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German parties move closer to coalition deal

Posted on: Wednesday, 9 November 2005, 12:46 CST

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.

Source: REUTERS

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