Merkel Seals Deal for Grand Coalition

Germany moved into a new political era last night as the country's two biggest parties reached a deal to form a left-right "grand coalition".

Angela Merkel's conservative CDU and the social democrat SPD emerged from negotiations with a 130-page agreement that would form the basis of Germany's bipartisan government.

The deal appears to end almost two months of political crisis in Germany, Europe's biggest economy, and ensures Ms Merkel will become the country's first woman chancellor.

"The coalition agreement is completed," a jubilant Ms Merkel said last night, flanked by Franz Müntefering, the SPD's outgoing chairman, and Edmund Stoiber, the leader of Ms Merkel's Bavarian CSU sister party.

She added: "I'm convinced that the coalition creates a genuine opportunity for Germany. We want to restore people's trust in politicians and show we can do something for our country."

Gerhard Schröder, whom Ms Merkel replaces as chancellor, had offered her his full support, Mr Müntefering said.

"We have learned to make compromises," he added.

But the coalition's plans, especially over tax, were criticised. Trade unions, pensioners' groups and business leaders condemned the coalition's apparent decision to increase VAT from 16% to 19% - one of a series of austerity measures designed to plug the ¿35bn (£23.5bn) hole in public finances.

"We told people during the election campaign that we wouldn't put up VAT. We are now doing the opposite," said Bernd Becker, a political scientist and SPD activist. "It's a betrayal and it's wrong. As an SPD party member I'm really disappointed," he said.

"This is poison for the economy," the president of the country's employers' association, Dieter Hundt, told Die Welt newspaper. The new government had made a "100% false start", he added.

The CDU and SPD both failed to win September's general election outright - forcing them to begin negotiations three weeks ago on the first grand coalition since the 1960s. Both parties have been forced to dump many manifesto commitments. Leaks from the talks suggest that the SPD has abandoned its opposition to a VAT increase - supporting a rise from January 1 2007. In return, it has demanded a tax on the wealth, something the CDU has resisted. Other disagreements include reforms to the labour market and atomic energy.

Negotiations have been complicated by an internal SPD power struggle which saw Mr Müntefering, resign and replaced by Matthias Platzeck, 51, an east German whose biography is similar to Ms Merkel's.

With more details likely to be revealed today, the SPD and CDU will hold party conferences next week.

Grassroots party members are expected to back the binding coalition "contract" despite grumbling by many within the SPD. Ms Merkel will then replace Mr Schröder as chancellor on November 22.

Yesterday, opinions were divided on whether the coalition would be able to steer Germany out of its economic mess or agree crucial reforms on tax, pensions and social security.

"The criticism so far has not been justified," said Dr Gustav Horn, the director of Berlin's Institute for Macro-Economic Policy.

"What we have in Germany is a deep crisis of confidence in the political process. Politicians have done everything they can to justify this mistrust. But I see better times ahead."

Earlier this week Germany's best-selling tabloid, Bild, depicted Ms Merkel on its front page as Pinocchio with a long nose - under the headline "tax-liar". The nose disappeared later in the week. But Mrs Merkel's problems appear to have only just started.