Coalition Talks Begin Merkel Sets Tone of New German Government

As coalition talks begin for Germany's new government, Chancellor Angela Merkel is already setting the agenda. She is opposing demands by her junior coalition partner, the business-friendly FDP, for labor market and welfare reforms. The new administration is going to look a lot like the old one -- both in policies and personnel.
Angela Merkel and FDP leader Guido Westerwelle are seen in silhouette in the Chancellory on Sept. 28, as they met for preliminary talks on the day after the general election.

Angela Merkel and FDP leader Guido Westerwelle are seen in silhouette in the Chancellory on Sept. 28, as they met for preliminary talks on the day after the general election.

Foto: ddp

From the eighth floor of the Chancellery in Berlin, visitors have a spectacular view of the German capital, including the green expanse of Tiergarten Park to the south and the glass dome of the Reichstag building to the east.

Shortly before the German general election on Sept. 27, the heads of Germany's trade unions enjoyed this impressive view when Chancellor Angela Merkel invited Michael Sommer, the president of the Confederation of German Trade Unions (DGB), and other union leaders to her offices for a closed-door meeting.

Merkel showered her guests with compliments and words of praise. Germany's economic stimulus packages, the government-subsidized short-time working program and the cash-for-clunkers scrapping premium had only become a "success story" with the help of labor leaders, Merkel said enthusiastically. She voiced her appreciation for their support by assuring her guests that, if she were reelected, there would neither be a weakening of employment protection legislation nor a rolling back of minimum wages or workers' right to a say in how their company is managed. She added that she looked forward to more regular get-togethers in the future, setting the next meeting for October, immediately following the election.

Resisting a Shift

It has been a week since Germany voted  in favor of a coalition government of Merkel's center-right Christian Democratic Union (CDU), their Bavarian sister party the Christian Social Union and the liberal, pro-business Free Democratic Party (FDP). But there is also another invisible coalition partner sitting at the table. As an advocate of the trade unions, Merkel wants to ensure that the FDP's plans for a "political shift" toward "more self-reliance" do not come to fruition. When the liberals and conservatives meet on Monday for their coalition conference, the most important outcome will already have been determined, at least when it comes to the key issues of economic and social policy. In other words, Germans may be getting a new government, but in terms of its policies it will be business as usual.

It is becoming clear that in many ways Berlin, under the new "black-yellow" coalition (named for the parties' official colors), will look about the same as it did during the previous "grand coalition" government of the CDU/CSU and the center-left Social Democratic Party (SPD). The only difference will be how the government's responsibilities are divided up. The liberals will be given their chance to shine in the areas of taxation, education and civil rights, while the Christian Democrats will keep watch over the social welfare state.

It is also clear who will be setting the tone. While the Free Democrats were still basking in the supposed glow of their 14.6 percent election result, the chancellor was already wrapping up the first items on the government's future agenda. In a few comments she made in interviews, she promptly declared large parts of the FDP's campaign platform to be obsolete, reined in the CDU's sister party, the CSU, and proposed completing coalition negotiations within five weeks.

The FDP voiced the requisite objections, but Merkel has a strong argument. If her timetable is adhered to, FDP leader Guido Westerwelle, who is expected to become the new German foreign minister, could already be getting to know international dignitaries such as French President Nicolas Sarkozy and British Prime Minister Gordon Brown when they attend festivities to mark the 20th anniversary of the fall of the Berlin Wall on Nov. 9. Isn't that reason enough to hurry things up a bit?

Planning Ahead

Although the general election is barely past, German politicians are already planning for the next elections. Merkel is already thinking about state elections in North Rhine-Westphalia on May 9, 2010, when the state's CDU Governor Jürgen Rüttgers will run for reelection. She is thinking of the slim black-yellow majority in Germany's upper house of parliament, the Bundesrat, and of the 900,000 SPD supporters who voted for the CDU/CSU on Sept. 27.

Merkel wants to keep those voters, and to do so she is determined to reinvent herself -- once again -- at the beginning of her second term in office. She was once the spirited reformer, arguing for an overhaul of the health insurance system and tax code. Next, she played the role of the thrifty housewife, whose primary concern, even in the midst of a severe economic crisis, was to hold onto the purse strings. And now she has found a new role, namely that of the chancellor of growth, determined not to stifle Germany's delicate recovery with premature government cost-cutting programs.

The woman reestablishing herself at the Berlin Chancellery is no Margaret Thatcher, but a sort of female version of her mentor within the CDU, former German Chancellor Helmut Kohl. Just as her predecessor paid for German reunification with borrowed funds to protect taxpayers and social welfare recipients, Merkel plans to use the same approach to overcome the financial and economic crisis.

There will be no sharp cuts in government services for now. Instead, Merkel wants to dispel Germans' fears of harsh neoliberal measures through new tax cuts. Merkel plans to counter objections that such cuts will enlarge the already massive holes in the budget by arguing that things will pick up soon in Germany and by pointing out that other countries are in a much worse situation.

Bad News for Merkel

The once-cautious and wavering Merkel is becoming a gambler. She is now pursuing policies based on borrowing, knowing full well that the mountain of debt on which her strategy is built must eventually come crashing down.

Germany's deepest economic and financial crisis since World War II has had a sharp impact on the government's coffers. Last year, the combined budgets of Germany's federal, state and local governments, as well as its social insurance programs, were still balanced. Now the country can expect to see a budget deficit equivalent to 3.7 percent of Germany's gross domestic product, as the German Finance Ministry told the European Commission in Brussels last Wednesday. The ratio of government debt to GDP is also set to rise to a record 74.2 percent this year, and it will probably exceed 80 percent during the current legislative period.

All of this is bad news, and yet it doesn't bother Merkel very much. More important to her is the fact that the news today isn't quite as bad as was feared only a few months ago. The number of unemployed people dropped by a surprising 125,000 in September, and there is even a light at the end of the tunnel when it comes to government finances. "So far, developments in 2009 have been significantly more favorable than was to be expected in the first half of the year," reads an internal memo prepared for Thomas de Maizière, the head of the Chancellery, who is playing the role of the Christian Democrats' chief negotiator on tax and budget issues. "On the expenditures side," the report continues, "there is now evidence of declines totaling €7 billion ($10.2 billion)."

Instead of roughly €47 billion, the federal government now needs only €40 billion in new loans. This is partly the result of lower interest costs and lower expenditures for unemployment benefits.

It also seems likely that the government's mountain of debt will grow more slowly next year than previously estimated. If the economy grows by 1.5 percent in 2010, as many research institutes now believe is possible, federal tax revenues will go up by €2.25 billion, according to the calculations of experts at the Chancellery.

Time for Saving Tomorrow

In other words, the new coalition partners will have enough leeway in the coming months to continue the government's current economic policies. The challenges will not come until the following year. "Beginning in 2011, there will be substantial risks that result from the consequences of the new debt regulation, risks that have attracted little notice until now," the Chancellery document continues. The text is referring to a new amendment to Germany's constitution which requires the federal government to almost completely balance its budget by 2016. The Chancellery document lists in detail how much money the new administration in Berlin will have to drum up by the end of the current legislative period, through budget cuts or tax hikes, to reach the 2016 goal -- €7.2 billion in 2011, €12.8 in the next year and €20.6 in 2013, making a total of €40 billion. This number does not even reflect lost revenues resulting from future tax cuts.

But the new coalition partners are not interested in addressing such gloomy prospects, at least not yet. Instead, their current policy seems borrowed from the words of an old German folk song: Paint the town red today; there will plenty of time for saving tomorrow.

Until further notice, Merkel is bent on remaining the feel-good chancellor she was in the days of the grand coalition. When the leaders of the CDU and CSU met last week at the Chancellery to flesh out a joint position for coalition negotiations, they quickly agreed on one point: nothing too harsh.

From Merkel's point of view, the CDU's campaign platform has paid off, because it didn't contain a single demand for sacrifice on the part of citizens. This helped the Christian Democrats achieve above-average results among women and residents of the former East German states. The price they paid was the record 14.6 percent vote for the FDP.

Collateral Damage

Now the economic wing of the CDU wants to get those voters back. "There is a great danger that the erosion process in the FDP's direction will continue," says Josef Schlarmann, head of the CDU's small- and medium-sized businesses association. Last week, the organization approved a document designed to put an end to the party's shift to the left. It calls for the introduction of a flat-rate insurance premium in the healthcare system, the abolition of the so-called "solidarity surcharge" (a tax levied to help pay for the costs of German reunification), and transforming the statutory long-term care insurance system into a private preventive care model. It is a document the FDP could sign without a moment's hesitation.

But Merkel is unlikely to be impressed. From the chancellor's perspective, the FDP's newfound strength is the acceptable collateral damage of her policies. Her main concern is to secure the votes of retirees and the unemployed. Merkel's advisers can offer very precise figures showing that the number of people in Germany receiving social security payments such as welfare or pensions already exceeds the number paying payroll taxes. "There is no point in (a political party) just targeting the gainfully employed," says one CDU member of Merkel's current cabinet.

Merkel also lacks the power to transform the party into a streamlined force for change. North Rhine-Westphalia Governor Jürgen Rüttgers has already made it clear to her that he would choose a direct course of confrontation with Berlin if the new administration hit upon the idea of asking citizens to make sacrifices. He is absolutely determined to prevent the new administration from ruining his prospects in his state's parliamentary elections next May.

Rüttgers' key ally within the CDU/CSU is CSU Chairman Horst Seehofer, who has already announced that there will be no "neoliberal string concert" under his watch. Seehofer is not even letting the CSU's miserable election results in its native Bavaria change his mind. Although the CSU's executive board took the party chairman to task in a meeting last Monday, with members making adverse comments 31 times, according to the official minutes, the only comment that truly posed a threat to Seehofer was incumbent Economics Minister Karl-Theodor zu Guttenberg's remark that a politician should also be allowed to express himself in a thoughtful way once in a while. It was an indirect attack on Seehofer's populism.

Guttenberg, who would like to rise to the position of the CSU's strong man in Berlin, opposes Seehofer's tax promises and his opposition to genetically modified food. Nevertheless, the party chairman is still the one holding the reins. Seehofer immediately quashed efforts by a few Guttenberg supporters to make the economics minister the CDU/CSU's chief negotiator in the upcoming coalition talks.

Business as Usual

And so the Merkel line remains uncontested within her own ranks, for now. There is nothing conservative politicians fear more at the moment than being forced to announce tax cuts and social welfare cuts simultaneously. This would make it all too easy for the SPD or the Greens to castigate such a move as a redistribution of wealth from the poor to the well-off, and it would be grist to the mill of the far-left Left Party.

It is hardly surprising that the chancellor's clean sweep is triggering resentment with one group in particular: the liberals. "Merkel is trying to create the impression that she is simply changing partners, and that otherwise it will be business as usual," says Andreas Pinkwart, leader of the FDP in the state of North Rhine-Westphalia. "But we won't play along with that. That's not why we were voted into office."

The entire party leadership feels the same way. It is unacceptable that Merkel is already drawing a line in the sand, the FDP's deputy leader Cornelia Pieper told the party's executive committee last Thursday. Sabine Leutheusser-Schnarrenberger, the FDP's designated justice minister, agreed, saying that the liberals must ensure that the coalition agreement is also a signal of change.

Westerwelle had to concede that he had apparently underestimated Merkel, with whom he is on first-name terms. The two politicians, he said, had had a good conversation marked by mutual trust on Monday. However, he added, Merkel had said nothing at the time about her intention to outline what would not be possible in the coalition on television that same evening. Then he called for a bit of sympathy for his party's future coalition partner. "The Christian Democrats have had a tough week," he said. "They open the newspaper every day, and what do they see? Me!"

Scoring Points

But the joke couldn't conceal the FDP's gradual realization that, although it might be possible to win elections with a bold program, it isn't necessarily the best way to shape policy. Simultaneously reducing income-, environmental- and value-added taxes, as the FDP is proposing, is unaffordable. And the liberals' plans for reforming the labor market seem ill-timed. Does the FDP truly want to reduce workers' job-protection rights just as companies are warning of a new wave of layoffs?

This explains party leader Westerwelle's defensive posture during a press conference following the executive committee meeting. The FDP's and the Christian Democrats' entire program is negotiable, he said. He had been singing a different tune a few days earlier, during the campaign, when he said that he wanted to abolish the new healthcare fund set up by the CDU-SPD grand coalition government and that he would only sign a coalition agreement if it included lower taxes.

Westerwelle is already preparing his troops for the likelihood that the FDP will only be able to achieve a few of its many demands in the upcoming negotiations with the Christian Democrats. The party is merely the junior partner in the new coalition, and the chancellor can determine the issues on which the liberals will be allowed to score points.

That includes, for example, tax policy. It is already clear that the new coalition will lessen the tax burden on business. The coalition partners plan to get rid of a number of rules from the days of the previous coalition government, that had triggered resentment among small and mid-sized businesses and heirs to family firms. The proposal will cost the state a few hundred million euros.

Tax Cuts

But CDU/CSU and FDP leaders know all too well that such minor measures don't win elections. Hence there will also be tax cuts for employees early next year, to improve the public mood. For instance, it appears that the child tax credit will be increased to €8,000, a measure that will cost €3 billion, about half of which will be paid by the federal government.

Reducing the basic rate of income tax, which was recently lowered to 14 percent, would also be a relatively cheap measure. Cutting it further would cost the federal government €500 million for each additional percentage point.

With relatively little effort, the new government could reduce taxes by €10 billion, and yet make do with less debt than the grand coalition had planned. Together with €10 billion in tax cuts the grand coalition had already approved, a proper feel-good reform could be put into effect by early next year. The liberals could also sell such a reform as a first step toward a major tax overhaul.

Controversial Issues

The FDP will also manage to push through a number of its demands regarding domestic issues. But one of the biggest points of contention is likely to be the online surveillance by security authorities of computers belonging to suspected criminals and terrorists, something of a hot-button issue in Germany. In the past, the FDP, which wants to strengthen individuals' freedom, has taken the matter to the Federal Constitutional Court in Karlsruhe, in the hope of making the practice illegal. The CDU, however, wants to expand the practice, if it can be shown that this kind of surveillance can help to prevent terrorist attacks, for example. Negotiations on the issue, says FDP domestic policy expert Max Stadler, "are hardly likely to be over in five minutes."

The CDU/CSU is particularly interested in seeing Germany's domestic intelligence agency, the Office for the Protection of the Constitution, used to fight organized crime, a pet project of current Interior Minister Wolfgang Schäuble. The FDP opposes the idea. However, the Christian Democrats know that the issue is not that important to German voters. In other areas, potential for compromise could already be seen ahead of the negotiations. For instance, on election night Schäuble, with the FDP in mind, offered "improvements" to a controversial law which aims to fight child pornography on the Internet using a black-list of sites drawn up by authorities. The law, which the FDP opposed, is hugely unpopular among Germany's online community, as it is widely seen as an attempt by the state to censor the Internet.

There are many indications that a sort of mutual neutralization will take place in the end. The FDP's demands for a change to current laws will largely fizzle out. In return, the CDU/CSU will refrain from making new proposals which are unacceptable to the FDP, at least for now.

Irreconcilable Positions

There will, however, be disagreement on the subject of compulsory military service, which the FDP wants to see "discontinued" and the Christian Democrats want to see "preserved." A compromise seems likely, with one possibility being to shorten military service. Currently, most German men over the age of 18 are obliged to complete a nine-month period of military service. However conscientious objectors can choose to do social work for the same period of time instead.

The coalition partners' positions are equally irreconcilable when it comes to healthcare policy. The FDP is determined to cast the grand coalition's most recent healthcare reforms onto the rubbish heap of history. "The health fund is badly designed," concludes Daniel Bahr, the FDP's expert on the subject, referring to a controversial new fund set up to collect individual's health insurance contributions and pass them on to statutory insurance companies. Merkel, on the other hand, wants to hold onto the current system -- in principle, at least.

It is unclear what the CSU's position will be as it enters the coalition negotiations. During the campaign, the CSU said it wanted to abolish the fund within the near future. But now Bavarian Health Minister Markus Söder is expressing himself more cautiously, talking about "corrections" rather than getting rid of the fund entirely.

It is unlikely that the Christian Democrats and the FDP will be able to agree on the details of a possible new healthcare reform during the coalition negotiations. The talks are complicated by the fact that the Christian Democrats' and FDP's health care experts -- who are few in number in any case -- are not on the same wavelength. For example, FDP health policy expert Daniel Bahr, who supports privatization, disagrees with the CDU's Karl-Josef Laumann, who is health minister in the state of North Rhine-Westphalia and who belongs to his party's left wing.

Keeping Minimum Wages

While the outcome of the coalition partners' poker game over healthcare is still up in the air, the Christian Democrats' pro-union stance -- on the contentious subject of minimum wages, for example -- will likely prevail when it comes to labor market policy. Merkel is determined not to roll back legislation introduced by the grand coalition stipulating minimum wages for certain industry sectors, no matter how vehemently the FDP opposes a minimum wage.

It is becoming clear that the CDU/CSU and the FDP will end up signing a coalition agreement similar to one that a Christian Democrat-Social Democrat alliance could have concluded, should the election have turned out different. But there are a few significant differences. Under the new coalition agreement, the operating lives of nuclear power plants will likely be extended (overturning a law to phase out nuclear energy by 2020 introduced by former Chancellor Gerhard Schröder's SPD-Green Party government), the security authorities will have to show greater respect for the private spheres of citizens and taxes will be reduced. The latter measure will come at the cost of future generations, who will find themselves paying off the government's mountain of debts. But this was no different under the grand coalition's more recent policies.

Familiar Faces

Continuity with the previous government can also be seen in the fact that familiar faces will largely be occupying the top jobs in the new administration. In many cases, the new government will have the same ministers as under the grand coalition. Although the Christian Democrats' and FDP's chief negotiators ritualistically insist that the list of cabinet members will not be submitted until detailed negotiations are complete, in reality it has already been decided who will occupy many of the posts.

For example, Merkel has decided to keep on Thomas de Maizière as head of the Chancellery. As she launches a new coalition, the last thing Merkel wants is to have to do without the administrative experience of the most important man at the Chancellery. This makes it highly likely that Wolfgang Schäuble will remain in his current position as interior minister, because de Maizière would be the only serious alternative for the post.

It is also seen as a given that Volker Kauder will remain the CDU's floor leader in the German parliament, the Bundestag. Merkel appreciates the fact that Kauder managed to keep the occasionally rebellious parliamentary group toeing the administration's line for four years.

Although the CDU's parliamentary secretary, Norbert Röttgen, has had his eye on Kauder's job, he occasionally allows himself to express an independent thought. Merkel prefers to kick him upstairs into the government, because it makes him easier to control. Possible posts for Röttgen include environment minister or minister of family affairs. The incumbent in the latter post, Ursula von der Leyen, is to be named Merkel's new health minister. CDU General Secretary Ronald Pofalla will be given the Labor Ministry, and Enak Ferlemann, a member of the Bundestag from Lower Saxony, is being discussed as Pofalla's replacement.

Coveted Positions

Despite his many slip-ups, it is highly likely that Defense Minister Franz Josef Jung will remain in office. And although the CSU's rising star Karl-Theodor zu Guttenberg, the current economics minister, would undoubtedly feel comfortable heading the Defense Ministry, CSU leader Horst Seehofer wants to avoid associations between his party and the unpopular Afghanistan mission.

From Seehofer's perspective, there are good reasons why Guttenberg should become finance minister. On the one hand, this would give the CSU a stronger say at precisely the ministry where its promised tax cuts could be put into practice. On the other hand, Guttenberg would be responsible for the federal government's record debt, which would automatically reduce his -- currently high -- popularity rankings. That would be a welcome prospect for Seehofer, who has long seen Guttenberg as a rival for power within the CSU.

Guttenberg knows this and has already told close associates that he would prefer to keep his current post, say CSU members of the Bundestag. His plan, they say, is to upgrade the Economics Ministry by giving it more authority. Officially, however, Guttenberg insists that he has not yet decided on a post.

The second portfolio the CSU will claim is either the Transport or Education Ministry. In the end, Seehofer would probably be willing to give up the Agriculture Ministry, which is currently led by the CSU's Ilse Aigner, for either of these cabinet seats.

History Repeating?

As far as the FDP is concerned, it is already clear that party leader Westerwelle will become foreign minister, a position traditionally given to the junior partner in a German governing coalition. It currently looks like Sabine Leutheusser-Schnarrenberger will become justice minister, a post she held once before in the 1990s. Bundestag Vice President Hermann Otto Solms could imagine taking the helm at the Finance Ministry. The only problem is that fellow FDP politician Rainer Brüderle has long had his sights set on the post of economics minister, and there is only room for one of them.

And so it is becoming clear that the photographers in Berlin will see many familiar faces when they assemble Merkel's second cabinet for the obligatory group photo in front of the Chancellery in a few weeks' time. A number of CDU/CSU and FDP members of the new government even served in the administration of former Chancellor Helmut Kohl, another Christian Democrat-FDP coalition government.

The political interests are also similarly distributed today. In Kohl's black-yellow coalition of the 1990s, the FDP primarily represented the interests of taxpayers, while the CDU/CSU felt responsible for the needs of pensioners and maintaining social balance.

The outcome was predictable. When there were strains on government budgets, such as in the wake of German reunification, taxpayers and social welfare recipients were spared. Instead, the finance ministers of the day turned to borrowing or raised social security contributions. After six years, government debt and social security contributions had risen to such high levels that deep-seated changes became unavoidable -- and Kohl was voted out of office.

Merkel is convinced that this will not happen to her. "History," she is fond of saying, "does not repeat itself."


Translated from the German by Christopher Sultan
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