New Government Program Comes Under Attack

Announcing the details of an agreement for a power-sharing deal which was struck on Friday, conservative leader Merkel said Germany must face up to a period of austerity.

"We know that with this coalition pact we are expecting a lot from people," she told a press conference.

Merkel said that controversial measures such as raising value added tax (VAT) in 2007 to 19 percent from its current level of 16 percent were "honest" and crucial elements of the coalition program between Merkel's Christian Democrats and the Social Democrats of outgoing Chancellor Gerhard Schröder.

In addition, the agreement includes strict job protection regulations, raising the retirement age from 65 to 67, raising income tax levels to plug a growing public deficit and imposing a so-called "rich tax" on people earning more than 250,000 euros a year. A central focus of the government agenda is to tackle Germany's chronically high unemployment rate.

The program must be approved by party congresses on Monday.

Their green light would pave the way for the parliament to make Merkel Germany's first woman chancellor on November 22, more than two months since an inconclusive general election left the country in political limbo.

"A declaration of bankruptcy"

But even as Merkel spoke of the coalition pact as offering Germany "a real chance" of pulling itself out of its ongoing economic crisis, the deal was attacked by business leaders who warn it may further strangle investment, trade unions fearful of a weakening of workers' rights, battle-ready opposition parties and a skeptical media.

"The coalition deal is a declaration of bankruptcy," the top-selling Bild newspaper said Saturday. An editorial said taxpayers were being made to pay for the mistakes of successive governments.

"The two big parties which, in doing nothing to tackle the situation in recent decades, have brought the country to the point of bankruptcy, are making us, the people, pay for their mistakes."

The centre-left Berliner Zeitung newspaper labeled the agreement "a big disappointment" and said it offered few long-term solutions.

"It is hoped that this coalition pact will only be temporary and that this government realizes once it takes office that the agreement cannot last for long," it added.

Business leaders fearful

Industry leaders and analysts said they feared the deal would further dampen consumer spending.

"Tax hikes are likely to depress consumers," UBS economist Holger Fahrinkrug said.

"As far as the labor market is concerned, these reforms lack the necessary clout. We need a functioning labor market if we're eventually going to resolve our difficulties," said Martin Wansleben of the DIHK organization.

"Raising pension contributions shows we can expect further reforms here too."

There were no words of praise from the trade unions either. They vehemently oppose plans to make it easier to hire and fire workers.

Opposition joins storm of protest

Opposition parties also launched an attack on the new government's tax policy, warning that the higher value-added tax will hurt consumer spending and cut into economic growth.

Guido Westerwelle, the leader of the pro-business Free Democrats with whom Merkel had originally planned to form a coalition government, said: "This orgy of tax increases agreed by the grand coalition could just as easily have been the work of the last government. We don't need new elections for that. The bottom line is that the grand coalition's program isn't favorable to employment and the creation of new jobs."

The widely unpopular VAT hike will be used partly to bolster strained finances and partly to bring down non-wage labor costs to promote hiring of staff.

The Social Democrats managed to force through a higher tax rate for top earners in the face of conservative opposition. The retirement age will be increased to 67 from 65 and the percentage of salary earmarked for the state pension system will be upped.

The opposition Green Party criticized the package as lacking ambition. Party leader Claudia Roth said the major parties had promised too much and were delivering too little.

"The coalition appears to be based on the lowest common denominator. It has no accent. The coalition has presented no concepts on issues concerning the future -- like health care, pensions, integration and the creation of new jobs," Roth said.

Foggy foreign policy goals

Foreign policy goals are vague, with a promise to improve relations with the United States which were weakened over German opposition to the Iraq war, and strengthen ties with EU partners.

The parties also accepted a neutral approach to Turkey's bid to join the EU.