Angela Merkel loosens purse strings, embraces Europe to strike coalition deal

To secure a fourth term aschancellor, Angela Merkel is handing her Social Democrat (SPD)coalition partners control of the Finance Ministry, giving themlicence to spend a record budget surplus, and embracing theirdemands for European reform.

Merkel's conservatives and Germany's main centre-left party reached an agreement to form a new coalition government after a final session of negotiations that dragged on for 24 hours.

Giving up the powerful ministry to the centre-left SPD is aparticularly strong signal to Germany's eurozone partners, manyof whom endured austerity championed by Wolfgang Schaeuble,finance minister in the previous government.

"Symbolically, it is quite big," said Carsten Nickel,managing director at consultancy Teneo Intelligence.

"The language will be different and I think the language canmake a difference, specifically in France but substance, I
think, is still a different conversation."

SPDLeader Martin Schulz has styled the coalition agreementon Europe as "an end of forced austerity" a pitch designed toappeal to his party's 464,000 members before they vote on thedeal and decide on their third grand coalitionwith Merkelsince 2005.

While the deal still stresses Germany's commitment to theEU's strict budget rules, it also calls for the eurozone's ESM bailout fund to be turned into a full-blown European MonetaryFund, and for funding to shield the eurozone from crises. Schulz said the prospective fund would become a significantinstrument for EU financing.

The agreement was welcomed by senior EU officials, who willalso greet the prospect of Germany using the fruits of its robust economic growth to increase domestic government spendinga move other EU capitals have long called for.

Key ministries may go to SPD

by CBC Europe CorrespondentMargaret Evans

In addition to finance, media reports suggest that theSPDwill hold several key ministries includingforeign, labour, justice and the environment.

Schulz himself is said to be in line for the role of foreign minister, with Hamburg Mayor OlafScholztipped as the new finance minister.

But whether that will be enough to convince rank and file members of theSPDthat another coalition withMerkelis a good idea is not a given.

They'll have to approve the agreement in a postal vote to be held in the coming days.

"There is a strong view [among Social Democrats] that the grand coalition is a sure path for theSPDinto oblivion," says JosefJanningof the European Council on Foreign Relations in Berlin.

"And that leads people to say we need an entirely new start, an entirely new way to organize politics."

Members of theSPD'syouth wing in particular are opposed to a coalition campaigning against it on social media using the slogan #NoGroKo: No Grand Coalition.

"They will mobilize against this," saysJanning. "And they will also likely use the fact that Martin Schulz seems decided to take a cabinet post as foreign minister and so they will denounce this coalition-building as being driven by interest in positions and red carpets and limousines."

Spending splurge

According to a draft of the coalition agreement seen byReuters on Wednesday, the next government sees additional fiscalspace of 46 billion euros ($71billion Cdn) over the next four yearsto increase investments and reduce taxes as Germany's strongeconomic upswing pushes up revenues and the budget surplus.

Still, a splurge as planned in the coalition draft wouldhave been harder to imagine with a Finance Ministry under Schaeuble, renowned for his laser-like focus on budgetaryrigour.

"Do not underestimate the impact of the SPD getting theinfluential finance ministry," said Commerzbank chief economistJoerg Kraemer.

"This marks a huge change from the policy of WolfgangSchaeuble regarding European integration, transfer of risks towards the peripheral countries."

Schulz said the key point was that the government wasprepared to put more into the EU budget.

The next finance minister is likely to be Hamburg Mayor OlafScholz, a down-to-earth figure and keen advocate of Europeanintegration who has been critical of Merkel's eurozone policyin the past.

'Opinions in the Bundestag, if anything, have become more skeptical on Europe.'- Guntram Wolff, director of the Bruegel think-tank

Even though the coalition deal takes a markedly positivetone on Europe, there may be more scepticism in the lower houseof parliament, the Bundestag, which ultimately controls fiscaland eurozone policy.

Guntram Wolff, director of the Bruegel think-tank, said thecoalition deal was "not a game-changer."

"Opinions in the Bundestag, if anything, have become moreskeptical on Europe and the majority [the coalitionparties]have now is much smaller," he added.

Fiscal angst

The far-right Alternative for Germany (AfD), which surgedinto parliament in the Sept. 24 election with almost 13 per centof the vote, opposes eurozone rescues and spending by the ESM.

Some conservatives in Merkel's bloc also fear that rushingahead with European integration would cost German taxpayersdear. Former European Central Bank chief economist Otmar Issingcalled the coalition blueprint "a farewell to the idea of an EUaimed at stability."

That fiscal angst inMerkel'sbloc risks feeding tensionsbetween the coalition partners, who only renewed the alliance they embarked on in 2013 after she failed to form a governmentwith two smaller parties after September's national election.