Battered by polls, tariffs and allies, Germany's Merz seeks to regain agenda

BERLIN (Reuters) - Germany's would-be Chancellor Friedrich Merz sought to recapture the political agenda on Monday, promising renewed focus on competitiveness after a bruising weekend that saw the far-right draw level in a poll with his conservatives for the first time.

His comment, after carping from allies at a seeming willingness to concede too much to his intended Social Democrat partners, came in response to alarm at the tariff-induced chaos engulfing financial markets.

Germany's main equity index plunged 10% at Monday's opening in reaction to U.S. President Donald Trump's tariffs, heightening pressure on Merz to form a government.

"The situation on the international equity and bond markets is dramatic and threatens to get worse," he told Reuters. "It's more important than ever for Germany to restore its competitiveness. That must be at the heart of coalition talks."

That promise, at the start of a crunch week of coalition talks, appeared designed to soothe restive party members and conservative voters, many of whom are aghast at what they see as too many potential concessions for the sake of a coalition.

Soon after winning the February 23 national election, Merz pushed through a constitutional amendment allowing Germany to take on as much as a trillion euros in new debt with the help of outgoing Chancellor Olaf Scholz's Social Democrats and the Greens.

Merz campaigned as an heir to the fiscal rigour that has characterised German governments for decades, and blocked attempts by Scholz's outgoing government to raise more money for infrastructure and the military.

FAR-RIGHT DRAWS LEVEL

A poll on Sunday showed the far-right Alternative for Germany, the election runners-up, drawing level with his conservatives - the first time in the post-war era that a far-right party has topped polls.

Criticism came from the leader of his party's own youth wing, Johannes Winkel, who said Merz's credibility was at stake over election promises.

"We can't carry on as before," Winkel told the Sueddeutsche Zeitung. "Especially in the key election themes: migration, the economy, cutting red tape. Merz has to pay back that debt," he added, hinting that he might oppose a deal that failed to deliver on those.

Both parties say they want to finalise the coalition agreement this week to allow the SPD time to poll members.

Merz's earlier promise of a government by Easter is starting to drift out of reach.

If a coalition deal is not reached, Merz would face a choice between going back on his pledge never to govern with the far-right, forming a minority government that would rely on ad hoc deals for parliamentary majorities, or calling new elections.

(Reporting by Thomas Escritt; Editing by Andrew Cawthorne)