German political parties reach deal to form goverment

BERLIN -- Three German party leaders announced a coalition agreement Monday night, pledging to form a government led by Chancellor Angela Merkel that would reform health care and cut up to $36 billion in taxes.

The parties approved the coalition deal nearly a month after general elections, after negotiating government policy and ministry portfolios.

"We are addressing the citizens of Germany with this agreement," Merkel said at the signing ceremony. "We have the courage and the intention to bring Germany forward with our coalition."

The new parliament on Wednesday will formally elect Merkel and swear in the new Cabinet -- including members from the three coalition parties, Merkel's Christian Democrats, their Bavarian sister party the Christian Social Union and the pro-business Free Democrats.

Going into the Sept. 27 elections, both the Christian Democrats and Free Democrats had advocated tax cuts in an effort to spur economic growth. However, they differed on how far to go at a time when efforts to combat the economic crisis have pushed up debt.

It is unclear how the new government will craft its planned tax cuts, which could total some euro24 billion over four years.

Free Democrat leader Guido Westerwelle also said last week he wants all nuclear weapons to be pulled out of Germany -- an issue that may prove vexing to the country's NATO allies, including the United States. Merkel has made no pledge on that issue so far.

A cornerstone of the coalition agreement is reform to the nation's health care system. It is expected to include a freeze on employers' contributions, meaning individuals will carry the burden of any cost increases.

Child benefits and tax write-offs for families with children are to be increased in 2010, making good on an election promise by the Free Democrats to ease the burden on families.

"By lowering taxes, the new government is living up to one of its central promises made during the election campaign," said Eckart Tuchtfeld, an analyst with Commerzbank AG. "However, by doing so, budget consolidation is likely to become more difficult as expenses will not be cut to the same degree, at least at the present juncture."

He said the planned tax cuts would likely be financed through new borrowing.

Germany's export-fueled economy returned to modest growth in the second quarter after a deep recession, and business confidence and industrial orders have been improving.