Merkel: Will to Form Coalition Still Strong

Merkel said on Saturday that she was aware that turmoil surrounding the talks to form a grand coalition between her Christian Democratic Union (CDU) and the Social Democratic Party (SPD) was leaving a negative public image, but assured the German people that the will was still there on both sides.

"What you're seeing and hearing at the moment is undoubtedly putting your basic democratic feelings to a hard test," she said at an event for the Konrad Adenauer Foundation, a think tank linked to her party.

Merkel said that despite reports of leadership disputes and internal strife, both sides are on track to form a coalition by the self-imposed deadline of Nov. 12.

"All the participants have an interest in getting agreement on the grand coalition and not just on a lowest common denominator coalition," she said.

Speculation had been growing in Germany about the possibility of abandoning plans for a grand coalition following several unexpected leadership changes. SPD leader Franz Müntefering announced he would step down as party leader this week after his candidate for the position of SPD secretary general was rejected by the party executive.

Almost immediately after, Edmund Stoiber, the leader of the CDU's sister party in Bavaria, announced that he would not to come to Berlin to take up the post of economy minister in Merkel's cabinet.

"The past few days were certainly not the best days," CDU general secretary Volker Kauder told a party meeting in Saxony. "It is not good if people get the impression that personnel decisions are more important than important issues and chances for Germany."

Finances are most pressing issue

The main issue dominating the coalition talks has been the dire state of Germany's public finances.

The CDU's financial expert, Roland Koch, said the new government would have to find 43 billion euros ($52 billion) in savings or new revenues if the budget was to be brought back in line with EU deficit regulations by 2007.

There has been growing acceptance by politicians that tax increases may be necessary to fill the gap -- an idea that is getting mixed reviews.

Ludwig-Georg Braun, who heads the Association of German Chambers of Industry and Trade, said the coalition partners should not embark on any fiscal policies which might nip Germany's nascent optimism in the bud.

Braun is worried about a planned 2 percent increase of value-added tax (VAT) from 16 to 18 percent.

"I think this would be the wrong move, because it would negatively impact domestic consumer spending," Braun said. "You cannot simply conduct coalition talks with the sole aim of budget consolidation in mind."

The president of the German Employers’ Association, Dieter Hundt, fears that the new government may try to raise revenue instead of cutting expenditure. Instead, Hundt wants to see state subsidies cut across the board, and money from a VAT hike put to a very specific purpose.

"We’re still in a very difficult economic situation which has been marked by very meagre growth rates for many years now," he said. "An increase in VAT can only be accepted if it follows cost-reduction measures in the social security system and if the money gained is exclusively used to lower non-wage labor costs. Everything else would be poison for the German economy."