Euro austerity row haunts Merkel in state vote

BERLIN (Reuters) - Angela Merkel's conservatives face defeat in a regional election on Sunday that could give the long-suffering German left vital momentum before next year's federal vote and add fuel to a fiery debate on the chancellor's European austerity drive.

North Rhine-Westphalia (NRW), a big industrial state in western Germany with an economy and population roughly the size of the Netherlands, has a history of influencing national politics.

A crushing defeat for former Chancellor Gerhard Schroeder's centre-left Social Democrats (SPD) there seven years ago prompted him to call an early national election, which he lost to Merkel.

No one is expecting any shocks of this magnitude on Sunday, but the vote is bound to send tremors all the way to Berlin, and could make Merkel, Germany's most popular politician, look politically vulnerable for the first time in a long while.

Polls suggest Hannelore Kraft, the popular SPD politician who has run a fragile minority government with the Greens for the past two years, will trounce her Christian Democrat (CDU) rival Norbert Roettgen - who happens to be Merkel's environment minister - and strengthen her hold on power in the state.

A tram-worker's daughter from the heart of the industrial Ruhr region, Kraft has won over voters by promising a go-slowly approach to cutting the state's 180 billion euro debt pile, deftly dodging accusations of fiscal mismanagement by the CDU.

A decisive victory for the SPD on Sunday would therefore be seen by many as a double defeat for the chancellor. Germany's most populous state would be rejecting not only her party but the fiscal discipline she has forced on heavily indebted euro zone countries like Greece.

"If the SPD and Greens strengthen their hold on the government in NRW then it would be a clear warning shot to Merkel and her conservative coalition in Berlin," said Ulrich von Alemann, a political scientist at the University of Duesseldorf.

AUSTERITY BACKLASH

The vote in NRW comes a week after Greece, France and Italy held elections that pointed to a growing backlash against German-ordered austerity in Europe.

Despite its indebtedness, it would be wrong to lump NRW together with ailing southern European countries like Greece, Portugal or Spain.

Unemployment stands at 8.2 percent, low by European standards, and the state is home to many of Germany's biggest companies, from Deutsche Telekom to retailer Metro and energy firms RWE and E.ON.

But the Ruhr, whose coal and steel plants once fuelled the country's post-war economic miracle, is now home to some of its poorest areas. In Gelsenkirchen the jobless rate stands close to 15 percent, over double the national average, and Oberhausen has the highest debt per capita of any city in Germany.

On the campaign trail the 50-year old Kraft has talked about strengthening indebted local communities, investing in schools and boosting NRW's business appeal.

Unlike Merkel, she is comfortable mingling with voters and has opted for small, intimate campaign events across the state where she speaks one-on-one with people about their concerns. Some see Kraft as a future chancellor candidate, though it seems unlikely she will take on Merkel in 2013 even if she wins big.

"Frau Kraft is very nice, authentic, she knows how to speak to people," said Roswitha, a 63-year-old teacher who listened to Kraft speak at a small crowd in Guetersloh last month.

Roettgen by contrast has held big, impersonal rallies in the shadow of a massive, inflatable "Schuldenberg", or debt mountain, the CDU constructed to remind voters of the dangers of voting for Kraft, who was forced to call an early election after failing to get her 2012 budget through the state assembly.

He angered many voters in NRW early on in the campaign by refusing to commit to being a full-time opposition leader in the state capital Duesseldorf if he lost, a move which would mean giving up his cabinet job in Berlin.

Earlier this week he described the vote as a referendum on Merkel's European debt policies, infuriating CDU allies.

"This election won't be Merkel's defeat but Roettgen's," said Manfred Guellner, head of the Forsa polling institute.

"I don't believe it is that important for her. It's a big state but not a test of the national mood," he added, noting that a strong majority of Germans supported Merkel's insistence on fiscal discipline in Europe.

But others see it differently. The regional leader of the Free Democrats (FDP) - junior partners in Merkel's centre-right coalition in Berlin - has sent out signals that he might be open to a so-called "traffic-light" coalition with the SPD and Greens, if they fail to get a majority.

Were a similar constellation to coalesce at the national level in 2013, it would doom Merkel's hopes of a third term.

"Angela Merkel is at the peak of her powers, and knows it's about to get difficult," the respected weekly Die Zeit said on Thursday in a story on Merkel entitled "How much longer?"

"The vote in North Rhine-Westphalia could be her day of reckoning," the paper said.

(Reporting by Noah Barkin; Editing by Giles Elgood)