how such restrictions might coexist with democracy and national sovereignty.

Which brings us back to the leaked Greek document, a veritable goldmine for Internet theorists. One blog claims that Germany has now decided that European banks are sufficiently protected against the consequences of a Greek default that Greece can now be dropped—the “soft landing” (for Europe, not for Greece) that’s been in preparation for some time. Another suggests that the proposal is meant as a warning to Portugal, Spain and Ireland against seeking their own debt “haircut”: try to renegotiate, and we take you over. A third points out that Germany’s Minister of Economics, Philipp Roesler of the Free Democrats, has openly endorsed the proposal—which suggests it might have been a shot across Merkel’s bows from her coalition partners before the Euro summit.

Whether all or none of these turn out to be correct, the Greek economist Yannis Varoufakis is surely right to argue that the proposal is the logical consequence (for Germany) of piling loans on an insolvent nation while imposing an austerity program that has shattered the economy and (for Greece) of accepting both the loans and the conditions. Time for Greece in this game appears to be running out (more on that on another occasion); for the rest of Europe, much depends on whether the leaders at the summit can make a real commitment, even at this late date, to job creation and growth over rigid fiscal discipline, and to democracy over the rule of the financial markets.