Merkel Speaks Out on Taxes, Iraq

Merkel told the Berliner Zeitung in an interview published on Saturday that she would work to improve relations with Washington, which were badly strained by Chancellor Gerhard Schröder's vocal opposition to the US-led war in Iraq. But she said she would stop short of sending German soldiers to Iraq to support US forces.

"We would not have done that and we will not do that," Merkel said.

Schröder's strident rhetoric against the US-led invasion of Iraq is widely credited with helping his Social Democrats narrowly win the 2002 general election against the opposition Christian Union parties (CDU/CSU).

Since then, the chancellor has repeatedly ruled out deploying German troops in Iraq. Germany has opted instead to train Iraqi security forces in the United Arab Emirates.

But Merkel, whose CDU/CSU alliance has a lead in opinion polls, said a government under her leadership would "put Europe's relations with the United States on a proper footing again."

Defending tax hikes

Merkel also defended her proposal for a two-point hike in the country's 16 percent value added tax (VAT), which has emerged as a hot button issue in the run-up to possible early elections in September. She told the Berliner Zeitung that the tax hike would cut labor costs, boost economic growth and create jobs.

"By raising VAT by two percentage points we'll be able to quickly cut the supplemental wage costs by two points," Merkel said. "You can't look at only the increase. Looking at the whole picture you can see clearly why we're doing it."

The head of the BDI German industry federation, Ludolf von Wartenberg, added his voice to that of other critics of the plan, including Merkel's allies in the liberal Free Democrat Party, who warned it would negatively impact spending and growth.

"Why do they have to start off by raising the VAT?" von Wartenberg asked. "Cutting spending should take priority. There are huge potential savings to be found by reforming the social welfare system."

Social Democrat party leader Franz Müntefering said his party would keep up pressure on the conservative's VAT proposals.

"It's a job killer," he told the Welt am Sonntag newspaper. "The talk of raising VAT is horribly damaging to the economy."

Battered by a string of state poll losses, Schröder called for a fresh mandate for his reform agenda. He deliberately lost a no-confidence vote before parliament earlier this month with the aim of triggering an early election in September.

President Horst Köhler has until July 22 to decide whether to dissolve parliament and call a national poll.