New German govt makes cutting unemployment top aim
(Reuters)
Updated: 2005-11-12 10:13

Germany's Christian Democrats and the Social Democrats have made fighting high unemployment the centerpiece of their grand coalition agreement, according to a draft of the 145-page document obtained by Reuters on Friday.

The two main Germany parties completed a deal earlier on Friday to form a government after a month of talks and plan to release the agreement on Saturday in Berlin.

"Reducing unemployment is the central obligation of our government policies," the coalition pact says in its preamble.

The country's unemployment rate, well above 10 percent, is described as the main challenge facing Germany.

"Unemployment, state debt, an aging population and pressures resulting from globalization require tremendous political efforts to ensure prosperity for the current and future generations," the first line of the agreement reads.

Outgoing Chancellor Gerhard Schroeder took office seven years ago with a firm pledge to cut unemployment or not deserve a second term. Unemployment rose further but he won re-election.

Germany's traditional rivals sealed the agreement to create a government under the leadership of conservative Angela Merkel eight weeks after an inconclusive general election on September 18.

But the new government, the second "grand coalition" in post-war history and 39 years after the first one that lasted only three years, will be able to operate without crippling opposition from the Bundesrat upper house of parliament, which has blocked reform efforts by previous governments.

The conservatives and the SPD have bridged differences that bitterly divided them during the campaign and recent decades.

At the heart of the deal is an agreement to bring Germany's ballooning budget deficit back within European Union borrowing limits by 2007 -- a colossal challenge requiring upwards of 35 billion euros in savings or extra revenues.

A good chunk of that sum will come from higher taxes. The parties agreed on Friday to a controversial 3 percentage point hike in value added tax (VAT) in 2007, an idea championed by the conservatives during the election campaign.

In return for agreeing to the VAT hike, the SPD secured conservative agreement for a so-called "rich tax," which will take the rate for Germans earning 250,000 euros or more up to 45 percent from 42 percent previously.