Testing times for Merkel in German euro vote

German Chancellor Angela Merkel faces a crunch vote Thursday that threatens to both weaken her politically and undermine her ability to manage the eurozone debt crisis.

Closely watched by already jittery financial markets and eurozone partners, Bundestag MPs in the lower house of parliament will decide on expanding a rescue fund for debt-mired Greece and other faltering countries.

Although the bill is expected to pass, Merkel may have to face the humiliation of garnering the opposition’s support, after some members of her governing centre-right coalition threatened to defect.

The two main opposition parties, the Social Democrats and the Green party, have vowed to vote in favour of expanding the European Financial Stability Facility (EFSF).

With a Greek default looming and the German economy slowing down, Europe and the world are looking to Berlin as the eurozone’s paymaster to steer the currency to safety.

Merkel and other advocates of a Greek lifeline argue the euro is crucial to Germany’s economic success as the world’s second biggest exporter of goods after China, as well as providing glue for Europe’s political unity.

The centre-left newspaper Der Tagesspiegel commented in Monday’s edition that this was “the most important week in Angela Merkel’s chancellorship to date.”

Failure to clinch a majority from within her own ranks would mark “the beginning of the end for her coalition,” the Berlin-based newspaper warned.

“In the middle of the currency crisis, the biggest economy in Europe cannot afford to have a government which is divided on a central issue and clinging to power.”

The bill would implement a decision by EU leaders on July 21 to expand the scope and volume of the EFSF, set up in 2010, and to which Berlin will contribute more than 200 billion euros ($270 billion) in debt guarantees — the largest share.

Several backbenchers from the pro-business Free Democrats (FDP), the junior partner in Merkel’s coalition, have warned they might vote against the bill or abstain, arguing that the aid would only encourage more profligate spending.

Economy Minister Philipp Roesler, who is the FDP’s leader and Merkel’s vice chancellor, panicked markets after saying that Europe could no longer rule out an “orderly default” by Greece on its huge debt repayment.

But the daily Sueddeutsche Zeitung said Monday it saw no cause for real concern with the vast majority of coalition deputies expected to toe the line.

“More likely is that the critics of the rescue package will be allowed to get half a dozen ‘No’ votes so that they can get through the vote having saved face,” it commented.

Merkel has brushed off fears she will fail to get a majority from within her coalition, stressing that the bill should not be seen as a vote of confidence.

“I would like to get my own majority and I am confident I will get this. I am going to campaign for that this week,” she said late Sunday, reiterating earlier comments.

Frank Engels, an economist at Barclays Capital, said that even if lawmakers pass the bill “by a very healthy majority”, growing disunity between Merkel’s Christian Democrats and the FDP signalled trouble ahead.

“German politics (is) likely to become even more volatile than before in the wake of the growing divergence between the FDP and the Conservatives on matters related to EMU (monetary union),” he said in a research note.

And Holger Schmieding, of Berenberg Bank, said: “Many German parliamentarians who are willing to vote on 29 September to strengthen the EFSF seem more reluctant to support Greece further.”

German lawmakers are already due to tackle a second aid package for Greece in several weeks’ time.

While the EFSF boost in funds must be approved by lawmakers throughout the 17-member eurozone, Slovakia threatens to gum up the work by setting conditions for its agreement.