Merkel Unveils Tax-raising Manifesto

Germany's conservative opposition leader, Angela Merkel, yesterday announced plans to increase VAT from 16% to 18% if she wins the general election, expected in September.

Speaking in Berlin at the launch of "the most honest manifesto for a long time", Ms Merkel said the money raised would be used to cut unemployment benefit contributions paid by workers and employers. This would bring down unemployment, she predicted.

The leader of the Christian Democrat party (CDU) also pledged to improve relations with the US, oppose Turkey's membership of the EU and bring back nuclear power - which the ruling Social Democrat-Green government is now phasing out.

"We have done this because we consider Germany has never been in such a bad state as it is today," she said.

The proposal to raise VAT came under fire from the Social Democrat chancellor, Gerhard Schröder.

"Under Ms Merkel everything will become more expensive but nothing better," he said. The biggest losers from the change would be old people and small children, he claimed, dismissing the plans as "not at all workable".

The VAT proposal also provoked disquiet in the FDP, Germany's small liberal party, whose support Ms Merkel will need if she is to put together a stable ruling coalition. "From what is known of the programme now, we will have work to do in the coalition to get the Christian Democratic Union back on to the path of market economic sense," the FDP's leader, Guido Westerwelle, told the Berliner Zeitung.

Although Ms Merkel is still way ahead in the opinion polls, the outcome of Germany's next election is beginning to look increasingly open. A new leftwing alliance launched last month could win as much as 11% of the vote, polls suggest.

This raises the intriguing possibility that Ms Merkel could still win the election but might have to govern in a grand coalition with Mr Schröder's Social Democrats - but probably without Mr Schröder.

The Social Democrats have refused to enter an alliance with the new left faction, and are unlikely to win enough votes on their own to form another coalition with the Greens.

There are still questions, meanwhile, about when an election originally scheduled for 2006 will happen. Germany's president, Horst Köhler, is likely to announce next week whether he agrees to early elections, after Mr Schröder deliberately lost a vote of confidence in the Bundestag, Germany's lower house. Yesterday Mr Köhler asked the chancellor to send him more information.

Ms Merkel yesterday said her priority was to increase growth and bring down unemployment in Europe's largest economy, which currently stands at nearly 5 million. The manifesto also proposes loosening the rules for companies to hire and fire staff. Under Germany's existing system it is virtually impossible to sack anybody.

Ms Merkel yesterday said that Germany was facing painful choices between trying to ignore the challenges of globalisation and tackling them head-on. "I prefer the second route," she said.

Mr Schröder launched his own manifesto last week. With it, his party lurched sharply to the left, proposing among other things a new tax on the rich. The manifesto said almost nothing about the unpopular welfare reforms he launched earlier this year.