German parties move closer to coalition deal

By Noah Barkin

BERLIN (Reuters) – Germany’s conservatives said on
Wednesday they had secured bipartisan agreement for a cut in
payroll costs and a loosening of job protection rules, steps
they argue are crucial for encouraging German firms to hire.

But, as a Saturday deadline neared for sealing a coalition
deal with the Social Democrats (SPD), concerns mounted that the
broad agreement would fail to spark sluggish German growth or
dent unemployment.

“There is no clear impulse for more growth and job creation
and that is precisely what is needed,” Dieter Hundt, the head
of the German employers’ association, told the Thursday edition
of German daily Tagesspiegel.

The agreed cut in payroll costs, via a reduction in
unemployment insurance contributions, represents a small
victory for the conservatives.

During the recent election campaign, Merkel’s conservatives
had pledged to cut the contributions by 2 percentage points in
the hopes it would encourage firms to hire and put a dent in
unemployment, which hit a post-war high earlier this year.

Instead of 2 percentage points, the deal foresees a
two-step cut of 1 point by January 2007, financed by savings
gleaned from outgoing Chancellor Gerhard Schroeder’s “Hartz IV”
labor market reform program.

Ronald Pofalla, deputy head of the conservatives in
parliament and an ally of chancellor-designate Angela Merkel,
said the conservatives hoped to win agreement for a cut of an
additional point, paid for by a hike in value added tax (VAT),
but remained vague on the timing of such a move.

The conservatives also won agreement from the SPD for a
loosening of job protection regulations — one of their key
campaign pledges. Officials said that under that deal, the
“probation period” for new hires would be extended to 24 months
from six months.

WORRIES MOUNT

Despite those gains, worries persisted in the conservative
camp that they were not getting enough out of the negotiations
– forced on the parties after a September 18 election failed
to give them enough votes to form a government with their
allies.

On the issue of nuclear power, one of the most contentious
points in the talks, the conservatives agreed to SPD demands
not to extend the lifespan of the country’s 17 nuclear power
plants, according to a draft document obtained by Reuters.

They also appear unlikely to get SPD support for their
plans to introduce fixed payment contributions in healthcare.

“The conservatives must ensure their positions are better
reflected in labor market, healthcare and economic policy than
they have been until now,” leading Christian Democrat (CDU) and
Hesse state premier Roland Koch said. “This is where the
decisive battles with the SPD will be fought.”

With three days left until the talks deadline, an
increasingly loud chorus of criticism has emerged from industry
and economists about the coalition’s plans.

Concern centers around plans to raise VAT to plug holes in
the budget — a move many fear would hit consumption and kill
off a fragile recovery in Europe’s largest economy.

Germany’s top parties have pledged to bring the budget
deficit, which will violate European Union limits for a fourth
straight year in 2005, back in line with EU rules by 2007.

But they have been taken to task in the German media for
focusing too heavily on deficit consolidation and relying too
much on tax hikes, rather than spending cuts, to get the 35
billion euros they say they need to meet their budget target.

“We are convinced that an increase in the VAT to
consolidate the budget would be a mistake from a growth policy
point of view,” said Bert Ruerup, the head of the government’s
council of economic advisers.

The three parties involved in the talks — the conservative
Christian Democrats (CDU), their Christian Social Union (CSU)
sister party, and the SPD — are due to meet on Thursday at
2:00 p.m. (1300 GMT) to iron out remaining policy differences.

If an agreement is struck, they would then present it to
their respective party members early next week. Angela Merkel
could then be elected German chancellor in the Bundestag lower
house of parliament on November 22.