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As Europe struggles, Merkel party cheers German strength

German Chancellor Merkel gives her closing speech at end of the CDU party convention in Leipzig
German Chancellor Merkel gives her closing speech at end of the CDU party convention in Leipzig

By Noah Barkin and Stephen Brown

LEIPZIG, Germany (Reuters) - The debt crisis sweeping southern Europe and lapping France is cause for alarm in Washington and Beijing, but not it seems for the rank and file of German Chancellor Angela Merkel's party.

On the contrary, at a meeting of Merkel's Christian Democrats the mood among delegates ranged from triumphalism over Germany's economic strength to complacency about the crisis and blind faith in Berlin's ability to shield Germany from it.

Merkel warned on the first day of the congress Monday that Europe faced what could be its "toughest hour since World War Two." But her message didn't register with many of those in the hall or with the German media. Much press coverage focused on domestic issues - the minimum wage, childcare and education.

"We're dancing on a volcano," said Oswald Metzger, a CDU delegate from Baden-Wuerttemberg who is deputy leader of the party's small and medium-sized business wing.

"Many of the people walking around here in Leipzig are divorced from the real economy and don't understand the euro crisis nor the risks we face."

Figures published Tuesday showed the German economy grew 0.5 percent pace in the third quarter. Unemployment has fallen to its lowest levels since German reunification in 1990 and the smaller "Mittelstand" firms that form the backbone of Europe's largest economy have strong order backlogs.

Many say they are not yet feeling the crisis that is hammering Greece, Portugal, Italy and Spain.

The sense of invulnerability was fueled by Germany's rebound from the global financial crisis. After suffering its worst annual post-war contraction in 2009, the economy bounced back sharply in 2010 on the back of robust exports and government subsidies that discouraged firing.

"Germany always comes out of a crisis well simply because we have competent leaders," said Eva Maria Meister, a social worker who runs a home for problem teenagers in Potsdam and spoke briefly with Merkel during her tour of the conference center. "Merkel is always right. That's just the way it is."

EUROPE SPEAKS GERMAN

The speakers in Leipzig contributed to the complacency, focusing more on Germany's strengths than the risks posed by the euro crisis.

Volker Kauder, who leads the CDU in parliament, told delegates that they should be proud of Germany's resilience, sparking loud applause.

"Germany will continue to be the motor of Europe. We will continue to compete, to create jobs -- we are the ones that have done things right in this time of crisis," Kauder said.

A debate on education policy that followed his speech elicited much stronger reactions from the audience in the vast conference room than Monday's discussion on the euro crisis.

Asked by Reuters about the risks to Germany from the crisis, many delegates turned the discussion around, saying countries on the euro zone's southern periphery must solve their own problems by following the German model of fiscal discipline.

"Europe is speaking German all of a sudden, not the language but in acceptance of the policies that Angela Merkel has fought for so long and so successfully," Kauder said.

The reality seems quite different. Roughly 40 percent of German exports go to fellow euro zone members and a full 60 percent to partners in the broader 27-nation European Union.

The Mannheim-based ZEW economic think tank said weakening global trade and public debt problems in the euro zone and United States posed a major threat to German business activity.

"These risks could gain even more importance and thus could further harm economic growth in Germany," ZEW President Wolfgang Franz said.

EMERGENCY SURGERY

Merkel tried to reinforce this message Monday, telling delegates that Germany's own well-being was inextricably linked to the stability of the euro zone.

While delegates grudgingly accepted Merkel's message that Germany should accept closer European integration, they made clear this must be done on German terms.

Bolder steps to end the crisis -- from joint euro zone bonds to stronger steps from the European Central Bank -- were rejected by many out of hand.

It was unclear whether Merkel did enough in Leipzig to explain to the CDU rank and file what Germany must do to shore up Europe's single currency and preserve its own prosperity.

Italian bond yields have spiked back above 7 percent -- a level which is widely seen as unsustainable. In Spain, borrowing costs reached their highest level in 14 years. And France, Germany's biggest trading partner, is far from immune.

"It's not cosmetic surgery but emergency medical aid that needs to be applied," said Peter Bofinger, a member of Germany's

"wisemen" panel of economic advisers to the government.

(Writing by Noah Barkin; editing by Janet McBride)

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