German Politicians Agree to Form New Government

Chancellor Angela Merkel vowed Monday to have a new center-right German government in place by the time Germany marks 20 years since the fall of the Berlin Wall on Nov. 9. She said tax cuts were possible in 2011, but rejected savings measures that might strangle an incipient economic recovery.

Voters on Sunday ended the conservative Merkel's right-left "grand coalition" and gave her a comfortable center-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 that the country was just emerging from a deep recession. She was meeting later in the day with the Free Democrats' leader, Guido Westerwelle.

Germany plans a state ceremony to mark the wall anniversary on Nov. 9, and Merkel said she would like to "greet (foreign) heads of government on Nov. 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, it appeared 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 Monday 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 center-left rivals, the Social Democrats — her partners in the outgoing coalition — argued that it was a bad idea to cut taxes at a time when the government has run up substantial debts to combat the economic crisis.

Yet the chancellor made clear that 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 percent 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 told reporters. "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 that "a general shift in economic policy (is) quite unlikely."

Kraemer forecast that the new coalition would "slightly" cut income tax and make minor changes to inheritance tax to make it easier to pass on family-owned companies, but said "a general cut in corporate tax is unlikely."

Merkel has made clear she isn't interested in loosening laws protecting workers from dismissal, as the Free Democrats propose.

Both parties in the new coalition oppose introducing a national minimum wage, but Merkel said she won't reverse the blessing the "grand coalition" gave to de-facto minimum wages in individual sectors, such as mail delivery.

The new government won't mean radical economic change or cutbacks because Merkel's Christian Democratic Union "must take account of the part of its electorate that is against big cuts," said Oskar Niedermayer, a political analyst at Berlin's Free University.

On top of that, "we are so highly indebted that the room for maneuver to spend gigantic sums on expensive projects isn't great," he added.

Official projections show that Germany's budget deficit will remain above the European Union-mandated ceiling of 3 percent of gross domestic production until 2013.

During the campaign, both Merkel's conservatives and the Free Democrats advocated halting a plan to shut down Germany's 17 nuclear power plants by 2021 and leaving some plants open until more renewable energy becomes available. Merkel declined to detail her plans on that issue Monday.

Merkel's job will be made easier by a majority in the upper house of parliament, which the "grand coalition" lacked.

A center-right win in a separate state election Sunday in Schleswig-Holstein put the new coalition over the top in the upper house, which represents Germany's 16 states and must approve much major legislation.