Fiery German euro debate haunts Merkel

REUTERS

Germany's Chancellor Angela Merkel.

Even in the remote Italian mountain village of Sulden, Angela Merkel must be finding it hard to tune out the relentless roar of the euro zone crisis.

While the German chancellor enjoys a rare hiking holiday with her husband, a fierce debate over her crisis policies has broken out in Berlin, pitting rescue-weary members of her own government against opposition parties that are stepping up calls for Merkel to take bolder steps to save the euro.

In recent days, prominent centre-right allies have urged her to cut Greece loose from Europe's single currency bloc. Others have criticised the European Central Bank and its Italian president for promising new measures to help stricken euro zone members.

Meanwhile the opposition Social Democrats (SPD), on whom Merkel has become increasingly reliant to get rescue measures through parliament, are pushing in the opposite direction.

SPD leader Sigmar Gabriel slammed Merkel on Monday for failing to spell out how she plans to deliver the “fiscal union” she says is necessary to save the euro.

Only through a combination of closer fiscal integration and common debt issuance - a step Merkel has vigorously resisted - could Europe hope to emerge from its three-year old crisis, Gabriel said, echoing the view of many economists.

Until now, Merkel has been able to strike the delicate policy balance necessary to keep her conservative allies and the opposition onside.

But the intense debate that has erupted over the past week suggests her room for manoeuvre is shrinking fast.

A ruling by Germany's Constitutional Court next month on the legality of the euro zone's new rescue mechanism could force her off the fence if it says further integration steps cannot happen without changes to the country's “Basic Law”.

That could compel Merkel to launch a more forceful public campaign for her as-yet ill-defined vision of an integrated Europe, at the risk of alienating members of her own government, notably from the Bavarian Christian Social Union (CSU) and liberal Free Democrats (FDP).

One year before Germany holds a federal election, such a shift would also move her closer to the SPD, raising the chances of another “grand coalition” between the country's two biggest parties after the 2013 vote.

CRUCIAL MONTHS

Getting to the vote will be the hard part.

Greece may need more aid from its European partners to avoid a catastrophic default, but going to the Bundestag to ask German lawmakers to back a third package for Athens is widely seen as a political no-go for Merkel.

Neither will she want to risk cutting Greece loose - and the contagion such a step could unleash - despite the growing calls from within her coalition to do just that.

Merkel's Economy Minister Philipp Roesler said last month there was no reason to fear a “Grexit” any longer. And Markus Soeder, a leading member of the CSU, said over the weekend he expected Greece to leave the euro zone by the end of the year.

“If someone is hanging on your rope and pulling you down into the abyss with him, you have to cut the rope,” he told Germany's Bild newspaper, using a mountaineering analogy.

But people close to Merkel say the risk-averse leader will do everything in her power to avoid a destabilising Greek exit in the run-up to next year's election.

That leaves her heavily dependent on the ECB and its President Mario Draghi to keep the euro show on the road for at least another 12 months. After that, if Merkel does secure a third term and forms a new coalition, she would presumably have more flexibility to combat the crisis.

Draghi's vow in a speech in London last month to “do whatever it takes” to preserve the euro, and his signals that the ECB will soon restart its dormant bond-buying programme went down badly in Germany's monetary-hawk establishment.

Juergen Stark, who stepped down from the ECB board last year in protest at the bond purchases, said in a radio interview on Tuesday that the central bank was going well beyond its mandate and violating the ground rules of monetary union.

But Merkel's government has remained conspicuously silent - a sign that it tacitly supports Draghi's flexible approach in keeping the euro afloat.

Working in Merkel's favour is her strong popularity at home.

A poll for public broadcaster ARD last week showed 68 percent of Germans believe she is doing a good job as chancellor and a full 70 percent support her course in the euro zone crisis.

This personal strength has helped keep disgruntled members of her own party on board in a series of crucial parliamentary votes in recent months.

Three weeks ago, she won an overwhelming majority in the Bundestag for a euro zone rescue package for Spain's banks, with 22 members of her coalition rebelling, down from 26 deputies in a vote the previous month on the bloc's permanent rescue mechanism.

“She's been able to hold things together so far and Germans still support her policies,” said Klaus-Peter Schoeppner, head of the Emnid polling group. “But her wiggle room is shrinking and the next months could be decisive.” - Reuters