Merkel signals cautious reforms in new coalition

  • World
  • Monday, 28 Sep 2009

BERLIN (Reuters) - German Chancellor Angela Merkel signalled on Monday she would resist pressure for radical reforms from her likely new coalition partners, the pro-business Free Democrats, and would stick to a path of gradual change.

In Sunday's federal election, Merkel's conservatives won a parliamentary majority with the FDP, her partner of choice, which brings to an end her awkward four-year partnership with the Social Democrats (SPD).

The two camps have said they will start negotiations soon on sealing a centre-right coalition deal, which will include tax cuts for Europe's biggest economy, but the talks could be tough as the FDP has more ambitious plans than Merkel's conservatives.

Potential areas of conflict include the scale and timing of tax cuts, how to curb a bulging budget deficit, and FDP proposals to make it easier to hire and fire workers.

Merkel made clear she would not shift far to the right.

"You know me. I have been like this for some time. I do a bit for everyone but I do not change with the colours of a coalition," she told reporters, adding the conservatives wanted to be the main party of the centre ground.

While governing with the SPD in the last four years, Merkel has shifted leftwards and abandoned the bold plans for economic reforms she had campaigned on in the 2005 election.

Economists welcomed the result, saying it would herald pro-market policies, and Germany's bluechip DAX stock market index was up 1.5 percent at 1320 GMT.

"We would expect both parties to agree on a cautious reform approach with respect to the labour market and the social security system," said Goldman Sachs economist Dirk Schumacher in a research note.

"The FDP will certainly push .. for more reforms but Merkel's reform appetite seems limited," he added.

Top members of Merkel's Christian Democrats (CDU) said the party aimed to have a coalition deal nailed down within a month.


The FDP, last in government under Helmut Kohl until 1998, is likely to get three or four ministries. Traditionally it has controlled the foreign, economy and justice portfolios.

Buoyed by its best ever performance in a federal election, the FDP is likely to make hefty demands of the conservatives.

But leader Guido Westerwelle refused to be drawn when reporters peppered him with questions on policy issues at a news conference, dodging them and referring repeatedly to his party's election programme.

Merkel said she was committed to her party's election promise of tax cuts worth 15 billion euros ($22.03 billion), but she refused to set a timetable due to weak public finances.

The FDP has more ambitious ideas, having waged its campaign on quick tax cuts worth 35 billion euros, and senior party members indicated they were determined to push them through.

"The voters expect it of us, we cannot chicken out," Hermann Otto Solms, the FDP's finance spokesman, told Der Spiegel.

He said the plans were affordable and, if necessary, spending cuts would be needed to rein in the budget deficit, forecast to rise to 6 percent of gross domestic product in 2010.

Other priorities for the FDP are making it easier for firms to hire and dismiss workers, and shedding state holdings in firms like rail operator Deutsche Bahn.

Merkel also said she would try to find a way to reverse a law to close Germany's nuclear power plants by 2020, and extend the lives of some reactors. Shares in nuclear operators E.ON and RWE were up 4.1 and 3.5 percent respectively.

Preliminary official results put Merkel's conservative bloc, the CDU and Bavarian Christian Social Union (CSU), on 33.8 percent, their second-worst postwar result, down from 35.2 percent in 2005.

The FDP offset the losses, surging to 14.6 percent, its best ever score, and putting the centre-right ahead.

The SPD was the biggest loser and will join the Greens and Left party in opposition after plummeting more than 11 points to 23.0 percent, its worst result since World War Two.

(Writing by and Madeline Chambers; editing by Mark Trevelyan)

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