October 10, 2005

Merkel to lead Germany in coalition of rivals

By Noah Barkin

BERLIN (Reuters) - Conservative Angela Merkel will become
Germany's first woman chancellor under a deal agreed on Monday
that forces Gerhard Schroeder out of power but gives his party
great influence over the pace of economic reform.

The coalition deal breaks a political deadlock that has
gripped the country since Germans gave Merkel's conservatives a
narrow victory in a September 18 election but too few votes to
form a government with her reform-minded liberal allies.

Merkel, a strong advocate of shaking up the German economy
with reforms of the labor market and tax system, will take the
reins of a government loaded with Social Democrat (SPD) rivals
that oppose her policies and will be keen to curtail her plans.

As part of the agreement, the SPD secured many top
portfolios, including the foreign, finance, justice and labor
ministries, party officials told Reuters.

Merkel's Christian Democrats (CDU) and their Christian
Social Union (CSU) allies were left with the economy, interior
and defense portfolios. Apart from CSU chief Edmund Stoiber,
who is taking over as economy and technology minister, the
names of the ministers will not become known for days or weeks.

"There's no doubt we will see a watering down of Merkel's
program," said Katinka Barysch, chief economist at the
London-based Center for European Reform. "When you look at the
breakdown of the cabinet, it is clear that she will need a lot
of skills to keep this government together."


The deal sets the stage for Germany's second "grand
coalition" since World War Two -- a grouping which some experts
fear could collapse after a few years and increase the voice of
smaller fringe parties.

German media have likened Merkel to former British prime
minister Margaret Thatcher, calling her the "Iron Maedchen" and
"Maggie Merkel."

"I am happy but I know that a lot of hard work lies ahead
of us," a content but restrained Merkel, told reporters.

The rival parties will begin talks on Monday and hope to
finalize the shape of a new government by November 12, said
Merkel, 51, who grew up in the former communist east.

Schroeder, 61, who had initially refused to relinquish his
hold on the chancellery, will take part in those talks,
although he is not expected to play a role in the new

He did not appear publicly on Monday, but was seen rubbing
his eyes and looking out the windows of the Chancellery, which
he will leave after seven years in power.

SPD chief Franz Muentefering said his party had struck a
good deal, but could not hide disappointment at having to ditch
Schroeder and join a government under Merkel.

When asked what qualified Merkel to succeed Schroeder, he
replied: "She is head of the CDU/CSU. That is for them to

Merkel has argued an easing of firing rules and a cut in
payroll costs were necessary to ease unemployment and boost the
German economy, which has one of the weakest growth rates in
the 25-nation European Union.

But signs were already emerging on Monday that Merkel had
agreed to water down her policies to secure the top post.

SPD sources told Reuters that unions would retain the right
to negotiate sector-wide wage deals under a new government -- a
right Merkel opposes. It was also unclear if the SPD would back
her idea to lift sales tax to pay for a cut in payroll costs.

"Merkel is going to be the chancellor," said Lionel Oster,
head of European government bonds at F&C Asset Management. "the
fear we have is that she might have given up too much" in order
to secure the job.

The euro currency and German stocks wiped out initial gains
and German bonds rose on Monday as investors worried a grand
coalition might not be able to make headway on reforms.

In foreign policy, where the differences are more subtle,
analysts said the SPD was likely to have less influence, even
if it did put its own candidate in the Foreign Ministry.

The parties differ on Turkey. The SPD under Schroeder has
backed Ankara's bid to join the EU, while the CDU favors a
"privileged partnership" that stops short of full membership.

Merkel also wants improved ties with Washington, strained
by Schroeder's opposition to the U.S.-led Iraq war, and to take
a more even-handed approach with France and Russia. Schroeder
has close personal ties with the leaders of those countries.