German parties seal 'grand coalition'

Incoming Chancellor Angela Merkel (L), leader of the conservative Christian Democratic Union (CDU) party, and Franz Muentefering, outgoing leader of the Social Democratic SPD party, give a joint press conference on Friday in Berlin after finishing their coalition talks.. PHOTO: AFP

"The coalition agreement is completed," Merkel told a news conference. "I'm convinced that the coalition creates a genuine opportunity for Germany."

The parties had already reached an understanding on a range of contentious financial issues going into the final round of talks on Friday and cleared up outstanding issues in time for the deadline they had set themselves of Saturday.

The pact, which corresponds with details announced earlier, paves the way for Merkel to become the country's first woman chancellor, and its first leader from the former communist East.

She will head a potentially unwieldy bipartisan government of traditional rivals after the inconclusive September 18 election left neither side able to form a majority of its own.

But it will be able to operate without crippling opposition from the Bundesrat, the upper house of parliament, which has blocked reform efforts by governments of both sides in the past.

In almost a month of surprisingly harmonious talks, the conservatives and the SPD have bridged differences that bitterly divided them during the campaign.

At the heart of the deal is an agreement to bring Germany's ballooning budget deficit back within European Union borrowing limits by 2007.

They will have to find some 35 billion euros in savings or extra revenues to meet the target and have agreed to adopt tax hikes that have already sparked loud opposition from the media and lobby groups.