German leaders agree economy crisis measure

Germany’s two biggest political parties reached an agreement on increasing value-added tax, a conservative official said, apparently resolving one of the toughest remaining obstacles to forming a left-right ”grand coalition” after weeks of negotiations.

Germany’s two biggest political parties reached an agreement on increasing value-added tax, a conservative official said, apparently resolving one of the toughest remaining obstacles to forming a left-right ”grand coalition” after weeks of negotiations.

However, the two sides remained apart on other key issues after talks that lasted into the early hours of today. They hoped to secure a deal later today, or at the latest tomorrow, to put conservative Angela Merkel in the chancellery in an alliance with outgoing Chancellor Gerhard Schroeder’s Social Democrats.

“We will continue” today, senior conservative Michael Glos said after party leaders broke up for the night. “Everything is looking good.”

The new government will have to tackle a sluggish economy, high unemployment and mounting debt. The two sides have been at odds over details of spending cuts and expected tax hikes to plug a €35bn budget deficit.

Yesterday evening, a senior conservative official said that they had agreed to raise VAT to 19% from 16% from January 1, 2007 – a move that was opposed by the Social Democrats during the campaign for September 18 elections.

Merkel announced the move in a telephone conference with other leaders of her Christian Democrats, the official said.

The two sides have yet to resolve differences on whether to shut down Germany’s nuclear power stations as planned by the outgoing government, and on details of labour and tax policy, negotiators said.

Officials have already agreed to several planks for a joint platform, including a gradual raising of the retirement age to 67 from 65 and a commitment to close ties with the US.

However, they also need to compromise on points where the two sides were diametrically opposed before the election. Voters denied both a majority to govern with their preferred small partners.

The outgoing government secured a deal with industry to close down all Germany’s nuclear plants by about 2021. Conservatives want safe plants to stay open longer.

The Social Democrats have been pushing for a higher income tax for top earners - an idea with which many conservatives are uncomfortable.

The extra revenue from the VAT raise likely would be earmarked for a reduction in payroll taxes, which Merkel and employers say deters hiring, as well as to shore up the budget. As well as putting the budget in order, the new government will have to find ways of boosting the chronically sluggish economy.

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