By Tony Czuczka and Leon Mangasarian
Sept. 28 (Bloomberg) -- Chancellor Angela Merkel and the pro-business Free Democratic Party began talks on forming Germany’s next government amid disagreements over taxes and labor regulations.
Merkel, whose Christian Democrats had their lowest score since World War II, stuck to her party program of waiting until 2011 to cut taxes. Free Democratic leader Guido Westerwelle pressed for faster and deeper tax relief and more deregulation of the labor market.
“It’s clear that our compass in these negotiations is our party program,” Westerwelle told reporters in Berlin today, fresh from steering his party to its best result in modern German history. He said he’ll push “with full determination” for as much of the program as possible to be accepted.
Merkel, 55, and Westerwelle, 47, held their first post-election talks at the chancellery in Berlin, seeking to chart the way toward a joint government platform. Merkel said she aims to have a government in place by Nov. 9, when Germany marks the 20th anniversary of the fall of the Berlin Wall.
“We want to do this quickly,” Merkel said at a separate press briefing. “We put forward our platform in the election and naturally we’re not going to depart from it.”
Germany’s deteriorating finances overshadow the coalition- building. Merkel’s administration will borrow a record 329 billion euros ($482 billion) in 2010 as it boosts spending to speed economic recovery.
Tax-Cut Differences
The forecast was made in June by Social Democratic Finance Minister Peer Steinbrueck and takes no account of 35 billion euros in tax cuts sought by the FDP. Merkel’s tax pledge amounts to 15 billion euros over her four-year term.
Merkel will also have to try to merge the platform of her bloc, which includes the Bavarian Christian Social Union, with demands by the FDP a simpler tax system comprising just three brackets: 10 percent, 25 percent and 35 percent.
“Merkel should be under no illusion: this alliance will only happen thanks to the FDP’s strong showing,” Tilman Mayer, head of Bonn-based Institute for Political Science, said in an interview. “Westerwelle will make his voice heard in coalition talks and demand a good deal of what the FDP’s been pushing for in the campaign.”
Afghan Friction
Afghanistan, where Germany has about 4,200 troops as part of NATO forces, is another point of potential friction. Westerwelle, the probable foreign minister replacing Frank- Walter Steinmeier, has accused Merkel’s former government with the Social Democrats of providing too few trainers for Afghan security forces.
Westerwelle wants to end the mission “as quickly as possible,” Der Spiegel magazine cited him as saying in an interview last month. That’s a more urgent tone than Merkel, who said Sept. 8 that Afghan forces must make “enough progress in the next five years to allow international troops to steadily reduce their role.”
German defense suppliers such as Duesseldorf-based Rheinmetall AG “could be seen negatively” because “a strong FDP within the government may mean earlier-than-expected withdrawal of troops from Afghanistan,” UBS Investment Research analyst Sven Weier said in a note today.
Hiring and Firing
The FDP’s campaign call to give German business more leeway to fire workers also goes further than Merkel’s party. Firing rules currently apply for companies with more than 10 employees and the FDP wants to raise the threshold to more than 20 employees.
“That’s a highly contentious, highly emotive subject,” Holger Schmieding, chief European economist at Bank of America- Merrill Lynch in London, said in an interview. Merkel and the FDP will probably look for other ways to change labor laws, he said.
While Merkel and the FDP agree on extending the lifespan of German nuclear plants beyond the planned closure by about 2021, the FDP probably will resist her call to impose new burdens on utilities that operate the plants to promote renewable energy, Claudia Kemfert, chief energy analyst at the Berlin-based DIW economic institute, said in an interview.
IG Metall, Germany’s biggest labor union, warned of wider public opposition to plans to return to nuclear power.
‘Fierce Conflict’
Merkel and Westerwelle’s parties faces “a fierce conflict with workers and unions if they call into question matters of social welfare, labor rights and the nuclear phase-out,” Hartmut Meine, an IG Metall regional director and a board member at Volkswagen AG and Continental AG, told reporters in Hanover.
Merkel’s Christian Democratic bloc won 33.8 percent in the elections to the 622-seat lower house of parliament, according to provisional complete results. The Social Democrats had 23 percent, a drop of 11.2 percentage points from 2005, the biggest decline for any party in postwar history. The anti-capitalist Left Party won 11.9 percent and the Greens 10.7 percent.
“Merkel can’t expect her coalition partner to slot into its historic role as the junior mascot,” Hans-Juergen Hoffmann, managing director of Berlin-based polling company Psephos, said in an interview. “The FDP will have none of that. It’s the kingmaker of Merkel’s new coalition.”
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