German alarm that their country is blamed for austerity measures compounding the problems in the euro zone helps explain Berlin's bilateral efforts to tackle youth unemployment in some of the countries worst affected.

That image problem needs addressing in part because Germany needs to attract foreign workers to make good shortages at home, while the bilateral nature of the initiatives is a measure of its leaders' frustration at the slow pace of the European Commission in taking action to deal with soaring joblessness among the young.

More than half of Spain's under 25-year-olds are jobless, 42 percent in Portugal, while in Greece, the first in the zone to receive an international bailout, youth unemployment shot to a record 64 percent in February.

German Finance Minister Wolfgang Schaeuble, long outspoken about the need to get Europe's youth into work, announced plans on Wednesday for Germany's state-owned development bank KfW to help set up a Portuguese financial development institution with the aim of tackling youth unemployment.

In private, officials in Berlin say the government is worried about Germany's image across the continent, where protestors have often carried banners depicting Chancellor Angela Merkel with a Hitler moustache or in Nazi uniform for insisting on painful austerity measures requested in exchange for rescue packages.

Schaeuble hopes Germany's efforts on jobs will help.

"If it contributes to fewer misunderstandings being fuelled in some areas of European communication, that would be a desirable, or acceptable, side-effect," he told journalists at a foreign press association (VAP) event in Berlin on Wednesday.

Schaeuble mooted similar plans with Spain a few weeks ago that also involved helping small and medium-sized companies get access to credit. Together with the bloc's second-largest economy France, Germany is due to announce a pact to fight joblessness across the continent.

Merkel has also invited all EU labor ministers for a youth unemployment conference in Berlin on July 3.

"Merkel and Schaeuble know very well that the future of the euro is not just decided in Brussels or Berlin, but on the streets of Madrid, Athens and so on," said Carsten Brzeski, an economist at ING in Brussels.

"High youth unemployment combined with hatred for Germany can turn into populism and nationalism quite quickly and, in the extreme case, lead to an end of the currency union."

Last week, Germans blamed Merkel's tough stance in the euro zone crisis for their poor showing at the Eurovision Song Contest, in which the country's contestant won no points from 34 of the 39 countries voting.

LABOUR SHORTAGE

Germany has also voiced frustration that the Commission is dragging its feet on fighting youth unemployment and boosting growth, with Schaeuble saying a 6-billion euro EU package to fight youth unemployment should be available more quickly.

"The situation requires us to act more quickly and more successfully," he said.

Germany, Europe's largest economy, has weathered the regional crisis better than others - employment is near its highest since reunification in 1990 and youth unemployment is just 7.6 percent. Its problems are in some ways the inverse of its euro zone partners.

An ageing population and relatively low immigration have created a shortage of workers in some professions and sectors, and economists warn it could put the brakes on the economy and in turn jeopardize a return to growth for the continent.

Last year, 33,000 posts for job training remained unfilled in Germany, and young workers from recession-hit parts of the euro zone could help fill that gap.

Berlin has already announced plans to cooperate with Spain that could give, according to Spain, about 5,000 Spaniards access to vocational training or a job in Germany. Germany wants to help Spain build up a training system similar to its own.

What will come of Schaeuble's plans to provide financing via KfW remains to be seen.

His ministry has earmarked 700 million to 800 million euros to be channeled to Spain and Portugal through KfW, but it is unclear whether and how the funds will flow. The plans are under discussion in the ministry, but sources close to the negotiations said it was unclear whether they could be put into action.

A Spanish government source had told Reuters Germany and Spain were looking at co-sponsoring a privately managed fund to attract 5 billion euros of private money from investors in the two countries and Asia.