German Parties Seal Pact With Economic Give, Take

The main German political parties agreed Monday on contentious welfare cuts and tax hikes to be carried out by a new coalition government, clearing the final obstacle for Angela Merkel to be sworn in next week as the nation’s first female chancellor.

The agreement between the leftist Social Democrats and conservative Christian Democrats forged an uneasy power-sharing coalition that must overcome deep differences on reforming the welfare state. It puts Merkel in the precarious role of presiding over a fractious government that many critics expect to lack the political will to revitalize Europe’s largest economy.

But the pact brings a measure of stability to a nation that has been anxiously awaiting new leadership since Sept. 18, when an inconclusive election pushed the two parties into a “grand coalition.” The rivals have vowed to reduce the budget deficit, increase the value-added tax by 3%, raise the retirement age from 65 to 67 and impose new taxes on the rich.

“A grand coalition is the only responsible option,” Merkel told her party before the rank and file overwhelmingly approved the agreement at a conference in Berlin. The leaders of both parties endorsed the deal Friday.

The agreement defining the new government amounts to 191 pages of concessions. Merkel’s conservative critics say she toned down calls for economic reform and abandoned a sweeping overhaul of the social programs needed to take pressure off German corporations. Liberals among the Social Democrats complained that the proposed pension trims and weakened labor protections would undermine the nation’s commitment to the welfare state that arose after World War II.

“No one is forcing anyone to love this grand coalition or to cheer about it,” Chancellor Gerhard Schroeder, whose term ends when Merkel is sworn in Nov. 22, told his party at a meeting in Karlsruhe. Addressing the Social Democrats before they accepted the agreement, Schroeder said the deal embodied enough of their philosophy that “I urge you to give your broad approval.”

The nation’s leading newspapers have criticized the plan as a series of nicks, trims and tax increases that further jeopardize the economy while avoiding comprehensive change. Germany has an 11.6% unemployment rate and sluggish consumer confidence. The parties’ plan to reduce the budget deficit by about $40 billion, partly through tax increases, is viewed by many economists as dangerous for economic growth.

“Everyone Must Pay for This Grand Coalition,” read a headline Monday in the Bild newspaper, which added, “Only the Politicians Won’t Have to Give Anything Up.”

Such a compromise agreement, which the coalition named Courage and Humanity, was not anticipated two months ago. Merkel and the Christian Democrats were ahead in the polls and expected to win a mandate. But Schroeder’s last days of campaigning pulled the Social Democrats within a percentage point of their rivals in the polls. Merkel was forced to relinquish much of her pro-business agenda and focus on pulling together a coalition that has often seemed on the verge of collapse.

“We urgently need to trigger trust in this new political culture,” said Matthias Platzeck, the Social Democratic governor of Brandenburg state. He added that the talks had saved the model of the “European social state. This is our culture, and we have defended it.”

The German debate over the future of social democracy, with it long vacations and litany of entitlements, has echoed across the continent, where France, Italy and other nations face similar dilemmas. The debate’s effects have been felt in the financial markets because of the power of Germany’s economy. In recent weeks, the value of the euro slipped against the dollar as traders grew jittery.

The leaders of both parties defended their compromise as a plan that spreads the necessary sacrifices and contains enough reforms to modernize Germany. But Monday’s editorial in the newspaper Die Welt expressed another view: “More state, more enforced payments, more harassment of industry in the name of ‘courage and humanity’: this is the core of this government. It will encourage the shadow economy, increase tax evasion and drive more companies” out of Germany.

“To lead the country does not mean to combine the bad [ideas] of two parties,” Bernd Pischetsrieder, chief executive of Volkswagen, told German reporters over the weekend.

Edmund Stoiber, governor of Bavaria and leader of the Christian Social Union, the sister party of the Christian Democrats, called the coalition treaty a “good basis for a new start in Germany.”

He rejected criticism, especially from businesses such as Volkswagen and DaimlerChrysler. “These ladies and gentlemen are laying off thousands of people, dumping them on politicians’ doorsteps and then criticizing us,” he said.