August 22, 2011 / 6:00 AM / 8 years ago

Merkel pressured, collateral row rages on

FRANKFURT (Reuters) - Germany’s Angela Merkel faced mounting domestic criticism of her euro zone policies on Monday, with the Bundesbank slamming an anti-crisis package she agreed to in Brussels last month and a senior ally warning he would vote against key parts of it.

German Chancellor and leader of the Christian Democratic Party (CDU) Angela Merkel, delivers her speech at a party meeting of Lower Saxony's CDU in Hameln, August 19, 2011. REUTERS/Fabian Bimmer

Elsewhere in the currency bloc, a week-long row over Finnish demands that Greece cough up collateral as a condition for new bailout loans raged on, with the Netherlands condemning a bilateral deal between Helsinki and Athens as illegal.

Rating agency Moody’s warned that the dispute could end up delaying approval of a new aid package for Greece, driving it into default.

Despite public reassurances from Merkel over the weekend that she would not bow to pressure from European partners and financial markets to agree to joint euro zone bonds, there were signs of growing unease at her policy course from within her conservative camp.

Shortly after returning from an official trip to the Balkans on Tuesday evening, she is now due to attend a special meeting of lawmakers from her parliamentary bloc — the Christian Democratic Union (CDU) and Christian Social Union (CSU) — to answer questions from concerned Bundestag members.

Reflecting worries about Merkel’s course, the CDU leadership has agreed to make the government’s euro zone policy a central theme of a party congress scheduled for early November, which had been meant to focus on education.

Elsewhere in Europe, the German leader is being accused of doing too little to save the 12-year old single currency project, while at home she is increasingly under fire for having gone too far.

Both her partners abroad and allies in Germany have begun questioning her leadership in the crisis, which has sometimes seemed passive as she struggles to satisfy different interest groups.

“Policy seems to be formed day by day. It’s always reactive, not proactive. There is no leadership from Merkel and that is the gist of the problem,” Josef Joffe, editor and publisher of respected German weekly Die Zeit told Reuters.

BUNDESBANK AND BOSBACH

On Monday, the Bundesbank issued one of its most stinging criticisms to date of Europe’s — and by default Merkel’s — crisis management, saying governments risked turning the bloc into a “transfer union” in which Germany pays for the sins of its euro partners.

Merkel and her 16 counterparts in the currency area agreed at a July 21 summit in Brussels to a series of new measures to combat the debt crisis that has raged since late 2009 and is now threatening to tear apart the bloc.

These included a second aid package for Greece and new powers for the European Financial Stability Facility (EFSF), the rescue mechanism which will be able to intervene in the secondary bond markets to prop up weak countries once parliaments across the euro zone have approved the decisions.

“The latest agreements result in a further big step towards joint liability and reduced disciplining via the capital markets,” the Bundesbank, which is led by Merkel’s former economic adviser Jens Weidmann, said in its monthly report.

Senior CDU lawmaker Wolfgang Bosbach broke ranks on Sunday and vowed to vote against the EFSF steps when the Bundestag meets next month.

Parliament seems sure to pass the measures, thanks in part to the support of the opposition Social Democrats (SPD) and Greens. But Bosbach’s public defiance is a sign that Merkel’s ability to hold her party together on euro zone issues is waning.

Manfred Guellner, head of polling group Forsa, said sentiment towards Merkel had undergone a change over the past weeks, pointing to a survey published in Cicero magazine in late July which showed 61 percent of Germans now believe Merkel will not win a third term in 2013.

“The fact that a strong majority don’t expect her to stay in office is completely new,” Guellner said.

DANGER OF DELAY

Germany is not the only country where fierce debates are raging about the euro zone’s latest crisis-fighting steps. In countries like the Netherlands, Finland and Slovakia, there is deep scepticism about providing further aid to the euro zone’s weakened periphery and giving the bloc’s rescue facility powers to prop countries up with bond purchases.

Ewald Nowotny, a member of the European Central Bank’s (ECB) governing council, said on Monday that he was worried that political jousting in member states could end up delaying parliamentary approvals of the July 21 deal beyond October.

Any delay would put more pressure on the ECB, which agreed to reopen its controversial bond buying programme earlier this month after promises from European governments that the EFSF would take over this task within months.

The bank bought another 14 billion euros of bonds last week to add to the record 22 billion euros a week earlier, according to a breakdown published on Monday.

Merkel is also under fire from across Europe for not taking more radical action including expanding the EFSF, and business groups in Germany called last week for joint euro zone bond issuance.

Moody’s said the division over the collateral row pointed to the need for Germany and France to take stronger steps to support the euro project.

“The tentative Finnish-Greek collateral accord raises concerns about the willingness and ability of some euro area policymakers to implement measures that may prove necessary to preserve the stability of the European Monetary Union,” the agency said.

“This reticence places greater pressure on Germany and France to stake out a strongly supportive stance towards the euro area, with more concrete and immediate effect.”

Writing by Noah Barkin, additional reporting by Andreas Rinke in Berlin

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