November 11, 2005

New German govt makes cutting unemployment top aim

By Markus Krah

BERLIN (Reuters) - Germany's Christian Democrats and the
Social Democrats have made fighting high unemployment the
centerpiece of their grand coalition agreement, according to a
draft of the 145-page document obtained by Reuters on Friday.

The two main Germany parties completed a deal earlier on
Friday to form a government after a month of talks and plan to
release the agreement on Saturday in Berlin.

"Reducing unemployment is the central obligation of our
government policies," the coalition pact says in its preamble.

The country's unemployment rate, well above 10 percent, is
described as the main challenge facing Germany.

"Unemployment, state debt, an aging population and
pressures resulting from globalization require tremendous
political efforts to ensure prosperity for the current and
future generations," the first line of the agreement reads.

Outgoing Chancellor Gerhard Schroeder took office seven
years ago with a firm pledge to cut unemployment or not deserve
a second term. Unemployment rose further but he won

Germany's traditional rivals sealed the agreement to create
a government under the leadership of conservative Angela Merkel
eight weeks after an inconclusive general election on September

But the new government, the second "grand coalition" in
post-war history and 39 years after the first one that lasted
only three years, will be able to operate without crippling
opposition from the Bundesrat upper house of parliament, which
has blocked reform efforts by previous governments.

The conservatives and the SPD have bridged differences that
bitterly divided them during the campaign and recent decades.

At the heart of the deal is an agreement to bring Germany's
ballooning budget deficit back within European Union borrowing
limits by 2007 -- a colossal challenge requiring upwards of 35
billion euros in savings or extra revenues.

A good chunk of that sum will come from higher taxes. The
parties agreed on Friday to a controversial 3 percentage point
hike in value added tax (VAT) in 2007, an idea championed by
the conservatives during the election campaign.

In return for agreeing to the VAT hike, the SPD secured
conservative agreement for a so-called "rich tax," which will
take the rate for Germans earning 250,000 euros or more up to
45 percent from 42 percent previously.