Merkel is branded 'a problem' as German coalition fights for life

Johannes Kahrs, a leading Social Democrat MP in the conservative-led grand coalition, rounded on Germany's first woman Chancellor and accused her of failing to control her government. "This coalition government has a problem and it is Angela Merkel," he said. "A rotten fish always stinks from the head down."

The acid tone of the attack prompted a furious response from senior conservatives, who warned that if such criticism continued, Ms Merkel's ruling alliance could fall apart well before the expiry of its four-year term.

"The Chancellor cannot be attacked in this way if we are to stay together for the next three years," said Wolfgang Bosbach, the deputy leader of the conservative parliamentary party. He said that the Social Democrats should " decide whether they want this coalition or not".

Ms Merkel made no attempt to respond to the attacks. Her aides said she had no need to reply and that she "was doing excellent work for Germany".

The row was caused by her highly controversial plan to reform Germany's unwieldy health care system. Under her proposals, health insurance fees will be increased from next year along with equally unpopular higher pension funds and a 2 per cent rise in VAT.

Social Democrats have accused Ms Merkel of reneging on coalition agreements by bowing to the demands of conservative provincial leaders and insisting that health care be funded by insurance increases instead of additional taxes. Ms Merkel has basked in unprecedented popularity since being elected to lead the grand coalition last year with a pledge to solve Germany's pressing economic problems "through small steps". But most of her acclaim has been won through astute foreign policy moves, which have brought a rapprochement with the United States and plaudits from the European Union.

With Germany immersed in World Cup euphoria over the past month, political commentators and the media had almost ignored Ms Merkel's domestic policy agenda until this week. But her health care programme and battery of tax increases has invoked angry condemnation from business leaders, trade unionists and economic analysts, with some pundits describing the Chancellor's reforms as "catastrophic".

Employers say Ms Merkel's plans to increase health insurance fees directly contradict her earlier pledges to lower the financial burdens borne by companies and thereby make it easier for them to hire staff and reduce German unemployment.

"The government's claims that only a grand coalition of conservatives and Social Democrats has the power to deal with Germany's problems is an illusion which has finally gone up in smoke," said Berlin's Tagesspiegel newspaper, and the government's agenda "lacked courage".

Economists have widely predicted that the coalition's decision to increase VAT next year will force a drop in German domestic demand and end its consumer boom. They say the high spending is driven by shoppers who have opted to buy now rather than pay more for purchases next year.

With political opposition in Germany reduced to three small parties - the environmentalist Greens, the radical "Left Party" and the liberal market-oriented Free Democrats - the grand coalition has faced only muted protests in response to its policy initiatives. Of the three, the Free Democrats have led the attacks on the coalition.

Guido Westerwelle, the party's leader, yesterday described the growing divisions within Ms Merkel's government as a "real sign that the conservative-Social Democrat coalition is starting to fall apart", adding that "elections before the government's term expires" were more than possible.