Merkel's Tax Plans Appal Germans

Germany's chancellor designate Angela Merkel yesterday promised to restore Germany's place among Europe's leading countries, amid growing public outrage over her plans to increase taxes. Merkel, speaking a day after her Christian Democrats reached a historic coalition deal with the centre-left Social Democrats, said she intended to reverse Germany's 'downward trend'.

'Our aim is to stop this and reverse it,' she said. 'We want Germany within 10 years to be among the top three countries in Europe.' Merkel - who will replace Gerhard Schroeder as chancellor on 22 November - also promised to bring Germany back into line with the EU's strict growth and stability pact by 2007. But the austerity measures unveiled by Merkel yesterday, after weeks of tough coalition negotiations, met with almost universal disapproval.

Business leaders, pensioners' groups and unions queued up to denounce plans to increase VAT from 16 to 19 per cent - in an effort to reduce the country's €35 billion budget deficit. Merkel also announced a raft of other unpopular measures yesterday - drastic cuts to tax subsidies for commuters and homeowners, a rise in the retirement age from 65 to 67 and an increase in pension contributions. Under pressure from the Social Democrats, the new coalition is also imposing a new tax on the rich - the top rate rising from 42 to 45 per cent.

'The negotiations over a grand coalition over the past weeks have ended as was feared: with a programme of disastrous contradictions. It will not solve our country's problems: neither the mass unemployment nor the over-regulation of economy and business,' Die Welt newspaper said yesterday. Bild, Germany's best-selling tabloid, was damning. 'The two big parties, after decades of inactivity, have led the country to the verge of bankruptcy. They are now helping themselves from those who can't defend themselves - our citizens,' it raged. Ordinary Germans also expressed dismay. 'I don't think this coalition is going to create jobs. That's what Germany needs,' Karen Sievert, 44, said yesterday.

'Putting up VAT is bad for the economy. It will kill consumption,' Toralf Thieme, 42, a businessman, added. But Merkel defended her strategy - set out in a 143-page coalition contract entitled Together for Germany. 'It would be a lot simpler if we could dodge reality. But we can't,' she said, flanked by the Social Democrats' outgoing party chairman Franz Muentefering. The challenge was to maintain Germany's costly 'social market' model at a time of globalisation, she said. All three parties in the 'grand coalition' - Merkel's Christian Democrats, her Bavarian sister party the Christian Social Union and the SPD - will vote on the deal this week. Once approved, Merkel will then become Germany's first ever woman chancellor.

There were few words of encouragement for Tony Blair yesterday, as he struggles to agree a deal next month on the EU budget. Blair had hoped that Merkel would be an ally in his attempts to reform the EU. But Merkel made clear she would 'defend Germany's interests' and signalled she wanted warmer relations with the EU's smaller states and a 'close' alliance with France.