UPDATE 2-Merkel says Europe faces toughest challenge since WW2
* Merkel urges step-by-step move towards political union in Europe
* Delegates say no alternative but to accept more integration
* Shift on minimum wage designed to position Merkel for 2013 vote
By Noah Barkin and Stephen Brown
LEIPZIG, Germany, Nov 14 - Warning that Europe faced its "toughest hour since World War Two", German Chancellor Angela Merkel urged her party to set aside its misgivings about the euro and accept closer political integration as a solution to the bloc's deepening debt crisis.
In a one-hour address to thousands of delegates from her Christian Democrats (CDU), Merkel offered no new ideas for resolving the crisis that has forced bailouts of Greece, Ireland and Portugal, and stirred doubts about the survival of the 13-year-old currency area.
But she said Germany, which as Europe's largest economy has provided the biggest share of the aid to stricken euro states, would have to make more sacrifices in the months ahead.
"The challenge of our generation is to finish what we started in Europe, and that is to bring about, step by step, a political union," Merkel told the party congress in the east German city of Leipzig.
"Europe is in one of its toughest, perhaps the toughest hour since World War Two," she said.
The two-day party meeting was originally supposed to focus on education policy but Europe's debt crisis has dominated headlines for months and thrust itelf into the centre of the debate.
Last week alone, the leaders of Greece and Italy were forced out and replaced with technocratic governments charged with pushing through tough austerity measures.
Merkel does not face an election until 2013, but knows that she too could become a victim of the euro zone turmoil if she puts a foot wrong.
"If the euro fails, then Merkel will fail. That's pretty clear," Said Juergen Dierks, a 57-year old CDU delegate from Lower Saxony who described her speech as solid.
Asked about Merkel's demand that the party accept "more Europe", he answered: "We all know there is no other choice."
VOLUNTARY EURO EXIT
Under former Chancellor Helmut Kohl, the CDU led Germany into the euro.
Nearly 13 years on, many German conservatives are uneasy with taxpayer-funded bailouts of weak euro states, resentful of fiscal backsliding in countries like Greece and concerned the crisis is impinging on the independence of the European Central Bank, which has been forced to buy up bonds of stricken states.
Some in the party believe the whole project was a mistake which must now be carefully undone, with Greece and possibly other countries exiting the bloc.
A resolution put forward by the party leadership in the run-up to the Leipzig congress states explicitly that countries that repeatedly violate Europe's fiscal rules should be allowed to leave voluntarily.
But Merkel argued that Germany had a responsibility towards its partners and was vulnerable itself if other euro zone states were allowed to collapse, noting that 60 percent of German exports go to the European Union.
"Irish problems are Slovak problems, Greek problems are Dutch problems and Spanish problems are our problem," Merkel said. "Our responsibility does not end at our borders."
Merkel said there were "red lines" Germany was not prepared to cross, rejecting joint euro zone bonds and other quick fixes which Germany believes could discourage euro states from running responsible fiscal policies.
"The hard part is that this crisis was not created overnight. It is the result of decades of mistakes, and we can't solve it in one fell swoop. We have a long, tough road ahead of us," she said.
WORLD IS WATCHING
Dietrich Birk, a 44-year-old member of the state assembly in Baden-Wuerttemberg, was broadly positive about Merkel's speech though he said it lacked real passion.
"There is a lot of uncertainty in the party. People are tense. They're worried about the impact of the crisis on the real economy, which we haven't really felt yet in Germany," he said.
It is not only Merkel's euro policy which has sparked concern in CDU ranks. After the Fukushima disaster in Japan earlier this year, Merkel abandoned the party's long-standing support for nuclear power, enraging the CDU's business wing.
Last month she made another about-face, backing the introduction of a nationwide minimum wage, a policy she had publicly opposed for years.
Merkel defended both decisions in her speech, receiving tepid applause. The reversals are part of a deliberate strategy by Merkel to co-opt the positions of rival parties, as she did on evironmental and family policy in her first term, and increase her coalition options for 2013.
Because of a precipitous slide in support for her current partner the Free Democrats (FDP), forming coalitions with the left-leaning Social Democrats (SPD) or Greens may be her only hope of retaining power.
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