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Merkel aims for quick coalition deal with FDP

CHANCELLOR Angela Merkel's conservatives vowed today to seal a coalition deal, including tax cuts, with the pro-business Free Democrats (FDP) within a month after winning Germany's election.

Merkel's conservatives won a parliamentary majority yesterday with the FDP, her partner of choice, enabling her to end her awkward four-year-old partnership with the Social Democrats.

Now the two centre-right parties must try to forge compromises on a range of issues including tax, labour market policy and domestic security in Europe's biggest economy.

"Coalition talks should start as soon as possible...and it is our goal to have a coalition deal in a month at the latest," said Ronald Pofalla, General Secretary of Merkel's Christian Democrats (CDU).

The next government faces major economic challenges. It will have to consolidate a surging budget deficit, cope with rising unemployment and ward off a credit crunch.

Economists welcomed the result and Germany's bluechip DAX stock market index rose 0.7 percent in early trade on hopes the new coalition would adopt a more pro-market stance. By 0747 GMT it had slipped, in line with other European indices, and was down 0.3 percent on the day.

But shares in nuclear power plant operators E.ON and RWE were up by around 2.9 and 2.4 percent respectively as investors pinned hopes on a centre-right government agreeing to reverse a law to close atomic plants by 2020.

"I'm pretty sure Germany is better off because we now have a policy that will be orientated towards the market," Deutsche Bank's chief economist Norbert Walter told Reuters Television.

Bund futures opened higher before giving up some of their gains.


The coalition talks between the parties could be tough, largely because the FDP will be emboldened to make demands after a strong showing in the vote.

"Considering the strength of the junior partner, (the ideas) of that party will penetrate negotiations. That includes the simplification of the income tax system as well as tax relief," said Heino Ruland of Ruland Research in a note.

Pofalla said his party was committed to implementing its election promise of tax cuts.

"We want tax cuts in two steps in the next legislative period which will result in relief of 15 billion euros ($22.03 billion)," he said.

However, the FDP will push for a more ambitious programme. While Merkel has steadfastly refused to put a timeframe on her party's plans, given the dire state of public finances, the FDP campaigned for quick cuts worth 35 billion euros.

The FDP is widely expected to push for laws to make it easier for firms to hire and fire. The coalition is also likely to look for opportunities to shed state holdings in firms like rail operator Deutsche Bahn.

Preliminary official results from Monday morning put Merkel's conservative bloc, the CDU and Bavarian Christian Social Union (CSU), on 33.8 percent, their second-worst postwar result, down from 35.2 percent in 2005.

But the FDP offset the losses, surging to 14.6 percent, its best ever score, and putting the centre-right ahead.

The SPD was the biggest loser and will join the Greens and Left party in opposition after plummeting more than 11 points to 23.0 percent, its worst result since World War Two.


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