Nov. 4 (Bloomberg) -- General Motors Co.’s decision to hold on to its Opel unit is a blow to Chancellor Angela Merkel as she begins her second term, forcing her government onto the defensive as it confronts its first major challenge.

The collapse of the sale of Opel to Magna International Inc. and Russia’s Sberbank, a deal backed by Merkel from May until it was signed in September, brings renewed uncertainty over the future of Opel’s 25,500 workers in Germany and leaves Economy Minister Rainer Bruederle, in office for seven days, to pick up the pieces. Merkel asked Bruederle to report to Cabinet on Opel today, her spokesman Ulrich Wilhelm said in a statement.

“This is not just embarrassing for Merkel but casts a far from flattering light on her economic competence,” said Hans- Juergen Hoffman, head of the Berlin-based Psephos polling company. “She put everything on Magna and it’s completely unravelled. She has some hard choices now: there’s a grave risk that she may dent industry’s confidence in the new government.”

Merkel had been riding a high. Fresh from her Sept. 27 re- election at the head of a coalition of her choosing, she won a standing ovation in Washington yesterday when she addressed Congress and is preparing to host world leaders on Nov. 9 for the 20th anniversary of fall of the Berlin Wall. The Czech Republic’s ratification of the Lisbon Treaty yesterday cleared a block on an overhaul of the European Union which she champions.

Warning Strikes

Now she faces worker unrest and job losses in states governed by her Christian Democrats just as she tries to rally German economic recovery, the focus of her government sworn in on Oct. 28. Workers at GM’s European factories may stage warning strikes tomorrow to protest GM’s decision, union official Harald Lieske said by phone.

GM’s behavior toward both workers and the German government is “entirely unacceptable,” Bruederle told reporters before the Cabinet meeting in Berlin. “We won’t be put under pressure by GM.” He said expects the Detroit-based company to present its own plan for restructuring as soon as possible.

“Treating workers in such a way just eight weeks before Christmas is in no way acceptable,” said Bruederle, a member of the Free Democrats, Merkel’s junior coalition partners. “They need the workers if they want any chance of success.”

Chief among the government’s tasks is trying to claw back 1.5 billion euros ($2.2 billion) in state aid that was granted this year to help keep Opel afloat during the economic crisis.

‘Negative Experiences’

Roland Koch, a deputy head of Merkel’s Christian Democrats and prime minister of Hesse state, the location of Opel European headquarters, said the aid should be repaid by Nov. 30.

“Given the negative experiences of GM’s company policy of the past years, I have great fears about the future of Opel and its workforce,” Koch said in e-mailed statement.

Merkel backed Magna’s bid over a rival offer by RHJ International, the Brussels-based investment fund, in the face of opposition from the Free Democrats and her then-economy minister, Karl-Theodor zu Guttenberg, who now heads the Defense Ministry.

“Merkel’s unwavering backing for Magna was questionable from the start and contradicted her party’s economic policy principles,” Uwe Andersen, a politics professor at the University of Bochum, the western German city where Opel employs about 5,300 workers, said in a phone interview. “This is a clear defeat for her.”

Tax-Cut Pledges

The blow comes amid growing doubts over Merkel’s ability to stick to her pledge to provide 24 billion euros in tax cuts, as outlined in the coalition agreement signed Oct. 24 with the Free Democrats. State prime ministers, industry leaders and Luxembourg’s Prime Minister Jean-Claude Juncker have criticized the step, arguing that she should focus on reducing government debt that’s forecast to soar to a record in 2010.

Tax experts see revenue falling short of previous projections by 4.7 billion euros, further undermining her ability to cut taxes, the Wall Street Journal reported, citing a person familiar with an assessment done by the Finance Ministry.

With the “surprising turn of events” at Opel following hard on the heels of the closure of Arcandor AG’s Quelle mail- order unit, “there’s heightened worry in the country over job security as the winter closes in,” Hoffman said. “Merkel’s not to be envied.”

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net.

Last Updated: November 4, 2009 06:08 EST