Merkel defends rescue plan, sees economy hit by crisis

BERLIN (Reuters) - Chancellor Angela Merkel defended her 500-billion euro bank rescue package against jeers from left-wing opponents on Wednesday, calling it an essential step that would shield average Germans from the global crisis.

Merkel told parliament the international financial crisis would weigh on the economy but not lead to a lasting slump.

"We have to expect a weakening of growth," she said. Merkel added, however, that a sharp, sustained economic downturn was not on the horizon.

"We've seen...that the state is and has been the only institution capable of recreating trust between banks," she said. "That's happening to protect citizens and not to protect bank interests...We're taking up our responsibility to avert damage to the German people."

Germany is expected to cut its growth forecast for 2009 to about 0.2 percent on Thursday, down from 1.2 percent before.

Finance Minister Peer Steinbrueck, who has said Europe's largest economy could slip into recession, told parliament the economy faced significant risks but there was no need to pursue a stimulus package to cushion it from the crisis.

"We will enter a very difficult period in 2009," he said.

The far-left Left Party, a rising force in German politics, sharply criticized the crisis management of the ruling grand coalition of Merkel's Christian Democrats (CDU) and Steinbrueck's Social Democrats (SPD).

Left party leader Oskar Lafontaine called for measures to boost domestic demand, adding many Germans found the cabinet's multi-billion bank rescue package hard to fathom as they suffered the effects of a weakening economy.

"When we asked for more money for Hartz IV (unemployment benefits), the answer was 'There's no money'. When we asked for more money for pensioners, the answer was 'There's no money'," Lafontaine told parliament.

"People are surprised that, all of a sudden, 500 billion euros are readily available to manage the crisis...The people doesn't understand that any more," he said.

Guido Westerwelle, leader of the opposition Free Democrats (FDP), warned the government not to give up their target to curb spending and balance the budget over the crisis.

"Solid state finances must not be laid to rest to the detriment of the next generation," he told the assembly.

Merkel defended her cabinet's approval of the bank rescue plan, which includes as much as 400 billion euros in guarantees to help banks get over a liquidity squeeze and up to 100 billion euros in state funds, mainly to recapitalize banks.

Merkel said Germany would push for new global rules for the financial system, reiterating her demand that the International Monetary Fund (IMF) take on a bigger supervisory role.

She said Germany would set up a new expert group, which would assess the financial market system.

Merkel's announcement that former Bundesbank president Hans Tietmeyer was to head the group drew jeers from Lafontaine's Left Party, which has sharply criticized Germany's banking elite in past weeks.

(Editing by Mark Trevelyan)