Economy biggest test for Merkel

By Erik Kirschbaum

BERLIN (Reuters) – Angela Merkel will become Germany’s
first woman chancellor on Tuesday with the broadest
parliamentary mandate in decades to pursue overdue economic
reforms, but already under widespread attack for her plans.

As Germany’s eighth post-war chancellor and the leader of
the first “grand coalition” government since 1969, Merkel’s
Christian Democrats and the Social Democrats have a crushing
majority in parliament’s lower house with 448 of its 614 seats.

The two main parties also dominate the upper house of
parliament, giving Merkel’s right-left government the ability
to ram through reforms of the federal structure, pensions and
taxes without fear of a Bundesrat veto.

“The election taught me that Germans are hesitant to accept
reforms,” said Volker Kauder, Merkel’s parliamentary floor
leader, in an interview with Bild am Sonntag.

“And that’s exactly where this grand coalition’s great
chance is. Both parties have to link arms together to convince
the public of the need for reforms and get them with us.”

Merkel was forced to form Germany’s first “grand coalition”
of her conservatives and outgoing Chancellor Gerhard
Schroeder’s Social Democrats (SPD) since the 1960s after
neither side was able to win a clear majority in a September 18
general election.

A majority of Germans doubt the “odd couple” can survive a
full four-year term, polls show.

But Merkel and SPD leaders, including the party’s new
chairman Matthias Platzeck, are exhibiting a sober
determination to cooperate for common goals — a sign perhaps
that the long-time rivals realize failure will harm them both.

ECONOMIC CHALLENGE

High unemployment, currently at 11.6 percent, has hurt
German confidence and torn holes in the budget for years. The
German economy, once Europe’s motor, is now one of the weakest
in the 25-nation European Union, with growth expected to come
in below one percent this year and only slightly better in
2006.

The economic challenges facing Merkel’s new government
could grow if the European Central Bank, as is widely expected,
lifts interest rates next month for the first time in five
years.

Merkel also has to hope her plans for a 3-percentage point
rise to 19 percent in value-added tax in 2007 will not hit
consumer spending, for years the German economy’s Achilles
heel.

But amid the gloom, there are reasons for hope.

Since the early 1990s, the party in control of the lower
house has almost never had a majority in the upper house, or
state’s chamber — meaning the lower house’s opposition
regularly used their upper house veto to cripple governments.

Merkel’s efforts to convince a German public reluctant to
let go of their cherished benefits and subsidies should also be
easier than her predecessor’s. Schroeder paved the way with his
“Agenda 2010″ reform steps that ultimately cost him his office.

“We want to put Germany back on top,” Merkel said on Friday
at a ceremony to sign the coalition agreement.

Still, there is a realization within the parties that the
road ahead will be bumpy.

In contrast to elaborate coalition signing ceremonies of
the past, the gathering on Friday was a sober one, without the
usual fanfare. It concluded with the coalition partners
clinking glasses of mineral water instead of the usual
champagne toasts.

Merkel plans to send a further signal as a first act of her
new cabinet — cutting generous pension deals for retired
ministers that she hopes will show a restless electorate that
political leaders aren’t exempting themselves from the pain.

Merkel and Platzeck, who was catapulted into the SPD’s
driver’s seat after a leadership crisis last month, have vowed
to work closely together on reforms. They are both 51, both
from the former communist east and both scientists by training.

They each weathered recent storms in their respective
parties and calmly emerged from the turbulence with
strengthened positions. Both are seen as pragmatic and are
known for their steady, analytical approach to problems.

“A blockade at the federal level that has hurt us for a
very long time is about to be removed,” Platzeck told Der
Spiegel magazine. “We have a lot of very difficult tasks before
us.”