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German Chancellor Angela Merkel would be forgiven for feeling she's damned if she does and damned if she doesn't. Since the Greek debt crisis began to unfold in February, every move Germany has made has been met with criticism, first for not helping the flailing country, then for agreeing to a bailout, and now for taking bold measures to try to save the plunging euro. Germany has often taken the initiative in Europe — and until now, it has almost always been in step with the rest of the 27-nation European Union. But this week, Germany is discovering that cutting a path on its own can be perilous.

When German lawmakers on Friday, May 21, approved the nation's participation in Europe's $1 trillion safety net to shore up the swooning euro, they did so only after weeks of Merkel's stalling and griping, which only made the financial markets more nervous. As Greece's crippling debt threatened to spread to other parts of Europe, Merkel tried desperately to stay on the sidelines, reaping criticism from Washington to Warsaw. And after she finally agreed to contribute €22.4 billion ($28 billion) to a rescue package for Greece, her Christian Democratic Union (CDU) party paid for her foot-dragging when it suffered a painful defeat in a crucial state election on May 9.

Under pressure from critics at home and abroad, Merkel decided to dash ahead of the pack on Tuesday and impose a ban on naked short-selling — traders' practice of selling shares without owning or securing to buy them — while also calling for an international tax on financial-market transactions. She was attempting to reassert her leadership in Germany and push Europe to move on financial-market reform. All she succeeded in doing, however, was to push the euro to a four-year low against the dollar. "She wanted to create a fait accompli to force Europe to impose measures against financial speculation because she is under pressure to do so at home," says Gerd Langguth, a political scientist and Merkel biographer. "Her actions are largely directed at domestic public opinion and the political situation in Germany."

The May 9 election defeat of Merkel's CDU in North Rhine–Westphalia, Germany's most populous state, means that the Chancellor's federal coalition with the liberal Free Democrats will likely lose its majority in the upper house of Parliament once a government is formed in the state. That makes Merkel more dependent on the Social Democratic Party (SPD), the CDU's main opposition, to pass key legislation. Merkel's about-face on imposing a transaction tax, then, has less to do with finding a workable cure for the systemic ills that led to the global financial crisis than with getting a jump on the SPD, which has been calling for a tax on purchases of stocks, bonds and other financial instruments. She was also hoping that by adopting a key SPD demand — one with huge popular support — she could persuade the SPD to back the European safety net. "She wanted to take the wind out of the SPD's sails and make it easier for them to back the rescue package for Greece," says Langguth.

Merkel was only partially successful. While she may have gained some ground in the public-opinion wars, she did not win the hearts and minds of the opposition parties. When Germany's lower house approved the euro rescue fund on Friday, it did so with a majority of 319 votes in favor, 73 opposed and 195 abstaining. The SPD and the Greens abstained rather than back Merkel's government. (The upper house of Parliament also backed the rescue bill, which must be signed into law by President Horst Koehler.)

Whatever Merkel was thinking this week, Germany's unilateral surprise actions did nothing to calm the panicked financial markets; instead, they seemed only to throw oil onto the flames. As European Finance Ministers gathered in Brussels on Friday to discuss how they could work more closely together in developing fiscal policies, their frustration with Merkel was evident. "Today's meeting is to coordinate economic policies," said Elena Salgado, Spain's Economy Minister, in a radio interview. "Obviously the decision taken in Germany was not an example of coordination."

Commentators have characterized Germany as being at war with the financial markets, and analysts warn that Merkel is jumping into a battle she cannot possibly win. "The Germans are no closer to understanding that the markets are not the problem," says Simon Tilford, chief economist at the London-based Center for European Reform. "The markets are right to be uncertain about the sustainability of the euro zone in its current form."

Merkel isn't done pushing for reform of the markets — she has said several times this week that she wants the euro-zone members to take action against financial speculation. But she's also calling for Europe to take a hard look at its budgets, and she hopes to lead by example. Berlin is proposing establishing harsh penalties on countries that run deficits higher than is allowed in the Maastricht Treaty. And Germany would also like Europe to adopt its balanced-budget law and establish an insolvency procedure for states that are unable to service their debt. Where some see a leader, though, others see a bully, and based on this week's events, Germany will likely have a hard time re-creating Europe in its own image.

• William Boston / Berlin