Letter from Berlin: Merkel's Coalition Fracturing over Tax Cut Proposals

Angela Merkel's chancellorship has descended into a constant struggle to put out fires, mainly in Europe where the euro crisis is raging unabated, but also in Germany where she has to contend with two nervous junior coalition partners desperate to score points to boost their electoral prospects.

Bickering between Merkel's Christian Democrats, its Bavarian sister party the Christian Social Union (CSU) and the pro-business Free Democratic Party (FDP) has dogged her center-right coalition ever since it was formed in 2009. And there is speculation that she is starting to look for alternative partners to secure a third term for herself after the 2013 election.

The latest fight concerns plans for modest tax cuts, and could plunge her government into serious trouble. Bavarian Governor Horst Seehofer, the combative leader of the CSU, is furious at having been ignored by the CDU and FDP over plans for tax cuts presented last month.

Finance Minister Wolfgang Schäuble, a senior CDU member, and Economy Minister Philip Rösler, the leader of the FDP, had jointly presented plans to cut taxes for low and middle income groups by €7 billion ($9.6 billion). Seehofer complained that he had not been consulted beforehand and promptly cancelled a scheduled meeting with Merkel.

Going Behind His Back

The breach is nothing short of a new ice age between the CDU and the CSU. "The CDU and FDP are making it very difficult to achieve common successes," Seehofer grumbled. Merkel's behavior in recent days had been "completely unacceptable." Seehofer accused Merkel of trying to go behind his back.

Relations between the two party leaders have never been easy because they are so different. Seehofer is a from-the-gut politician, while Merkel is cautious and calculating. But they have rarely been as far apart as they are now. Merkel's aides complain that Seehofer is forever seeking confrontation to sharpen his profile.

Seehofer for his part is constantly worried about being sidelined by the bigger CDU. As a result, the two parties often devote their resources to sniping at each other rather than governing together.

A new round of tax talks has been scheduled for this coming Sunday, but there is little to suggest that the coalition parties will settle their differences by then. There is no agenda for the meeting and no one seems to have a plan for settling the dispute.

Fears of Coalition Break

Coalition politicians are no longer ruling out that Sunday's meeting could mark the beginning of the end of this coalition. Seehofer is disappointed with Merkel. He believes he deserves more respect after having been consistently loyal to her in recent months, for example by supporting her decision in March to exit nuclear power.

But their interests have diverged since then. For Merkel, rescuing the euro is the issue that will decide the 2013 election. Her struggles to safeguard German interests in international talks are boosting her stature as a stateswoman, while Seehofer's role in this the debt crisis has become nothing short of irrelevant.

That has made it all the more important for him to have a say in the tax cut talks, a need which Merkel has woefully underestimated.

CSU lawmakers in the Bavarian regional parliament are starting to whisper that the CSU should pull out of the coalition in Berlin in order to boost its chances in the 2013 regional election in Bavaria. With the center-left SPD fielding a strong challenger -- the popular mayor of Munich Christian Ude -- the CSU faces a real prospect of losing power in the state for the first time in decades.

Seehofer himself isn't talking about a break-up of the coalition, but he isn't quashing the speculation either. He wants to deliver a tax cut, and he wants the two conservative parties -- CDU and CSU -- to agree on policy among themselves before they consult the FDP.

'No One Can Predict Seehofer'

"The way in which we work has to change if we want to be successful," Seehofer said. "There is concern in parts of the CSU about the way in which the government is presenting itself." He added: "My idea of a coalition government is that the views of every partner carry weight and are taken account of."

Seehofer hopes that Sunday's coalition meeting will produce an agreement. He has proposed cutting the solidarity income tax surcharge -- introduced 20 years ago to help pay for the rebuilding of former communist eastern Germany -- for low and middle income households. Such a move wouldn't require the approval of the Bundesrat, Germany's upper legislative chamber, where the coalition doesn't have a majority.

The problem is that many conservative politicians, particularly in the east, are opposed to cutting the surcharge because it symbolizes solidarity between the east and west of Germany. Finance Minister Schäuble, underlined such concerns in a Wednesday interview with the Financial Times Deutschland.

"If you want to provide tax relief to low and middle income earners, you can't start with the Soli," Schäuble said, in response to Seehofer's suggestion.

Such statements seem unlikely to improve the atmosphere between the CDU and the CSU before Sunday. But some CSU politicians fear that if Sunday's talks fail, Seehofer will crack. "The threat of a coalition break is constantly present," said one regional lawmaker in the Bavarian state capital, Munich. Another one said: "No one can predict when Seehofer will have had enough."

With reporting by Peter Müller