German Chancellor Angela Merkel is being buffeted by domesticpolitical turbulence, threatening to distract her efforts to followthrough on a European summit agreement last week to tackle the eurodebt crisis.

Christian Lindner, the general secretary of Merkel's FreeDemocratic coalition partner, unexpectedly quit yesterday amid aparty tussle over bailouts. Separately, Merkel's spokesman said thechancellor had full confidence in Christian Wulff, Germany'spresident, after a Bild report that he misled lawmakers over a500,000 euro ($650,000) home loan.

The political turmoil engulfed Merkel's administration five daysafter she secured what she called a “breakthrough” European deal toenforce stricter budget rules and to stem the financial contagionnow in its third year. That uncertainty may disrupt her efforts torestore market confidence by pushing the steps agreed on inBrussels through parliament in Berlin.

“The FDP and Wulff are a distraction in many ways,” JoergForbrig, an analyst at German Marshall Fund of the United States,said by phone. “The FDP is basically in the process of dismantlingitself as a party while serving in government.” It's “the lastthing Merkel needs right now.”

Lindner, 32, resigned two years after taking the job as partymembers squabbled over an internal ballot coordinated by lawmakerFrank Schaeffler that seeks to build support among fellow bailoutskeptics to reject the permanent rescue fund, the EuropeanStability Mechanism.

Of the 21,500 votes required to trigger a change of party policyagainst bailouts, 19,000 were in place as of three days ago,Schaeffler's office said today. The official result of the ballotis due tomorrow.

Merkel's government would risk collapse if the referendum showedmajority support among the junior coalition party for rejecting therescue fund, said Peter Matuschek, an analyst at Forsa pollinggroup. Even without such a scenario, “it will become tense over thenext few weeks,” he said by phone.

Peter Altmaier, the chief whip for Merkel's Christian Democrats,rejected any suggestion that Lindner's resignation weakens thecoalition and undermines Philipp Roesler, the economy minister andvice chancellor, who took over the helm as Free Democratic leaderin April amid slumping support. Polls show voter backing for theFDP has failed to recover.

'Broad Majority'

Coalition policy on the rescue fund will remain unchanged,Altmaier said in an interview today with broadcaster N24. Thegovernment already “has the backing of a majority in parliament andwill continue to do so,” he said. “I'm convinced that we will havea broad majority” for measures to shore up the euro.

The political diversions came as Bundesbank President JensWeidmann, Merkel's former economic adviser, hinted the central bankmay not provide its share of loans to the International MonetaryFund that was part of last week's summit agreement.

“The Bundesbank has stated its readiness to provide up to 45billion euros as long as there is a fair distribution of the burdenamongst the IMF members,” Weidmann said in comments releasedyesterday. “If these conditions are not fulfilled, then we can'tagree to a loan to the IMF.”

Merkel's chief spokesman, Steffen Seibert, was forced to respondto questions about both Lindner and Wulff's loan from the wife of abusinessman friend at a regular government press conference inBerlin, eclipsing queries on the coalition's approach to combatingthe debt crisis.

“The chancellor sees no reason to doubt the statements thepresident has made in this matter,” Seibert said. Merkel “trustshim, his person and his conduct in office.”

Merkel, in a phone call to the president yesterday, criticizedhis handling of questions surrounding the home loan and urged himto speak out publicly, Bild reported today, without saying how itgot the information.

Merkel herself fielded a question on Lindner's resignationduring a media briefing with Tajikistan's President Emomali Rahmon,and dismissed the impact on her government.

“I believe that we can work together in the governmentcompletely unaffected,” Merkel said of the coalition allies, notingRoesler's intention to quickly name a replacement. He laterproposed the FDP treasurer, Patrick Doering, for the post.

Roesler stirred internal party anger by saying in a weekendinterview that the members' ballot had not drawn enoughparticipants to establish a quorum. Lindner refused to answerquestions yesterday as he quit, citing only the need “to make wayto enable a new dynamic.”

'Dead Duck'

The upshot for Merkel is “a dead-duck coalition partner whoseactions may now become unpredictable,” Nils Diederich, a politicsprofessor at Berlin's Free University, said by phone. “That's arisk for Merkel as she tries to navigate parliament through givingup some sovereignty in the name of fiscal union as well as increasetaxpayers' input into rescuing the euro.”

Free Democratic support has plunged since the party won a record14.6 percent in September 2009 elections, helping Merkel to asecond term. All six regular polls now show FDP backing below the 5percent threshold needed to win seats in parliament.

“The FDP leadership is imploding and we can't be certain whatwill emerge after today's palace coup,” said Diederich.

Bloomberg News

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