* Merkel says sticking to Iran deal is best way to tackle issues
* Backs ESM as euro zone backstop, more cautious than Macron
* Far-right AfD lawmaker booed for discrimination in speech (Adds quotes on euro zone, diesel, AfD)
By Michelle Martin and Madeline Chambers
BERLIN, May 16 (Reuters) - Germany’s Angela Merkel on Wednesday defended the Iran nuclear deal following its rejection by Washington, arguing the pact is the best way to tackle concerns about Tehran’s role in Syria and its ballistic missile programme.
In a wide-ranging policy speech to the Bundestag lower house of parliament, the chancellor of 12-1/2 years addressed a range of individual issues from euro zone reform to digitalisation and defence, without laying out a cohesive strategic vision.
A multilateral approach, including towards Iran, is the only option, said Merkel, who with other European powers is struggling to keep alive the nuclear deal without the United States.
Merkel described the deal as “everything other than ideal”, but argued that international nuclear authorities said Iran was sticking to its commitments.
“This does not mean we are happy about everything Iran is doing, we have to talk about its role in Syria, its ballistic missile programme, other issues, but the question is whether you can talk better if you terminate an agreement or if you stay in it,” Merkel told lawmakers.
“We say you can talk better if you remain in it,” she added.
Last week, U.S. President Donald Trump abandoned the 2016 pact between Iran and six world powers which lifted most international sanctions in return for Tehran curbing its nuclear programme, under the surveillance of the U.N. nuclear watchdog.
“Despite all the difficulties that we have these days, the transatlantic relationship is and remains paramount,” Merkel, whose fourth term atop a coalition started in March after her conservatives made big losses in a Sept. vote, told lawmakers.
“But these transatlantic relationships also must be able to deal with differences of opinion.”
Merkel also called for a strengthening of the euro zone and threw her weight behind proposals from her Social Democrat Finance Minister Olaf Scholz to transform the European Stability Mechanism (ESM) fund, into a facility to wind down bad banks.
Merkel and Scholz are at odds with French President Emmanuel Macron over his more radical ideas to create a separate euro zone budget, appoint a finance minister and convert the bloc’s ESM emergency rescue fund into a European monetary fund.
Merkel, adamant that Germans will not take on greater risks, said that individual members must take responsibility for themselves within a currency union. She also said she supported developing the ESM “to give it tasks that come close to those of a international monetary fund”.
“I agree that when a lot of progress has been made on reducing risks nationally, we can have a common backstop and this common backstop could be domiciled in the ESM, as the finance minister said yesterday,” said Merkel.
Scholz had on Tuesday suggested the ESM become a common backstop as long as risks in national banks’ balance sheets were reduced first. This is a smaller step than Macron wants. He aims to turn it into a preventative fund to help members facing short-term financial problems.
Both leaders have said they will reach agreement before a summit in Brussels on June 28-29.
In a lively debate, the parliamentary leader of the far-right opposition Alternative for Germany (AfD), Alice Weidel, was scolded by Bundestag President Wolfgang Schaeuble for discriminating against women wearing headscarves in her speech.
“Burkas, headscarf girls, knifemen who live off benefits and other good-for nothings will not secure our prosperity, economic growth and above all the welfare state,” Weidel had said to boos from other lawmakers.
She also quoted Czech President Milos Zeman: “If you live in a country where you are punished for fishing without a licence but not for illegally crossing a border, then you are fully justified in saying the country is ruled by idiots.” (Additional reporting by Paul CarrelWriting by Madeline Chambers; Editing by Paul Carrel and Janet Lawrence, William Maclean)