Coalition set after parties back deal

The 130-page agreement was approved by Merkel's conservatives and outgoing Chancellor Gerhard Schroeder's center-left Social Democrats at separate party conferences on Monday.

Leaders formally put pen to paper on the historic deal at a ceremony on Friday.

Merkel, 51, now looks assured of being chosen Germany's first-ever woman chancellor in a parliamentary vote next Tuesday — two months after an inconclusive September 18 election left neither of Germany's major parties with the seats to govern with their traditional partners.

She will lead a power-sharing alliance tasked with tackling slow growth, an 11% unemployment rate and a growing budget deficit in Europe's largest economy.

The detailed coalition agreement — unveiled last Friday after four weeks of horse-trading between traditional rivals — will guide her efforts.

A binding roadmap for government policy, the pact includes a 25bn Eur ($29bn) research and infrastructure investment program designed to kick start Germany's fragile labor market.

In another job boosting measure, dismissal rules will be relaxed by lengthening the probationary period for new employees from six months to two years.

It also foresees the overhaul of Germany's cumbersome federal system, which has been blamed for stifling reform.

At the center of the deal, though, is a raft of unpopular tax hikes and subsidy cuts meant to plug a budget shortfall of 35bn Eur ($41bn), including provisions to

• raise Germany's value-added tax by three percentage points to 19% by 2007,
• increase the income tax rate for the wealthiest taxpayers to 45% from 42%,
• abolish tax write-offs for people who build new homes and slash tax subsidies for commuters,
• raise the retirement age on a step-by-step basis to 67 years by 2035 and
• increase pension contributions.

Merkel says that plan will bring Germany's troubled finances into line with European Union-mandated budget rules by 2007, putting the country on track to become one of the union's three leading economies within a decade.

Yet critics say it does too little to loosen the straitjacket of rigid rules governing Germany's labor market and could hit already weak German consumption, making it tough for the coalition to achieve its goal of cutting unemployment.

Higher consumer spending is needed to boost overall growth — currently forecast at just 1.0% for 2006 — and in turn create new jobs, the government's panel of economic advisors said in a recent report.

Bild, arguably Germany's most influential newspaper, called the pact "a declaration of bankruptcy," while Ludwig Georg Braun, head of the powerful DIHK Chamber of Industry and Commerce said: "There are too few reforms and too many tax increases."

Others said the pact will help the economy — if only by ending the uncertainty that has loomed since outgoing Chancellor Schroeder called for early elections in March.

"In principle, we welcome the fact that the coalition agreement has been reached, even if excellence does not emerge from compromises," said Juergen Hambrecht, the chief executive of German chemicals giant BASF.

For her part, Merkel said there is no meaningful alternative to the deal. "Politics is not the art of what you simply desire," she told a party congress on Monday, "but rather the art of what is possible."

Source:
Germany Info, German Embassy Washington, D.C.
http://www.germany-info.org/relaunch/info/missions/embassy/embassy.html