November 11, 2005

New German govt targets tackling high unemployment

By Noah Barkin and James Mackenzie

BERLIN (Reuters) - Germany's Christian Democrats and the
Social Democrats will make fighting high unemployment the
centerpiece of their grand coalition deal, according to a
document obtained by Reuters ahead of its Saturday release.

The two main German parties completed a deal late on Friday
to form a government after a month of talks and plan to release
the 145-page agreement they spent the last month hammering out
at a news conference 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 in Europe's biggest economy rose
further but he won again in 2002 before losing in September.

Germany's main parties sealed the agreement to create a
government of traditional rivals under the leadership of
conservative Angela Merkel, ending eight weeks of deadlock
after an inconclusive general election.

"I'm convinced that the coalition creates a genuine
opportunity for Germany," said Merkel, who will become the
country's first woman chancellor and first from the former
communist East if, as expected, the new parliament formally
elects her on November 22.

Merkel will head a potentially unwieldy bipartisan
government that includes her Christian Democrats (CDU), their
Bavarian sister party the Christian Social Union (CSU) and the
Social Democrats of outgoing Chancellor Gerhard Schroeder.


But the new government -- only the second "grand coalition"
in post-World War Two history -- will be able to operate
without crippling opposition from the Bundesrat upper house of
parliament, which has blocked reform efforts by previous

In almost a month of relatively harmonious talks, the
conservatives and the SPD have bridged differences that
bitterly divided them during the campaign.

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 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.

Economists and industry leaders worry the tax rises could
hit already weak consumption and prevent the parties from
achieving their priority -- cutting unemployment.

"Never before has a new government hit the public with so
many burdens," said Gerd Langguth, a political scientist at
Bonn University and biographer of Merkel.

The CDU was unable to convince the SPD to reverse
Schroeder's policy of phasing out nuclear power stations.

But they did win concessions from the SPD in labor market
policy. Part of the VAT hike will go toward cutting non-wage
labor costs -- a measure the conservatives say is crucial for
encouraging German firms to hire.