Analysis - Allies' tough talk on Greece undermines Merkel

BERLIN Wed Sep 14, 2011 4:06pm BST

German Chancellor Angela Merkel is seen through a window of the Chancellery as she waits for the arrival of Finnish Prime Minister Jyrki Katainen (not pictured) in Berlin, September 13, 2011. REUTERS/Thomas Peter

German Chancellor Angela Merkel is seen through a window of the Chancellery as she waits for the arrival of Finnish Prime Minister Jyrki Katainen (not pictured) in Berlin, September 13, 2011.

Credit: Reuters/Thomas Peter

BERLIN (Reuters) - By picking a fight with Angela Merkel over the euro zone crisis to boost their popularity, Germany's Free Democrats (FDP) have deepened rifts in her coalition, hurt the chancellor's authority and emboldened rebels before a crucial vote on the bailout fund.

The infighting could even undermine Merkel's standing abroad at a time when the 17-member currency bloc is looking to Europe's biggest economy for leadership in the debt crisis.

"This debate is weakening Merkel, she is finding it more difficult to enforce her position," said Gero Neugebauer, political scientist at Berlin's Free University.

Merkel was forced to publicly slap down 38-year-old FDP chief Philipp Roesler, who is her economy minister and vice-chancellor, after he jolted markets by saying an "orderly bankruptcy of Greece" should not be taboo.

While few analysts or party members predict an imminent collapse of the coalition, Merkel clearly faces a battle to push her agenda of closer economic integration in the euro zone as the price of backing further bailout moves.

Roesler's comments, which triggered a market sell-off and unleashed a barrage of criticism in the German media, were aimed at his domestic audience, in a bid to avoid another electoral catastrophe in Sunday's vote in the city state of Berlin.

Roesler, who has struggled to stamp his authority on the FDP since replacing the unpopular Foreign Minister Guido Westerwelle as party leader in May, is desperate for a boost.

The FDP has suffered big losses in regional votes this year, and this month dropped out of the assembly in Mecklenburg-Vorpommern. Roesler badly needs it to do better on Sunday.

Nationally, polls suggest the party would not even win sufficient votes to enter parliament if elections were held now.

"I think this was designed to boost Roesler's profile," said political analyst Gerd Langguth. "He has shown his colours and there are a lot of people who agree with him."

"It is dangerous for the coalition inasmuch as there are now voices in the FDP who are saying 'We must change our stance on Europe and leave the coalition'," said Langguth, adding that he did not think there was any chance of that happening yet.

"But it is a clear warning of the state of the coalition."

BAILOUT REBELLION

Roesler already seems to have cheered some in his party.

"We want to govern at last and move away from being defensive and just nodding through whatever Merkel decides," one senior member of the FDP's parliamentary party told Reuters.

"Roesler is only saying aloud what we all think."

The danger for Merkel is that he emboldens FDP lawmakers to defy the government in a September 29 vote on expanded powers for the European Financial Stability Facility (EFSF).

While there is no doubt Merkel will get the vote through because the main opposition parties support the motion, failure to secure a majority from her own ranks could so damage her authority over her own party that was forced to call an early election.

Langguth said that, in the end, most of Merkel's conservatives would vote for the motion and she would be safe. But a tougher challenge lies just around the corner.

FDP financial expert Frank Schaeffler has mustered 1,200 signatures for a vote among the party rank-and-file on the European Stability Mechanism (ESM), the permanent euro zone bailout fund that is supposed to succeed the EFSF. The German government is to vote on that in December.

If sufficient FDP members came out against the ESM, it could be hard for FDP lawmakers to back the law in parliament.

It is not just the FDP who are breaking ranks. The Christian Social Union (CSU), sister party to Merkel's Christian Democrats (CDU), is also playing to its more eurosceptic audience and some members have threatened to oppose the EFSF.

German Transport Minister Peter Ramsauer, a prominent CSU member, has also criticised the ESM, which Merkel has helped to shape in Brussels.

"The ESM would in part dictate to us sums we have to pay, over which the parliament no longer has any control," Ramsauer was cited as telling Die Zeit weekly. "This undermines the foundations of parliamentary sovereignty over the budget."

Ramsauer did not suggest voting against the ESM in December, but warned that Merkel's government should not rush things, especially as the EFSF was difficult for lawmakers to digest.

RATTLED MARKETS

The clear differences on euro zone policy have shaken already jittery markets and could limit Merkel's room for manoeuvre in talks about tackling the euro zone debt crisis.

It is a humiliation that she had to rebuke her economy minister, a trained doctor with no experience of economics, for seeming to be oblivious to the way markets work.

She pointedly said people should weigh their words carefully and warned "we do not need alarm in financial markets."

Economists are worried.

"Mr Roesler seems to think the euro is safe, that the ECB is there, that everybody believes Germany will defend the euro and this is just about Greece," said Berenberg Bank economist Christian Schulz.

"That is an illusion. Markets do not think the euro is safe. Actually, markets are thinking Germany is the country that might leave the euro. Roesler's comments reinforce that view."

"If Merkel doesn't manage to rally her coalition, this will definitely weaken her authority, which would mean the role of Germany would be reduced in European policy," said Neugebauer.

(Additional reporting by Matthias Sobolewski; Writing by Madeline Chambers; Editing by Stephen Brown and Kevin Liffey)