Isolated Merkel sticks by austerity after vote setback

(Reuters) – Angela Merkel is looking increasingly

isolated at home and in Europe after what she called a “bitter, painful defeat” for her party in a

weekend election in Germany’s most populous state.

The German chancellor said the vote did not change her view that fiscal rigor

was the best path for Europe, although it highlighted resistance among Germans to enduring the kind of

austerity she has forced on debt-laden southern nations.

Merkel will have to contend with a more

aggressive opposition and less compliant allies with the setback for her Christian Democrats (CDU) in

North Rhine-Westphalia on Sunday at the hands of the centre left Social Democrats (SPD).

And

France’s new Socialist President Francois Hollande is expected to press for new steps to boost growth

in Europe, where many countries are struggling with recession and rising unemployment, when he meets

Merkel in Berlin for the first time on Tuesday.

“It does not affect the work we have to do in

Europe,” Merkel said on Monday when asked about the impact of the NRW vote on her

policies.

Nobody in her government opposed growth, she said, but the question was the impact of

stimulus measures on the budget.

The CDU’s campaign for the state vote focused on cutting the

state’s 180 billion euro debt mountain against Social Democrat plans for a slower approach to budget

consolidation, but it was also a personality battle that the CDU lost.

“Yesterday was a bitter

day, it was a bitter, painful defeat,” Merkel said after results showed the SPD won 39.1 percent

against 26.3 percent for the CDU.

Despite the growing austerity backlash, people close to Merkel

have signaled that she has no intention of making big concessions to Hollande, beyond agreeing to a

form of “growth pact” containing modest steps long under discussion in Brussels.

German

officials, including Finance Minister Wolfgang Schaeuble, have suggested over the past week that they

could tolerate higher inflation at home to help compensate for deflationary tendencies in Europe’s

southern periphery.

But they are ruling out stimulus measures that would raise debt levels. One

senior aide to the chancellor told Reuters on condition of anonymity that she was “willing to talk

about intensified growth and employment strategies” but only as long as they didn’t involve new

deficit spending.

One possible area of compromise is on deficit targets for euro zone weaklings, even

if German officials have said repeatedly in recent weeks that there is no wiggle room here.

Most

EU governments, the European Commission and the International Monetary Fund (IMF) now believe that some

countries, notably Spain, will need more time to reduce their deficits.

“Merkel will find it

hard to resist them all,” said Charles Grant, director of the Centre for European Reform in

London.

UNRULY PARTNERS

Germany’s Social Democrats (SPD), emboldened by Hollande’s

victory and their big win in NRW, are demanding new growth-boosting steps to complement the German-led

European fiscal pact.

SPD chairman Sigmar Gabriel said the state election had taught the party

the value of being “combative and engaged”.

Merkel needs the SPD’s support to push her fiscal

compact through parliament, but said on Monday that she would not engage with her rivals until after an

informal May 23 summit in Brussels.

The so-called “troika” of SPD leaders – Gabriel, Peer

Steinbrueck and Frank-Walter Steinmeier – have scheduled a news conference for Tuesday morning, hours

ahead of Hollande’s arrival, to set out their demands.

A day after the regional setback, Merkel

also had to contend with pushier partners within her own coalition.

A surprisingly strong

showing for her federal partners, the Free Democrats (FDP), in NRW has reinforced the idea among the

party leadership that only by standing to Merkel can they hope to thrive.

“If we don’t yield

but stick to our stance no matter how much pressure is on us, we will succeed in the end,” said FDP

chief and economy minister Philipp Roesler.

Horst Seehofer, head of the Bavarian Christian

Social Union (CSU) – the third party in Merkel’s centre-right coalition – has also signaled he is fed

up with the chancellor’s party after weeks-long infighting over childcare and data retention

policies.

The CDU’s rout was widely blamed on its candidate in NRW Norbert Roettgen, Merkel’s

environment minister, who riled voters by refusing to commit to lead the opposition in the state in the

event of a loss.

On Monday he tried his best to deflect blame for the battering away from

Merkel.

“This was a total, comprehensive, clear defeat that we suffered, but it was also my

defeat,” Roettgen said.

“Above all this is the fault of the lead candidate, me, the themes I

set, my style of campaign. I haven’t only taken responsibility, but I believe this was my

responsibility.”

(Additional reporting by Matthias Sobolewski; writing by Noah Barkin

and Stephen Brown; editing by Philippa

Fletcher)