Germany Unlikely To See Economic Shift After Election

BERLIN (AP) -- German Chancellor Angela Merkel won a mandate to govern Europe's biggest economy with a new, pro-business coalition partner -- but burdensome government debt from the financial crisis may put limits on proposals to cut taxes.

Voters ended the conservative Merkel's unwieldy right-left "grand coalition" in Sunday's election and gave her a comfortable center-right majority -- thanks to a strong performance by the business-oriented Free Democrats.

Merkel now has a partner that fought for hefty income tax cuts in a bid to spur economic growth and would like to loosen laws protecting workers from dismissal. The Free Democrats also share her opposition to a national minimum wage and her desire to extend the life of some of Germany's nuclear power plants.

The change was well received by German business.

"We welcome the fact that voters have decided in favor of pro-business and growth policy," said August-Wilhelm Scheer, the head of BITKOM, Germany's high-tech association. Franz Fehrenbach, the chief executive of auto parts supplier Robert Bosch GmbH, said he expected "clear and reliable conditions for growth and employment in Germany."

Still, Merkel has been a cautious, consensus-seeking leader and said she still wants to be "the chancellor of all Germans." And public skepticism in many quarters about the merits of unbridled capitalism also helps rule out a sharp lurch to the right.

The "grand coalition" was credited with solid handling of the crisis, intervening quickly to rescue banks and then putting in place economic stimulus packages.

That, however, has meant an increase in public debt; official projections show that Germany's budget deficit will remain above the European Union-mandated ceiling of 3 percent of gross domestic production until 2013.

"The new government has ... to manage a tricky balancing act between fiscal consolidation and implementing new strategies for supporting growth," wrote Alexander Koch and Andreas Rees, economists at UniCredit in Munich. They said that, "apart from minor steps, the overall tax burden will not be reduced."

"In order to bring the public deficit down, drastic cuts in government spending are necessary," they added. Merkel, however, insisted Monday that "so long as we are in this trough ... the question of savings measures is not right."

She said possible tax cuts could be implemented starting in 2011 or 2012, but gave no details of what they might look like.

In the campaign, Merkel advocated only modest middle-income tax relief, a proposal well short of the overhaul the Free Democrats want -- with big cuts to both top and bottom income tax rates.

The Free Democrats should be able to "push through reforms in selected areas of economic policy (and) this will be appreciated by the markets," said Joerg Kraemer, the chief economist at Commerzbank in Frankfurt.

But he added that Germans' skepticism toward capitalism has grown over recent years, and "this makes a general shift in economic policy quite unlikely."

The center-left Social Democrats, the junior partner in the outgoing coalition, were hurt in part by the strength of the opposition Left Party, which takes a hardline stance against economic reform and welfare-state cuts.

Kraemer forecast that the new coalition would "slightly" cut income tax and make minor changes to inheritance tax to make it easier to pass on family-owned companies, but said that "a general cut in corporate tax is unlikely."

The outgoing coalition gave its blessing to de-facto minimum wages in individual sectors such as garbage collection and mail delivery, but its successor won't extend those arrangements any further, Kraemer said.

Merkel has made clear she doesn't want to loosen protection from dismissal.

"The biggest problems and the deepest pitfalls are yet to materialize" in handling the fallout of the crisis, the UniCredit economists said, with unemployment set to rise although the export-dependent economy returned to slight growth in the second quarter. GDP is still expected to shrink by 5 percent or more this year.

Frankfurt's main DAX index of blue-chip stocks perked up slightly on Monday. By lunchtime, it had gained nearly 0.8 percent.

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