German Social Democrat and conservative leaders prepared for the second round of formal coalition talks Monday, with both sides vowing to tighten fiscal policy following a pessimistic economic forecast last week.
The Social Democrats are proposing a fiscal plan that calls for doing away with tax breaks in an effort to generate an extra Ђ40 billion, or about US$30 billion. For their part, chancellor-designate Angela Merkel's Christian Democrats, along with their sister party the Bavarian-based Christian Social Union, are calling for budget cuts worth roughly the same amount.
Years of sluggish growth have driven unemployment figures into the double digits and pushed the nation's budget deficit over the European Union-mandated limit of 3 percent of gross domestic product.
Consequently, Germany's new government has limited room to maneuver if it expects to meet the EU requirements by 2007. The two sides started formal coalition talks a week ago, after inconclusive Sept. 18 elections left both of Germany's main parties without a clear majority for their desired coalitions. Consequently they were forced to cooperate in a so-called "grand coalition."
Several working groups tasked with hammering out the details of an agreement on which to base government policy were set up at the last discussion and their progress was to be reviewed Monday. Negotiations are expected to last until mid-November.
Contentious points include Merkel's campaign pledge to finance a cut in nonwage labor costs by increasing value-added tax. The Social Democrats continue to oppose that plan.
Weak consumer spending and high oil prices have been a drag on Germany's export-driven recovery. On Friday, the outgoing government lowered its growth forecasts for this year and next to 0.8 and 1.2 percent, respectively, echoing predictions a day earlier by the nation's leading economic think tanks, AP reports.