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Merkel seals coalition deal, eyes tax relief

GERMAN Chancellor Angela Merkel's conservatives sealed a coalition deal with the Free Democrats (FDP) after marathon talks that stretched into early today, leaders from the parties said.

The agreement shortly after 2 am (0000 GMT) paves the way for a new centre-right government to take office next week, roughly a month after Merkel's conservatives and the FDP won a parliamentary majority in a federal election.

"The coalition agreement has been reached," said Ronald Pofalla, general secretary of Merkel's Christian Democrats (CDU) in comments to journalists after more than 12 hours of talks.

To spur growth the government will cut income taxes by 24 billion euros (US$24 billion) from 2011-2013, said Horst Seehofer, head of the Christian Social Union, the CDU's Bavarian sister party. That is more than the 20 billion euros Merkel wanted but less than the FDP sought.

"That number is right -- even if you didn't hear it from me first," Seehofer said with a laugh when asked if income taxes would be cut by 24 billion euros.

"I'm very pleased with this result," he added, referring to the coalition agreement after the protracted talks. "We've come up with a reasonable result for the next four years and the coalition has set up a good platform for the upturn in Germany."

Merkel, 55, and FDP leader Guido Westerwelle left through a side entrance without talking to reporters. They will join Seehofer at a news conference with details at 0830 GMT. The final round had been bogged down by financial issues, Seehofer said.

"The financial issues at the end are always the most difficult and most exciting and you have to do that great care," Seehofer said, explaining why the talks stretched until the middle of the night. "But it all worked out in the end."

Party sources said there would also be further corporate tax cuts.

The talks dragged on as the incoming government struggled to reconcile their promise of billions of euros in tax cuts with a separate pledge to get Germany's deficit, swelled by massive stimulus packages, back under control.

They had already forged compromises on a range of other issues, from healthcare to nuclear energy and foreign policy, where the differences between them were minimal.


Late yesterday, the parties divided up cabinet posts, tapping Wolfgang Schaeuble, a member of Merkel's Christian Democrats (CDU), for the finance ministry and FDP leader Guido Westerwelle as foreign minister.

Schaeuble, 67, a former protegee of Helmut Kohl who has earned a reputation as a hardliner on domestic security issues as Merkel's interior minister for the past four years, was a surprise choice as finance minister.

Before the election, he indirectly criticised Merkel's pledge to pursue billions of euros in tax cuts, saying there was little room for them given Germany's strained finances.

Now he will be charged with implementing those cuts against the backdrop of a deficit that is poised to rise to double European Union limits next year.

In a wheelchair since he was shot and nearly killed by a mentally ill man in 1990, Schaeuble is likely to speak his mind and stand up to Merkel even though they have patched up their differences.

"He's going to be a tough nut to crack -- especially for Merkel," said one source involved in the month-long coalition talks. "There's a lot of conflict potential."

Other cabinet members include deputy FDP leader Rainer Bruederle, 64, who is slated to become economy minister. He will take the place of Karl-Theodor zu Guttenberg, the 37-year old rising star from Bavaria, who gets the defence portfolio and will have to explain Germany's military presence in Afghanistan to a sceptical public.

Guttenberg will no longer be the youngest minister in Merkel's cabinet. That honour goes to Philipp Roesler, 36, who was born in Vietnam and becomes Germany's first Asian-born cabinet member as health minister.


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