Queen Merkel facing rebellion

As head of the richest European economy, German Chancellor Angela Merkel has been variously called the Paymaster or even the Queen of Europe.

But fancy titles will mean nothing in Berlin tomorrow, when Merkel has to somehow find a path between two crushing forces - electoral hostility and market scepticism - in a vote likely to determine the path of Europe's financial crisis.

Merkel is asking the Bundestag, the Lower House, to endorse a plan to pump a further €190 billion ($327 billion) into a €250 billion rescue fund to support the eurozone's biggest debt-stricken economies.

Had the vote taken place a few months ago, Merkel would have walked it. But her public standing has slumped just as Germany's bill for bailing out Europe's spendthrifts has risen. Her party, the conservative Christian Democratic Union (CDU), has lost six out of the seven regional elections this year and is squabbling with its coalition partner, the pro-business Free Democratic Party (FDP), which is saying in essence: "Enough's enough."

At the same time, Merkel is facing mounting pressure from global markets to further strengthen the rescue mechanism, known as the European Financial Stability Fund, or EFSF. After a meeting of the International Monetary Fund in Washington at the weekend, stock values rose sharply amid expectation that a doomsday save-the-euro strategy was in the works and that the EFSF would rise to €2 trillion.

Merkel has to reassure an increasingly worried public that Germany is not writing a blank cheque for the widely-mocked "Club Med" countries whose chicanery brought the 17-nation eurozone close to collapse. And she has to convince cynical markets that Plan A will work and there is no need for Plan B.

Speaking to business leaders in Berlin yesterday, Merkel said that approving the package was "of the utmost importance" and argued that Germany's prosperity hung on the single currency, as 70 per cent of its exports went to eurozone economies.

She ruled out lifting the EFSF beyond €440 billion, of which €211 billion - equivalent to two-thirds of Germany's annual budget - would be guaranteed by Berlin. Sounder public finances were the answer.

"We don't have a euro crisis but a debt crisis," said Merkel. "The notion that you need to boost growth by taking on ever greater debt is the wrong idea."

Also at the meeting was Greek Prime Minister George Papandreou, who urged Germany to have faith in his country's "superhuman efforts" to redress its economy. Backing Greece was an investment in the future.

"I can guarantee that Greece will live up to all its commitments ... we Greeks will soon fight our way back to growth and prosperity after this period of pain."

Whether Merkel's legislators will buy the rhetoric is unclear. The coalition has 330 seats in the 620-seat Bundestag, or 19 more than an absolute majority.

Merkel seems sure to get the law approved, as the opposition Greens and Socialists have said they will vote in favour. What is being scrutinised is how badly her majority will be eroded by defections.

A haemorrhage of coalition MPs voting against or abstaining would cripple her credibility and could even lead to an election.

"What's on the line is Greece's survival in the eurozone and the survival of the euro itself," Handelsblatt said. "But for the Government, it is a fight for its very future."

Only nine of the 17 eurozone states have ratified new powers for the EFSF that were agreed at a July summit. The delay has added to the sense of drift and back-biting surrounding EU financial management.

Europe "never fully dealt with all the challenges that their banking system faced", US President Barack Obama said.

"It's now being compounded with what's happening in Greece. So they're going through a financial crisis that is scaring the world."