German parties in deal to make Merkel chancellor

By Noah Barkin and Markus Krah

BERLIN (Reuters) – Conservative leader Angela Merkel will
become Germany’s first woman chancellor under a deal that sees
Gerhard Schroeder step aside but gives his Social Democrats top
posts in a new government, sources said on Monday.

Three weeks after voters gave Merkel’s conservatives an
unexpectedly narrow win over Schroeder’s SPD in a federal
election, sources from both parties said an agreement had been
struck that would set the stage for a power-sharing cabinet and
break Germany’s political deadlock.

According to a senior SPD source, the SPD is poised to get
the foreign, finance, justice and labor ministries in a new
government led by the 51-year old Merkel, a pastor’s daughter
who grew up in the former communist east.

That would give Schroeder’s party a key role in shaping
budget and labor market policy, as well as influence over
foreign policy.

Merkel’s Christian Democrats (CDU) and their Christian
Social Union (CSU) allies would get the economy, interior and
defense portfolios.

Current Economy Minister Wolfgang Clement said CSU chief
and Bavarian state premier Edmund Stoiber would replace him in
the post, leaving Merkel’s CDU with very few major ministries.

“In exchange for getting the chancellery, the conservatives
will have to make compromises in personnel,” said Andreas Rees,
an economist at HVB Group in Munich.

“It is unlikely that reform-minded politicians will have a
lot to say in the new government.”

CONCESSIONS

The tough negotiations between the main forces on the
German centre-left and centre-right come after the September 18
election gave neither the conservatives nor the SPD enough
votes to rule with their preferred partners.

Following the tight vote, Schroeder’s SPD initially refused
to relinquish its hold on the chancellery.

The deal should break the deadlock, paving the way for
detailed coalition talks and the formation of Germany’s second
“grand coalition” since World War Two. Those talks are likely
to extend into November.

By securing many of the most important ministries in return
for sacrificing Schroeder, 61, the SPD is expected to force
concessions from Merkel on economic policy, resulting in a
dilution of the reform agenda she pushed during the election
campaign.

Merkel advocated an easing of firing rules, a cut in
payroll costs and changes to the way labor agreements are
negotiated as ways to boost growth and spur job creation.

German gross domestic product is expected to grow just 1
percent this year, one of the weakest rates in the 25-nation
European Union. Unemployment hit a postwar high in February of
over 5.2 million people, 12.6 percent of the workforce.

“The reform mandate is probably not going to be as strong
as it would have been under an outright victory by Merkel,”
said Ian Stannard, senior foreign exchange strategist at BNP
Paribas.

In some areas, however, a grand coalition could
successfully push through reforms.

There is agreement between the two parties to reform
Germany’s complex federal structure and attack its budget woes.

Markets showed little reaction to the news. Germany’s Dax
index of leading shares was trading 0.8 percent higher and the
euro currency and bonds were little changed.

WEAKER INFLUENCE ON FOREIGN POLICY

Unless the SPD can come up with a heavyweight politician
for the Foreign Ministry post, it is unlikely to have as much
influence on foreign policy, analysts said.

“I presume it will be someone of a lesser standing (than
Schroeder), so the SPD mark on German foreign policy will be
weaker,” said Katinka Barysch of the Center for European
Reform.

The main foreign policy difference between the two parties
is on Turkey. The SPD under Schroeder has backed EU membership
for Ankara, while the CDU favors a “privileged partnership.”

Merkel has also vowed to improve ties with Washington,
strained by Schroeder’s vocal opposition to the U.S.-led Iraq
war, and take a more even-handed approach with France and
Russia — countries with which Schroeder established close
relations.

(Additional reporting by Claudia Kade, Valdis Wish, Andrew
Gray, Nick Antonovics, Dave Graham)