Victorious Merkel vows swift coalition

GERMAN Chancellor Angela Merkel vowed yesterday to have a new centre-right German government in place by the time Germany marks 20 years since the fall of the Berlin Wall on November 9.

She said tax cuts were possible in 2011 but rejected savings measures that might strangle an incipient economicrecovery.

Voters on Sunday ended the conservative Merkel’s right-left “grand coalition” and gave her a comfortable centre-right majority – thanks to a strong performance by her new government ally, the business-oriented Free Democrats.

“Germany is entitled to have a new government quickly,” Merkel said, noting the country was just emerging from a deep recession. She was meeting last night with the Free Democrats leader Guido Westerwelle. Germany plans a state ceremony to mark the wall anniversary on November 9, and Merkel said she would like to “greet [foreign] heads of government on November 9 with a new government”. Sunday’s election outcome nudged Europe’s biggest economy to the right but, with the cautious, consensus-seeking Merkel still in charge, itappeared unlikely to produce a radical lurch in economic policy. A key plank of Merkel’s campaign was a pledge to offer moderate middle-income tax relief.

The Free Democrats want a more radical overhaul of the tax system, cutting both the top and bottom income tax rates considerably.

Westerwelle said his party would push for a “fair” tax system. Merkel said possible tax cuts could be implemented starting in 2011 or 2012, but gave no details of what they might look like.

She argues that cuts would stimulate economic growth and ultimately improve tax revenues. Merkel’s centre-left rivals, the Social Democrats – her partners in the outgoing coalition – argued it was a bad idea to cut taxes when the government has run up substantial debts to combat the economic crisis. Yet the chancellor made clear she doesn’t want to implement painful spending cuts to balance the books. The export-dependent economy returned to slight growth in the second quarter, but is still expected to shrink by 5% or more for the whole of this year.

“So long as we are in this trough... the question of savings measures is not right,” Merkel said. “We must do everything so that we do not experience what the Americans did at the end of the ’30s – namely saving straight into the small upswing that was becoming apparent after the crisis and so breaking this upswing.”

Investors are likely to be pleased by the Free Democrats’ influence, economists said, even if Merkel herself does not push for huge changes.

The Free Democrats should be able to “push through reforms in selected areas of economic policy [and] this will be appreciated by the markets”, said Joerg Kraemer, the chief economist at Commerzbank in Frankfurt. But he added “a general shift in economic policy [is] quite unlikely”.


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