Merkel`s Coalition At Odds Over New Stimulus Plan

Merkel`s government was one of the first in Europe to agree measures to protect the economy.

The parties in German Chancellor Angela Merkel's government clashed on Sunday over new measures to shield Europe's largest economy from what threatens to be its deepest recession since World War Two.

Before a meeting of German coalition leaders on Monday to agree the outlines of a second stimulus package, deep divisions were evident over whether to pursue near-term tax cuts in an effort to boost growth.

Merkel's government was one of the first in Europe to agree measures to protect the economy, but an initial package agreed in November includes only about 12 billion euros ($16.66 billion) in new spending and has been criticised as too modest.

Bowing to pressure from conservative allies at home and partners in Europe, Merkel has now acknowledged the need for a new package that is expected to focus on investments in infrastructure and schools and total about 25 billion euros.

But she faces the daunting challenge of uniting her uneasy left-right "grand coalition" behind a common approach.

Her conservative allies, the Christian Social Union (CSU), have vowed to reject any package that does not include tax cuts.

Merkel's other coalition partner, the centre-left Social Democrats (SPD), are firmly against offering tax relief and are instead proposing a tax hike on top earners.

"Tax cuts won't work right now. There are better solutions," Frank-Walter Steinmeier, the SPD foreign minister who will challenge Merkel in a September election, told the Sueddeutsche Zeitung newspaper in an article to be published on Monday.

Steinmeier said the SPD had agreed to push for a 40 billion euro package that foresees 10 billion euros in federal spending on infrastructure, cuts in health insurance fees, higher child benefits and incentives to buy climate-friendly cars.

To help pay for the package, the SPD wants to raise the top income tax rate to 47.5 from 45 percent and apply it to those making 125,000 euros per year, down from 250,000 currently.

MERKEL BACKTRACKS

That portends a major clash with Merkel, leader of Germany's Christian Democrats (CDU), who initially rejected near-term tax cuts but signalled last week that she was ready to go along with the CSU and include them in a new package.

Merkel was meeting CSU leader Horst Seehofer on Sunday evening in the Chancellery to agree a common conservative position on the stimulus package before they reconvene on Monday to hammer out an agreement with the SPD.

Partisan sniping within Berlin's coalition is expected to grow in a politically charged year loaded with 5 regional elections and the German federal vote.

Despite her sometimes shaky response to the global financial crisis, Merkel remains popular and polls suggest she is on track to win re-election. But she must ensure that Germany's economic woes do not drag her down and hit support for her conservatives in the coming months.

The economy officially entered recession in the third quarter of last year and leading economic institutes have forecast that it will contract by 2 percent or more this year -- easily the worst annual performance in the post-war era.