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Chancellor Angela Merkel is at a defining point in her fourth term as German leader amid opposition from her political allies over migration. Her sister party, the Christian Social Union (CSU) from the Bavarian region, is against Merkel's stance on migration. The allied party wants German police to prevent refugees, who are already registered as asylum seekers in other European countries, to enter Germany. However, Merkel blocked the proposal last week, starting a spat with her interior minister and chairman of the CSU, Horst Seehofer. The clash has escalated into a power struggle between Merkel's party (CDU) and the CSU, which have long been key allies. Together, both parties call themselves The Union and agreed that the CSU operates in Bavaria, while the CDU operates in all the other states. The CSU is traditionally slightly more conservative than Merkel's CDU. "This is definitely the worst crisis she has faced in her 13 years as German chancellor," Holger Schmieding, chief economist at Berenberg Bank, told CNBC's Annette Weisbach Monday.

However, he added that Merkel is likely to stay on as chancellor "because probably even her opponents from the CSU will not dare to bring down the government ... That would hurt the CSU as well and not just Merkel." Merkel is due to meet the Italian Prime Minister Giuseppe Conte Monday laying out the foundations for a European-wide agreement over migration later this month. The item will be part of the agenda of a European summit on June 28. According to Schmieding, the CSU is likely to wait 10 days to see what Merkel manages to get from Brussels. The topic of migration has been an Achilles' heel for Merkel. In contrast to many leaders, the German chancellor claimed an "open-door" policy to refugees from war-torn nations in 2015. But rising concerns over widespread terrorist attacks in Europe and discontent over economic conditions have fuelled nationalist movements across the European Union, including Germany. "As Merkel pulled CDU towards the middle in recent years, not least via her stance on refugees, her Bavarian partners from CSU became increasingly nervous, not least as AfD (a far-right German party) began to gain traction in parts of the population," Erik Nielsen, group chief economist at UniCredit said in a note Sunday night.