Bruised Merkel returns home to more policy fights

BERLIN Mon May 21, 2012 6:29pm EDT

German Chancellor Angela Merkel carries a coffee to her seat at the 2012 NATO Summit in Chicago, May 21, 2012. REUTERS/Jim Young

German Chancellor Angela Merkel carries a coffee to her seat at the 2012 NATO Summit in Chicago, May 21, 2012.

Credit: Reuters/Jim Young

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BERLIN (Reuters) - Angela Merkel returns from one of her most difficult foreign trips in recent memory on Tuesday to face more, severe tests of her long-standing command over the policy agenda in Germany and Europe.

The chancellor looked unusually isolated at a weekend G8 meeting in Camp David, where new French President Francois Hollande teamed up with host Barack Obama to push back against the bitter austerity medicine Merkel has prescribed for reeling euro zone members.

That conflict will continue to haunt her this week at an informal summit of EU leaders on Wednesday and at a meeting with German opposition leaders the following day, where she must defuse an escalating row that could delay approval of her cherished "fiscal compact" on budget discipline.

The man that Merkel was relying on to push these new fiscal rules through parliament, her chief whip Peter Altmaier, was abruptly shifted to the post of environment minister last week and will now have his hands full getting Merkel's stalled energy transformation plan back on track.

All this comes against the backdrop of embarrassing conflicts within her centre-right coalition over childcare subsidies and data protection, that have left Merkel looking indecisive and her government inept before a federal election in September of next year.

Some leading German commentators are likening Merkel's troubles to the last months of her predecessor Gerhard Schroeder's reign, although no one expects her to gamble on early elections as he did.

Instead, people close to the chancellor suggest, she may be forced into compromises she would not have considered in the past, when her political standing seemed unassailable.

The concessions may start on Wednesday in Brussels when Hollande and other European leaders, including Italy's Mario Monti and Spain's Mariano Rajoy, look poised to gang up on her and push for the introduction of joint euro zone bonds.

Merkel's opposition has been firm on this issue, nor will she entertain separate French calls to let the European Central Bank to lend directly to troubled euro states like Greece.

But after her lonely experience at the G8 summit, it is becoming increasingly difficult for the German leader to stick to all of her policy "red lines", no matter how popular they may be at home.

"Chancellor Merkel will have to change her savings-focused policy in Europe," the Sueddeutsche Zeitung newspaper wrote in a Monday editorial titled "Germany versus the rest of the World".

"No one holds it against the Germans that they don't want to pay unlimited sums for the mistakes of others. Despite that, Merkel's consolidation course is now seen as a huge mistake."

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A first step might be for Merkel to agree to loosen deficit reduction targets for countries like Spain and Greece that many economists view as wildly unrealistic.

One German official who requested anonymity due to the sensitivity of the matter said such a concession could come as early as the second half of June, but warned that special care must be taken not to send a signal to financial markets that it was "party time" again in Europe.

"We need to ensure that Hollande doesn't tell people the period of savings is over," the official said. "Then the markets will say, the Europeans just haven't understood."

Merkel needs to give Hollande something to get the Social Democrats (SPD) behind her course.

She needs the SPD's backing to win parliamentary approval of the fiscal compact and will try to forge a compromise at a meeting with opposition leaders on Thursday.

Her government is insisting on a simultaneous vote by the end of June on the tough new budget rules written into the pact, and the euro zone's permanent rescue mechanism (ESM).

The SPD is threatening to decouple the two votes, approving the ESM next month in time for it to go into force on July 1, but waiting until after the summer to vote on the fiscal compact -- a move that Merkel's aides worry could endanger the entire European approval process.

"If the Germans delay approval until after the summer, what kind of signal is that for Europe and the financial markets," the German official said. "You will see immediately, on the same day, three or four other countries pushing it back."

In an unusual move that underscores the breadth of opposition to Merkel's course, the head of the SPD Sigmar Gabriel is expected to travel to the Elysee Palace in the coming weeks to plot strategy with the new French president.

Josef Joffe, editor of influential weekly Die Zeit, said he believed Merkel would weather the storm and has little incentive to make big concessions despite the rising backlash against her policies.

He points out that the SPD has limited room to score points with its growth-oriented focus because a solid majority of Germans still back Merkel's focus on austerity. Any moves by Hollande to engage in more deficit-spending could backfire quickly, putting France at the centre of the crisis.

"Merkel has more than a year until the next election and no one can force her out," he said. "She is a disciple of Helmut Kohl who spent 16 years in power by waiting out policy debates like this."

Still, the camaraderie between Hollande and other leaders over the past days, a newly feisty German opposition, and the ongoing tensions in her own government show that life is unlikely to get any easier for Merkel in the months to come.

(Reporting by Noah Barkin; editing by Philippa Fletcher)

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