INSIGHT-German eurosceptics go mainstream in threat to Merkel
* Alliance with Cameron's Tories helps AfD shed populist tag
* One year old party talks less about euro, more about values
* AfD expected to do well in looming eastern state elections
* Merkel's CDU tries to contain debate on cooperation
BERLIN, June 15 (Reuters) - The Alternative for Germany (AfD) failed to make as big a splash in European elections last month as its eurosceptic counterparts in France and Britain. But that may be about to change.
Less than a month after the vote, the party formed last year by a group of renegade academics is on track to establish itself as a permanent force in German politics and a long-term headache for Chancellor Angela Merkel and her Christian Democrats (CDU).
The admission last week of the AfD into British Prime Minister David Cameron's conservative faction in the European Parliament has given the party a dose of credibility and its leaders a boost in their drive to distance the AfD from the populist, anti-immigrant movements of France's Marine Le Pen and Geert Wilders of the Netherlands.
After a professionally run EU campaign in which the party spoke less about its signature issue, the euro, and more about conservative German values, pollsters say the AfD is being seen by a growing number of voters as a legitimate, democratic party to the right of the CDU, and less like a flash in the pan.
Ahead of three regional elections in eastern Germany which are likely to vault the AfD into state assemblies for the first time, their rise is unsettling members of the CDU, with some now suggesting their party consider cooperating with the upstarts they had hoped would fade away.
"The AfD is establishing itself as a national conservative party, the kind that couldn't emerge after 1949 (when West Germany was founded) but has a tradition in pre-war Germany," said Ulrike Guerot of the Open Society Initiative for Europe.
Its core supporters are not rabid xenophobes, as Germany's mainstream parties have seemed to suggest, but church-going traditionalists who believe in conservative family values, are deeply worried about the loose policies of the European Central Bank (ECB) and want Germany to cure its own ills rather than help its euro partners.
"Until now these voters had stuck with the CDU. But under Merkel the CDU has lost much of its conservative flavour," Guerot said.
In the German federal election last September, the AfD fell just shy of the 5 percent threshold needed to enter the Bundestag lower house of parliament.
Some experts predicted the party would wither away like the once trendy Pirates party, and in the months after the German vote that looked like a good bet. At the turn of the year, media reports on the AfD described a party in crisis, beset by infighting and struggling to stem an exodus of members.
Most damaging, in a country where far-right views are not tolerated in politics because of the Nazi past, were allegations the AfD was being hijacked by extremists.
But leader Bernd Lucke, a 51-year-old economics professor and father of five, appears to have silenced the more radical elements in the party and broadened out the AfD's message.
At its founding, it was a one issue party calling for a return to the Deutsche Mark. During the recent EU campaign it talked as much about education, domestic security and support for small businesses as it did about the euro, scoring 7 percent.
These are the themes regional AfD leader Frauke Petry hopes will secure the party a double-digit result in an election in the eastern state of Saxony in late August. State votes in Thuringia and Brandenburg follow two weeks later.
"If we get into all three state assemblies it would establish the AfD as a stable force in German politics," said Petry, a 39-year-old chemist and founder of a small business that makes sealant for tyres.
"The fact that we are now working with Britain's Tories in Brussels shows we've arrived on the European scene. We'll use this in the election campaign to send a signal to voters about our legitimacy."
Saxony, which shares a border with Poland and the Czech Republic, has been ruled by Merkel's CDU ever since German reunification in 1990. It is the last state in the country where the CDU governs with the Free Democrats (FDP), its traditional ally on the right but now a party in free fall.
The FDP's weakness may force the CDU to look for another partner this time around. And officials like Steffen Flath, CDU leader in the regional parliament in Saxony, believe his party cannot afford to rule out cooperation with the AfD.
That seems highly unlikely given strict orders from Merkel that the party steer clear of the AfD. But if a similar scenario plays out in other states over the coming years, the CDU could face the same fate as the centre-left Social Democrats (SPD), crippled half a decade ago by a divisive internal debate over cooperation with the radical Left party.
"I think the elections in the eastern states are coming too early for the CDU to consider changing its stance on working with the AfD," said German pollster Klaus-Peter Schoeppner.
"But if the AfD plays its cards right, there will be people in the CDU who say it needs to consider the AfD option for the next federal election in 2017."
SCARED OLD MEN
Advisers to Merkel reject the idea that the CDU is divided over cooperation with the AfD. And they note that the new party did better in the EU election than in the German vote because of low turnout rather than a rise in voter support, garnering roughly two million votes in both races.
"If you look at their supporters, they are mostly old men who are scared about the changes going on in German society," an aide to the chancellor told Reuters on condition of anonymity.
"So you have to ask yourself whether the AfD can broaden out their base beyond this rather limited group. I think there are big questions about whether they can succeed."
Still, there are some worrying signs for the CDU.
Under Merkel, the party that has shifted to the left, embracing a minimum wage, renewable energy, female quotas in boardrooms and rental caps.
This has been welcomed by the broader German electorate, which re-elected Merkel to a third term in September with her party's strongest score since reunification.
But the policy shift, and Merkel's support for euro bailouts and accommodative ECB policies, have also alienated a core group of CDU traditionalists, opening the door to the AfD and its Germany-first, conservative values message.
"I really don't know what the CDU stands for today," complained Reinhold Festge, head of the German Engineering Association (VDMA) in a newspaper interview last week. "My party has lost most of its identity. This saddens and infuriates me."
Guerot of the Open Society Initiative believes the AfD, fuelled by CDU defectors, has the potential to grab up to 10 percent of the vote in Germany.
This would put it on a par with more established parties like the Greens and Left - and profoundly change the German political landscape. (Additional reporting by Hans-Edzard Busemann; Writing by Noah Barkin; Editing by Giles Elgood)
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