The head of German domestic intelligence was removed from his post on Tuesday after he publicly contradicted Angela Merkel in a move widely seen as interfering in politics.
Under a compromise deal to avoid a split in Mrs Merkel’s coalition, Hans-Georg Maassen was not dismissed but will instead be moved to the interior ministry as a senior civil servant.
Mr Maassen threatened to tip Germany into a new political crisis when he publicly disputed the chancellor’s account of last month’s neo-Nazi protests in the city of Chemnitz.
Mrs Merkel’s main coalition partners, the centre-Left Social Democrats (SPD) demanded that he be sacked as head of the BfV domestic intelligence.
But Mr Maassen won the backing of Horst Seehofer, the interior minister and the leader of Mrs Merkel’s other coalition ally, the Bavarian Christian Social Union (CSU).
The face-off had threatened to end the fragile peace that has held since Mrs Merkel bested Mr Seehofer in a power struggle over migrant policy at the start of the summer, and plunge her coalition into a new crisis.
Under the compromise worked out by party leaders on Tuesday, Mr Maassen will move to the interior ministry where he will be responsible for security as a senior civil servant.
In theory it is a promotion, and comes with a payrise, but no one was left in any doubt on Tuesday that he is only getting the job so Mr Seehofer can back down without losing face.
“Horst Seehofer values Mr Maassen’s competence in matters of public security, but Mr Maassen will not be responsible for supervising the BfV at the ministry,” a terse official statement said.
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The row began when Mr Maassen said he had seen no evidence to support media accounts of mobs of far-Right protestors hunting foreigners through Chemnitz — directly contradicting Mrs Merkel.
The intelligence chief claimed a widely circulated video of foreigners being attacked could have been fabricate, but when challenged by MPs, admitted he had no proof to back his allegations.
A police report leaked to German television since then appears to confirm large groups of protestors were looking for foreigners to attack.
Mr Maassen also came under fire after it emerged he had held several meetings with the present and former leaders of the nationalist Alternative for Germany party (AfD).
A former AfD staffer claimed he had advised the party on how to avoid being put under intelligence surveillance — a claim Mr Maassen denies. There were even allegations he passed confidential information to the party.
It is no secret Mrs Merkel wanted to be rid of the troublesome intelligence chief, but it is thought she would have preferred to wait until after next month’s regional elections in Bavaria — which could decide Mr Seehofer’s political future.
But the SPD made it clear it was not prepared to wait.