Merkel Risks Revolt Over Greece as FDP Ally Splits on Aid Terms

May 14, 2011, 9:25 AM EDT By Brian Parkin

May 14 (Bloomberg) -- Chancellor Angela Merkel faces a gathering storm in her coalition over Germany’s share of euro- area rescues, threatening to undermine her ability to make concessions on additional help for Greece.

Merkel’s Free Democratic Party coalition partner signalled a hardening of its stance on aid at a convention today, calling for penalties on bailout recipients that miss debt-reduction targets. A leading FDP rebel said that as many as 50 coalition lawmakers are ready to reject the post-2013 euro rescue fund when it goes to parliament, enough to make Merkel reliant on opposition votes.

“We know that public acceptance of European topics is dwindling,” Economy Minister Philipp Roesler told FDP members in the Baltic Sea port of Rostock in his first speech as party leader. Aid appraisals must be based on “clear conditions with sanctions for failure to adhere to rules,” he said. Financial help “cannot be a one-way street.”

One year after she agreed to aid Greece to save the euro, Merkel must again balance domestic resistance to bailouts with the need to tackle a resurgence of the debt crisis where it started. The euro fell to a six-week low against the dollar on concern Greece may have to restructure its debt even as European finance ministers prepare to discuss further support on May 16.

Eighty-five percent of international investors surveyed by Bloomberg this week said Greece will probably still default on its debt. Greek two-year notes rose to a record 26.77 percent on May 12 amid restructuring speculation before declining to 24.99 percent yesterday.

Debt Crisis Dilemma

A motion debated in Rostock today and backed by the FDP leadership demanded that investors share the bill for any aid given to indebted states, saying that “in no case whatsoever” can the German public assume the debts of other countries.

The Free Democrats, one of three parties in Merkel’s coalition, are struggling to present a united front on the debt crisis as factions demand harsher conditions on debt-wracked states including their possible ejection from the euro. Others see that as anathema for the party of Hans-Dietrich Genscher, the foreign minister who oversaw German reunification in 1990 after the fall of the Berlin Wall and who went on to symbolise European unity.

“We’re at a crossroads,” Otto Fricke, the FDP’s budget spokesman in parliament, said in an interview. “We can either take the populist anti-euro road that some are advocating, or work on becoming a byword for economic stability and common sense, be it over tax cuts, budget discipline or the euro.” The FDP “needs to show we’re the other voice in the coalition, and that may mean taking a tougher stance on the debt crisis where necessary.”

‘Going Badly Wrong’

FDP lawmaker Frank Schaeffler, who last year called for Greece to sell its islands to cut debt and who favors ejecting states from the euro “at short notice” in cases of rule breaking, said that “a good many Free Democrats share the view in private that something is going badly wrong in solving this crisis.”

As many as 50 coalition lawmakers are prepared to join his revolt against the European Stability Mechanism due to take over from the current rescue fund in mid-2013. That’s an increase of at least 10 votes in the past three weeks, enough to eliminate Merkel’s 41-seat majority over the opposition when the ESM goes to a vote after the summer recess. “A year ago I was isolated in the party,” Schaeffler said. “That’s no longer the case.”

The bailout skeptics aim to tap a vein of resentment that’s brewing in Germany and other AAA-rated countries such as Finland over being forced to bail out their euro-area neighbors.

Poll Ratings

Twenty percent of Germans view Merkel’s decision last year to help Greece as “right,” according to a poll published May 8 by consumer survey company GfK SE. Another 47 percent of respondents said the decision was “wrong,” suggesting that Merkel’s coalition may struggle to justify any additional aid.

The Free Democrats, who won a record 14.6 percent in the September 2009 federal election to enter Merkel’s second-term government, are battling to re-inflate their ratings after support collapsed amid bickering over policy, an unpopular leadership and failure to deliver their core policy of tax cuts.

FDP backing rose one percentage point to 5 percent, the threshold for seats in parliament, an Infratest poll for ARD television showed yesterday. While Merkel’s CDU still placed first with 33 percent, the FDP’s weakness means the coalition trails the opposition Social Democrats and Greens by 38 percent to 48 percent.

The FDP “won’t garner points by fanning anti-euro sentiment,” Hans-Juergen Hoffmann, head of the Psephos polling company, said by phone. “That’s not credible from a party that has so long been an advocate of European unity.”

The Free Democrats remain committed to the euro and the idea of European integration, “whatever a minority of critics say,” Werner Hoyer, deputy foreign minister and an FDP lawmaker, said in an interview in Rostock.

The party divisions “are damaging to our efforts to tackle this crisis” and the new leadership elected this weekend “will make this clear,” Hoyer said. “The euro’s stability architecture has holes, but we can plug them.”

--Editors: Alan Crawford, Francis Harris

To contact the reporter on this story: Brian Parkin in Rostock, Germany at bparkin@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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