Party leaders close to reaching coalition deal

11th November 2005, Comments 0 comments

11 November 2005, BERLIN - After almost four weeks of horse-trading, Germany's political leaders are putting the final touches on a deal to forge a new grand coalition that will pave the way for Angela Merkel to become the nation's first woman chancellor.

11 November 2005

BERLIN - After almost four weeks of horse-trading, Germany's political leaders are putting the final touches on a deal to forge a new grand coalition that will pave the way for Angela Merkel to become the nation's first woman chancellor.

But while key areas still have to be resolved, agreements so far reached indicate that the centrepiece of the new Merkel-led government's term is likely to be a determined assault on the nation's yawning budget deficit.

At the same, the new government is planning a highly unpopular hike in consumption tax along with further labour market liberalization and a 25 billion euros (29 billion dollars) growth and jobs pact.

Merkel's conservative Christian Democrat-led alliance and the Social Democrats, led by outgoing Chancellor Gerhard Schroeder, have to hammer out an accord before Monday when the agreement is to be considered by separate party conventions.

The German parliament is expected to elect 51-year-old Merkel as Chancellor on November 22, more than four weeks after September's inconclusive election forced Merkel's political bloc and the SPD to hold talks on forming what will be Germany's second grand coalition government.

The last time the SPD and the CDU alliance shared power was in the 1960's. The parties have already nominated their candidates for the Merkel-led government.

Party leaders were meeting again Friday with officials in Berlin expressing optimism that a final agreement could be thrashed out before the weekend.

However, the two sides still have to reach a compromise on the SPD's demand for the introduction of a so called 'rich tax' with high income earners forced to pay a taxation surcharge and a CDU proposal to reform Germany's wage setting system.

The new government's action plan also includes a push to tackle the greying of the German population and to ease the burden on the country's hard-pressed state pension system by raising the retirement age to 67.

In addition to cutting public spending by 35 billion euros (41 billion dollars) by 2007 in a bid to bring Germany's deficit below the 3-per-cent target for euro member states, the party blocs have agreed to far-reaching reforms next year of the nation's health insurance system.

This represents a bid to overcome their differences on how to reform the country's lumbering health system and to address the explosion in the cost of prescription drugs.

The parties have also decided to overhaul the Schroeder government's controversial welfare reforms, which trimmed benefits in a bid to cut the cost of the programme known as Hartz IV.

However, two of the most controversial parts of the new government's programmes are likely to be its plans for a three percentage points hike in consumption tax and a move to roll back Germany's strict hire-and-fire laws.

At a late night meeting Thursday, the leaders agreed to increase the consumption tax from 16 per cent to 19 per cent to help generate funds to wind back the deficit and for the planned growth package for investment in public work projects. Germany's deficit is expected to breach the three per cent rule next year for the fifth year in a row.

The increase in the consumption tax, which is to be introduced on January 1 2007 and would raise an estimated 24 billion euros, comes against the backdrop of fierce criticism from both German industry and private economists.

They see the move as placing at risk the nation's economy emergence from a protracted period of stagnation.

As it is, economists believe that the German economy will be lucky to grow by one per cent this year, with growth accelerating only modestly in 2006.

With unemployment topping 11 per cent, sluggish domestic demand means that exports have become the mainstay of German economic growth.

Indeed, while Germany's export machine continues to chalk up solid growth rates, retail sales are projected to drop for their fourth year in 2005.

The SPD has also accepted the hike despite strongly campaigning against the proposal, which formed a key part of Merkel's election platform.

Merkel also wants to use funds generated by the increase to help cut Germany non-wage labour costs by two per cent to below 40 per cent. Economists say Germany's high labour costs hinder job creation.

But as a sign of voter resistance to the proposed increase, an opinion poll released Friday by German public television ZDF showed that 63 per cent of those responding to the survey rejected the increase.


Subject: German news

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