Merkel faces tough times as chancellor

ANGELA MERKEL becomes Germany’s eighth post-war chancellor today - but only after being forced into awkward compromises on taxes and welfare-state reforms that could undermine her coalition and slow efforts to fix a lagging economy.

Lawmakers meet today to elect Ms Merkel, 51, as Germany’s first female leader. She will lead a “grand coalition” of her conservative bloc and the centre-left Social Democrats of outgoing chancellor Gerhard Schroeder.

Ms Merkel needs support from 308 members of the 614-seat lower house to succeed Schroeder. With the coalition holding 448 seats, her victory is practically assured.

However, a major question mark hangs over how effective and durable the coalition will be after Ms Merkel bargained away key campaign pledges such as limiting union power in regional wage negotiations and accepted a Social Democrat demand for a ‘rich tax’ on top earners.

Commentators are already speculating that left-wing Social Democrats will snub Ms Merkel in today’s vote, exposing tensions which may jeopardise the government once it gets to work on a host of tricky issues.

Conservatives have warned them to stick to the agreement. “Everybody knows what is at stake,” Ronald Pofalla, a senior conservative lawmaker, said on ZDF television on Monday. “I expect that Angela Merkel will get a good result.”

Ms Merkel’s Christian Democrats and their Bavaria-only sister party the Christian Social Union were forced to ally with the Social Democrats after falling short of a clear victory in the September 18 parliamentary elections.

The Social Democrats finished a close second and have secured half the 16 seats in Ms Merkel’s Cabinet, including the high-profile finance and foreign affairs portfolios.

The coalition agreement the two sides signed last week has a blend of contrasting views on how to fight Germany’s biggest problem: double-digit unemployment and sluggish growth.

Ms Merkel pushed through a cut in a payroll levy used to finance unemployment insurance and an easing of the rules protecting Germans from being fired - moves designed to ease the burden of Germany’s creaking welfare state on employers and encourage them to hire new staff. The two parties have also agreed to bring Germany’s budget deficit back within the EU’s 3% limit by 2007. But Social Democrats have fended off her vow to weaken the role of labour unions in industry-wide wage-bargaining.

The programme is being financed partly through cuts in spending and subsidies, but also through a hike in value-added tax from 16% to 19% and a new top rate of income tax, dubbed the ‘rich tax’, of 45%.