Germany's biggest parties reach deal to form coalition government

Germany's biggest political parties have reached a deal to form a coalition government, sealing an accord that will make Angela Merkel the country's first female chancellor and put her in charge of attempting to revive Europe's biggest economy.

"We want to make more of Germany and we, the two big parties, want with these policies to win back people's trust in the ability of politicians ... and show that we can do something for our country," a visibly relieved and smiling Merkel told reporters. "I think this could be a coalition of new possibilities."

The deal will need endorsement on Monday from Merkel's Christian Democratic Union, its Bavaria-only Christian Social Union sister party and the centre-left Social Democrats of outgoing Chancellor Gerhard Schroeder.

That would allow parliament to elect Merkel on November 22 as the head of only the second "grand coalition" in German history.

"After 39 years of opposing each other ... the SPD, CDU and CSU want to move Germany forward in joint responsibility," Merkel said. "This coalition treaty also gives us the chance to show foreign policy reliability," she added, without elaborating.

The two sides were bitter opponents before Germany's September 18 election gave neither a majority to govern with its preferred smaller partner.

Merkel's conservatives emerged only just ahead of the Social Democrats - setting the scene for a three-week power struggle in which both she and Schroeder claimed the right to lead the new government.

In an October 10 deal, Schroeder gave way, but the Social Democrats extracted equal representation in Merkel's Cabinet and key ministries such as foreign affairs and finance.

"None of us were prepared for a grand coalition," said Social Democrat chairman Franz Muentefering, who is expected to become Merkel's vice chancellor and labor minister. "There was quite a lot to get over, and that's what we did in the past few weeks."

Over that time, the parties struggled to agree on how to plug a Euro35 billion (US$41 billion) budget gap while trying to boost a chronically stagnant economy and reduce an 11 percent jobless rate.

Both sides made a breakthrough on Thursday on raising VAT to shore up the government's finances. The tax will rise to 19 from 16 per cent in 2007 - a victory for the conservatives.

On Friday, the conservatives fulfilled the Social Democrats' demand for a higher income tax for top earners, conservative Juergen Ruettgers said. He did not give details, but the Social Democrats had called for a new rate of 45 percent rather than the current top rate of 42 percent.

Another conservative, Peter Mueller, said the outgoing government's four-year-old deal with industry to close down all Germany's nuclear plants by about 2021 would stand. Conservatives had wanted safe plants to stay open longer, but Mueller said "the existing rules remain."

The Social Democrats accepted a weakening of rigid labor market regulations that Merkel said discouraged hiring. In future, new hires will enjoy legal protection against dismissal only after two years, rather than the six months at present.

Among other points, the two sides had agreed to raise the retirement age to 67 from 65 gradually, starting in 2012, and made a commitment to close ties with the United States.

Matthias Platzeck, who is to take over as Social Democratic chairman next week, said the new government had to quickly meet the challenges of globalization.

"Germany is in the midst of change and nobody in the world will give us anything for free," Platzeck said. "We have to solve the problems ourselves. People have considerable expectations."

Still, the proposed tax rises already have drawn a hostile response in German media and from industry, who say it will dampen consumer spending. The leader of the pro-business Free Democrats, with whom Merkel once hoped to form a center-right government, delivered a damning verdict.

"The 'grand coalition' is a change of personnel, but it is not a change of policy," Guido Westerwelle said. "The 'grand coalition' has decided on an orgy of tax increases."