Coalition Partners Say Government Will be Formed by Weekend

The conservative Christian Democrats of incoming chancellor Angela Merkel and outgoing leader Gerhard Schröder's center-left Social Democrats (SPD) are still divided on several issues including tax increases and spending cuts.

They want to complete their haggling in order to present the proposed program to their rank and file members at party congresses next week.

A new round of negotiations was to start at 16:00 UTC on Friday and, despite earlier suggestions that the talks could go into the weekend, several key participants said that would not be necessary.

"We will get it done today," said Franz Josef Jung, the incoming defense minister.

He said the two sides had made "a decisive step forward" by reaching agreement Thursday on most of the remaining points (on divergence.)

Renate Schmidt, who is to become justice minister, said the new government's program would be ready at 18:00 UTC.

The EU's most populous country was forced to pursue an unusual "grand coalition" left-right power-sharing agreement after the general election on Sept. 18 failed to produce a governing majority for either of the main parties.

A copy of a draft agreement circulating late Thursday outlined points of consensus already reached but there were several headings that were stamped "unresolved," including increases in the value-added tax, a tax on the high-earners, protection against dismissal and phasing out nuclear power. The text also included an agreement to put off until 2006 any discussion of reforming the creaking public health care system due to the two sides' starkly differing proposals.

The pact must be completed by Saturday to allow approval by the rank and file of the two parties at separate congresses next week, paving the way for Merkel to be voted in on Nov. 22 as the country's first female chancellor.

The talks, designed to lay out a plan of action for the government's four-year term, have been particularly hard-fought because they bring together bitter rivals from the two sides of Germany's political divide.

Going American?

Incoming SPD chairman Matthias Platzeck (photo) warned that while some progress had been made, nothing was certain until all the key points had been wrapped up.

"There is only an agreement on something when everything is agreed," Platzeck said as he entered a round of negotiations Thursday.

A leading conservative negotiator, Ronald Pofalla, said it was unlikely the pact could be finished overnight, or Friday. "Prepare for it being Saturday," he told reporters waiting outside the Christian Democrats' headquarters in central Berlin where the talks were held.

After the Christian Democrats on Wednesday touted an agreement on extending the length of trial periods for new employees in a bid to encouraging hiring, outgoing SPD leader Franz Müntefering denied there was any final deal after a late meeting with trade union leaders.

The powerful conservative state premier of Lower Saxony, Christian Wulff, said the Christian Democrats would fight for a measure they saw as crucial to reducing the 11 percent jobless rate.

"This is not about dismantling employees' rights but about more opportunities for those out of work," he said.

But trade unions, traditionally close to the SPD, warned the move would mark a dangerous step toward a US-style hire-and-fire system in which employees had few protections.

Higher VAT or wealth tax?

The second major hurdle to a deal is Germany's dire fiscal situation. The parties have agreed to attempt to slash a record 35 billion euros ($41 billion) from the public budget by 2007 to bring down the deficit. But the parties are at loggerheads over a conservative proposal to hike the value-added tax from 16 percent and an SPD bid to impose a tax surcharge on high earners.

"Those with broad shoulders must carry more than the weak," Platzeck said, saying the so-called "rich tax" was aimed at fostering social justice. "That is why today's negotiations are so crucial," he said.

Critics have warned that despite the need for austerity, steep tax increases at a time of anemic consumer spending could put the breaks on even meager economic growth, set to reach just 0.8 percent this year and only 1.0 percent next year. The director of the Institute for Economic Research, Ludwig Blum, said a VAT hike in particular would "send shock waves through the economy."

However, the head of Germany's BDI industry federation, Jürgen Thumann, welcomed signs of a real attempt to bring the deficit down to conform to EU budget rules.

"If I take a sober look at it all, I personally am not disappointed," he told German radio.

The two sides are also at odds over the future of the country's nuclear power plants. While the previous coalition government of Social Democrats and Greens passed legislation to mothball the sites over the next two decades, the conservatives want to extend their service.