Monday, 28 September 2009
German Chancellor Angela Merkel will on Monday start preparing for tough negotiations with the pro-business Free Democrats (FDP) to forge a coalition programme of tax cuts and economic reform after Sunday's election victory.
Merkel's conservatives clinched a parliamentary majority with the FDP, her partner of choice, in the election, which brings to an end her loveless four-year-old partnership with her rivals, the Social Democrats (SPD).
But the centre-right parties, who last ruled together between 1982 and 1998 under former Chancellor Helmut Kohl, must now try to forge compromises on issues ranging from taxes to labour market policy and domestic security.
"We want to get going with talks quickly so a new government can start work. There is a lot to do," Merkel said on Sunday.
The next government faces major economic challenges. It will have to consolidate a surging budget deficit in Europe's biggest economy, cope with rising unemployment and ward off a credit crunch as fragile banks rein in lending.
And analysts said the new coalition parties will have to work hard to bridge differences.
"There are some notable differences between Merkel's conservatives and the FDP on economic policy, so there could be some struggles for them here," said Dietmar Herz, a political scientist at Erfurt University.
The latest results from the early morning put Merkel's conservative bloc -- the Christian Democratic Union (CDU) and Bavarian Christian Social Union (CSU) -- on 33.8 percent, down from 35.2 percent in 2005, their second-worst postwar result.
But the FDP offset the losses, surging to 14.6 percent, its best ever score, and putting the centre-right ahead overall.
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.
MARKETS COULD GET BOOST
Markets, which had feared another grand coalition would lead to policy gridlock, could take heart from the result which gives the conservatives and FDP a comfortable majority in parliament.
"For financial markets this will be a positive," said Klaus Wiener of Generali Investments.
The parties will start exploratory talks in the next few days but it could take weeks to divide up cabinet posts and hammer out policy compromises needed for a coalition deal.
Together with the FDP, Merkel is expected to look for opportunities to reduce taxes, sell off state holdings in companies like rail operator Deutsche Bahn, and reverse a phase-out of nuclear power plants.
"We want a fair tax system, better education opportunities and to ensure civil rights are again respected," FDP leader Guido Westerwelle said late on Sunday.
Merkel's conservatives have promised to pursue 15 billion euros of tax cuts but refused to put a timeframe on their plans given the dire state of public finances. The FDP wants to move quickly and favours a much larger 35 billion euros in cuts.
The FDP also wants to make it easier for firms to lay off workers, but it is unclear if Merkel will back that.
While governing with the SPD over the past four years, she has shifted to the left and adopted policies on climate change and the family which could put her at odds with the FDP.
(Writing by Noah Barkin and Madeline Chambers; editing by Andrew Roche)
By Madeline Chambers
