German coalition talks enter decisive week

Germany’s Social Democrats pressed for a new tax on high-income earners today as negotiators opened a decisive week in their efforts to form a new government - talks that will focus on plugging a huge budget shortfall.

Chancellor-designate Angela Merkel’s conservatives and the Social Democrats, the party of outgoing Chancellor Gerhard Schroeder, hope to complete an agreement by the weekend on forming a so-called “grand coalition.” That would allow party conventions to approve any deal next week and parliament to elect Merkel as chancellor on November 22.

Many details remain open, and both sides likely will have to make painful compromises as they seek to combine efforts to boost the sluggish economy and cut high unemployment while closing a budget gap of more than €35bn.

“One thing is clear: we will only agree to other tax rises in the coalition talks if high incomes also bear a heavier burden,” Social Democratic chairman Franz Muentefering told the Bild daily before the two sides resumed talks this evening.

During the campaign for the September 18 election, which gave neither side a parliamentary majority, his party vehemently opposed Merkel’s plan to increase value-added tax.

Such an increase, however, now appears likely to emerge from the coalition talks, along with cuts to subsidies. The Social Democrats want to soften the blow by pushing through their own proposed higher taxes for people earning more than €250,000 a year.

“Otherwise, we cannot explain to pensioners and families why they should make their own contribution to getting federal, state and local governments out of their financial misery,” Muentefering said.

The idea of an extra tax for the wealthy was long rejected by conservatives, but some are now signalling that they could accept it as part of a wider deal that would give overall savings and less red tape.

“The whole concept must work,” Roland Koch, the governor of Hesse state and a senior member of Merkel’s Christian Democrats, told ZDF television. “We will have to swallow a lot of bitter pills, but the Social Democrats have to know that goes for them too.”

Another leading Christian Democrat bristled at the Social Democrats’ suggestion that the wealth tax was a condition for other tax rises.

“Public attempts at blackmail won’t move us forward,” party general secretary Volker Kauder said.

An official close to the talks said negotiators were moving towards a VAT rate of 19%, compared with the current 16%. However, the official said there was no final agreement.

The new government needs to close the budget gap as it strives finally to get Germany’s deficit back within a European Union-imposed limit in 2007.

Ahead of today’s talks, senior conservatives urged th Social Democrats to show greater flexibility on issues such as labour and health policy.

The one-time opponents have been at odds over conservatives’ hopes of reforming the state health insurance system and on whether to loosen labour laws to make it easier for small firms to fire workers. That key plank of Merkel’s election campaign was vehemently rejected by Schroeder.