Merkel allies break taboo with Greek default talk

By Madeline Chambers

BERLIN (Reuters) - Senior politicians in German Chancellor Angela Merkel's center-right coalition have started talking openly about a Greek default, reflecting mounting concern in Europe's biggest economy about the debt crisis and pressuring Greece.

"To stabilize the euro, there can no longer be any taboos," Philipp Roesler, economy minister and leader of Merkel's junior coalition partner, the Free Democrats (FDP), told Die Welt.

"That includes, if necessary, an orderly bankruptcy of Greece, if the required instruments are available," he said.

Roesler, also Vice Chancellor, said sanctions should be imposed on states failing to tackle big deficits, including the possible withdrawal of EU voting rights.

FDP general secretary Christian Lindner went further, telling the Berliner Morgenpost his party had not ruled out the possibility of Greece leaving the euro zone.

Even senior figures in Merkel's conservative Christian Democrats (CDU) are leaving open the possibility of default.

"The way things are looking, you can no longer rule out a possible Greek restructuring," CDU budget expert Norbert Barthle told Reuters when asked about a default or euro zone exit.

Germany has repeatedly said Greece must meet conditions set by the European Union, European Central Bank and International Monetary Fund to get the next tranche of aid.

Partly to ramp up the pressure on Greece to comply, German lawmakers have, in the past few days, adopted a tougher tone.

Der Spiegel magazine reported that German finance ministry officials were preparing for the possibility of a default by Greece and working through scenarios including the reintroduction of the drachma.

The stakes are high for Merkel who is battling to convince rebels in her coalition to vote for new powers for the European Financial Stability Facility (EFSF) on September 29.

Although she will get the law through due to support from opposition parties, if she fails to secure a majority from the ranks of her own coalition parties her authority will be seriously dented and she may even have to call elections.

Some members of her party have raised questions about Greece's continued membership of the euro zone.

"If the Greek government's efforts to make cuts and reform are not successful, we must also ask the question whether we do not need new rules which make possible the exit of a state from the currency union," Der Spiegel quoted senior CDU member Volker Bouffier as saying.

Merkel herself has ruled out an expulsion of Greece, saying it would trigger a domino effect, but rifts have been opening up in her coalition on the subject.

On Saturday, the conservative Christian Social Union proposed threatening heavily indebted states with having to leave the currency union.

Merkel is in a bind as she tries to push an agenda of greater economic integration as Germans grow more skeptical. A poll this week found 76 percent of Germans opposed to granting any further aid to heavily indebted Greece.

Former German foreign minister Joschka Fischer fed public concern, saying on Sunday the euro could even collapse.

"The situation in Europe is really as serious as it has ever been. Until now, I did not think the euro would fail, but if things continue like this then it will collapse," Fischer, foreign minister for the Greens in their coalition with the Social Democrats from 1998-2005, told Bild am Sonntag.

Peer Steinbrueck, tipped as the Social Democrats' challenger to Merkel in 2013 elections, said the EU needed new structures to cope with the new reality, including common euro zone debt issuance -- a move Merkel has ruled out.

"That means, of course, Germany has to pay. But the money is well invested in the future -- ours and that of Europe -- in peace and affluence."

(Reporting By Madeline Chambers; Additional reporting by Noah Barkin; Editing by Dan Lalor)