ANALYSIS:Officials are left shaking their heads, while Merkel refuses to let it spoil her holiday, writes DEREK SCALLY

GERMAN CHANCELLOR Angela Merkel is on holiday in South Tyrol and, come what may, is planning to stay there.

That was the message from Berlin yesterday, where Merkel’s officials described the letter from European Commission president José Manuel Barroso – calling on EU leaders to extend the capacity of the bailout fund – as unwelcome and unnecessary.

“If we allow ourselves to play this game, we’ll be at it every 10 days,” complained a senior Berlin official.

As Italian prime minister Silvio Berlusconi battles market speculation in Rome, German newspapers showed a floppy-haired Merkel quite literally letting her hair down 700km (435 miles) to the north, in the mountain village of Sulden.

Earlier this week, the German leader and her husband, Joachim Sauer, were invited to dinner by celebrity mountaineer Reinhold Messner, who has spent his life scaling the world’s highest peaks.

After a dinner of homemade yak carpaccio and local wine, he was very complimentary of the German leader.

“She is a good hiker,” he said, “because she goes slowly but keeps moving forward continuously.”

The mountaineer could be describing the German leader’s strategy in the euro-zone crisis: refusing to be hurried by EU colleagues or markets. After the relative calm following last month’s summit, Berlin officials are furious at the Barroso letter.

“We’re all just shaking our heads,” said one well-placed Merkel confidant in Berlin, suggesting the letter was less about the euro and more about Barroso trying to get back into a debate from which he feels increasingly excluded.

“The size of the rescue umbrella cannot be endlessly extended beyond what the member states can afford because then doubts arise and you need another umbrella above it again,” said the Berlin source.

The German finance ministry was similarly scathing, saying it “wasn’t clear how reopening the debate two weeks after the summit would calm the markets”.

Berlin officials say the reform of the European Financial Stability Facility will be addressed “very quickly” after the summer break and suggest the low summer volume of trading – and financial news – has given the Italian and Spanish turbulence a significance it doesn’t have.

By refusing to react to the latest turbulence, Berlin has the support of many leading analysts in Germany.

“The problem is that Dr Merkel can’t do anything other than make a statement that all is being done, something the markets wouldn’t believe anyway,” said Matthias Kullas, head of economic analysis at the Centre for European Policy.

He pointed out that there was little substantive that EU leaders could do until their summit conclusions were translated into legal language and financial agreements – a process to be completed later this month at the earliest.

German analysts are confident the markets can differentiate between the problems of Spain and Italy – respectively high unemployment and high debt – and the Greek economy, which was plagued by both problems simultaneously.

But there is some uncertainty in Berlin, based on experience, that the Merkel administration will, if the need arises, pick the right moment to grasp the nettle and agree to a larger stability facility rescue fund.

“German politicians haven’t managed to communicate to the populace that the rescue fund is not about a transfer of money that costs us, but about loans with interest, making the whole business very unpopular,” said Ferdinand Fichtner, chief economist at the German Institute for Economic Research in Berlin.

“The main problem is we aren’t dealing with real economic problems [in Spain and Italy] but with a herd mentality on markets. There’s a danger this will lead to a self-fulfilling prophecy. Enlarging the rescue fund would make the danger of a default very unlikely.”

Some describe the current market turbulence as justified to a point, reflecting market expectation that Rome and Madrid would redouble their reform efforts.

“That the markets are exerting pressure on Italy or Spain for greater reforms and competitiveness is not necessarily a bad thing,” said Kullas, “and it wouldn’t really be in Germany’s interest to do anything to take them out of the firing line.”

Put that to German government officials, and they say they don’t like to talk about market “pressure” to reform.

But they concede that it acts as a catalyst for reforms once unthinkable in many European capitals.