FACTBOX-Key political risks to watch in Germany

BERLIN, July 2 (Reuters) - Chancellor Angela Merkel is under pressure from members of her own coalition to review a flagship budget savings plan after party rebels forced a humiliating vote over the German presidency.

The struggle to get Christian Wulff elected to the largely ceremonial post of head of state on Wednesday, even when Merkel had a clear majority on paper, showed growing disenchantment with the leadership of her nine-month-old centre-right alliance.

The presidential vote is the latest in a run of setbacks for Merkel that have left her coalition severely weakened and led political commentators to question whether the government can last until the end of the term in 2013.

Despite the domestic political turmoil, Germany has played a leading role in dealing with the euro zone debt crisis. After initial reluctance, Berlin agreed to help bail out Greece and contribute to a euro zone safety net.

The German economy -- Europe's largest -- is also recovering after suffering its worst recession since World War Two in 2009.

Unemployment fell in June to its lowest level since December 2008 and a raft of economic institutes have raised their forecasts for German growth this year -- some to above 2 percent. However, many economists expect growth to slow in 2011.

Following are some of the key factors to watch:

COALITION WOBBLES

The presidential vote cast doubt on Merkel's future. She had already been struck by a series of resignations this year that have deprived her conservative Christian Democrats of their most experienced figures, leaving her isolated at the top.

Support for Merkel has plunged to a record low, a poll conducted earlier this month showed, and nearly half of those surveyed said they wanted new elections. [ID:nLDE65F0A7]

The drop in Merkel's popularity has coincided with a rally by the main opposition Social Democrats (SPD) in polls.

The SPD looks set to enter the government of Germany's most populous state, North Rhine-Westphalia, as senior partner, after a vote on May 9 which saw Merkel's conservatives lose support.

This will enable the SPD to block laws drafted by Merkel's centre-right coalition in the Bundesrat upper house of parliament, giving the opposition more say in national government and potentially slowing down the legislative process.

Merkel's woes have been compounded by a drop in support for her junior coalition partner, the Free Democrats (FDP), to below the 5 percent threshold for entering parliament for the first time in 7-1/2 years. [ID:nLDE65S17U]

The collapse in support has fuelled criticism of FDP leader Guido Westerwelle from senior figures in his party.

A debate over healthcare reform has also provoked a slanging match within the government, between the FDP and the Christian Social Union -- Bavarian sister party of Merkel's conservatives.

What to watch:

-- Merkel's reaction to the presidential vote setback. She needs to unify her coalition and get the ruling parties behind a common policy programme. Failure to agree on healthcare reform could raise fresh questions about the government's future.

-- Analysts say Westerwelle's position as FDP leader could be under threat if his party fails in state elections next year. Three states with a combined population of more than 17 million are due to vote next March, with three others later in the year.

-- State elections in March 2011 in Saxony-Anhalt, Baden-Wuerttemberg and Rhineland-Palatinate.

POLICY DISPUTES/IMPASSE

Healthcare reform is the coalition's first test after the presidential vote. The government needs to plug an 11-billion euro funding gap in the state healthcare system next year and wants to put a new long-term financing structure in place.

The three ruling parties have different ideas on how to address the issue and need to tackle it before parliament's nine-week summer break.

Merkel is also under pressure from within her coalition to tone down plans for 80 billion euros in budget cuts over the next four years.

Many want planned cuts to welfare spending -- which would account for the biggest chunk of consolidation -- to be eased and for the government to take a more equitable policy approach.

Disagreements in the coalition over policy could hold up legislation and lead to policy stagnation. Merkel's government has relatively few big plans left for the remainder of its term.

From 2011, it must take into account a "debt brake" law requiring Germany to cut the structural deficit by around 10 billion euros and reduce the deficit-to-GDP ratio to a limit of 0.35 percent by 2016.

What to watch:

-- The healthcare reform debate is an immediate test for the coalition's unity and ability to get business done.

-- Whether Merkel heeds calls from with her coalition to scale back the extent of her budget savings plans.

ECONOMY

Exports and industrial orders have leapt since the start of the year, spurring a revival in the labour market. Several economic institutes have raised their forecasts for growth this year but economists expect the economy to slow later in 2010.

Germany is heavily dependent on exports for growth, which has prompted some trading partners to accuse Berlin of not doing enough to boost its own domestic demand.

Some economists also say productivity could suffer if firms use a state subsidy for reduced hours for too long, inflating their cost base by artificially protecting the labour market.

What to watch:

-- Germany's economic recovery may start to sputter if the austerity measures launched during the euro zone debt crisis sap demand in major European trading partners.

-- If Germany continues to profit from the global rebound and countries such as France fail to gain traction, disputes over economic policy in Europe may intensify.

-- The Ifo think tank's latest survey on German business sentiment will be published on July 23, while preliminary data for GDP in the second quarter are due on Aug. 13.

DEBT

Bank bailouts, labour market subsidies and stimulus measures to boost growth have all added to Germany's debt burden.

As Europe's benchmark issuer of sovereign debt, the federal government has seen strong secondary market demand for its bonds, lowering the cost of servicing new debt.

However, low coupons on recent issues have hit demand, as shown by an auction of five-year "Bobl" notes on May 26.

At local government level, a number of large western cities are nearing bankruptcy, a situation exacerbated by the fact that until 2019 they must continue paying towards the redevelopment of the former East Germany.

What to watch:

-- The deterioration in municipal finances has deepened splits between Berlin and the regions, and aggravated discontent among westerners who think they have already paid enough for the benefit of the eastern states.

-- Some leading politicians from western Germany have said they will seek to reduce the burden on afflicted municipalities this year when the law governing the so-called "solidarity charge" for the east is debated in parliament.

-- Forthcoming bond sales will provide a clearer picture of the impact of the crisis on demand. A 10-year Bund top-up auction comes on July 7, with a five-year Bobl sale on July 14.