New German coalition gets set for government

Germany's newly elected coalition got set for government on Saturday after three weeks of tough negotiations on a programme to guide the country out of its worst recession since World War II.

Chancellor Angela Merkel won a second term in elections on September 27, managing also to ditch her previous coalition partners, the centre-left Social Democrats, in favour of the pro-business Free Democrats (FDP).

Three weeks of hard bargaining wrapped up in the early hours of Saturday morning, with the parties hammering out an action plan spearheaded by some 24 billion euros (36 billion dollars) worth of tax cuts, officials said.

Further details were due at a news conference at 10:30 am (0830 GMT).

The challenges facing Merkel, 55, over the next four years are immense.

Germany's export-dependent economy, Europe's largest, has been hit harder than most by the global slowdown, triggering its worst recession since the foundation of the postwar Federal Republic in 1949.

The health care system is in dire need of reform, the country's increasingly bloody mission in Afghanistan is deeply unpopular, its banks are still reeling from the financial crisis and unemployment is set to rise.

Economic output is set to fall around five percent this year, but is on course to recover slightly in 2010, with gross domestic product (GDP) predicted by the government to grow by around 1.2 percent.

The recession has left Germany's public finances in tatters, with Merkel rolling out two stimulus packages worth around 80 billion euros, tax receipts plummeting and social security spending spiking.

As a result, the government is on course to spend 50 billion euros more than it takes in this year.

It already spends tens of billions in interest payments on its debts each year, and will be forced to borrow hundreds of billions of euros more over the next few years, putting it in breach of EU deficit rules.

This makes the new government's pre-election promises to voters to slash taxes hard to meet, making this the thorniest issue in the coalition talks.

The liberal FDP, led by Guido Westerwelle, had promised in its election campaign 35 billion euros worth of tax cuts but Merkel wanted 15 billion euros worth.

In the end the parties reached a compromise figure of 24 billion euros, said Horst Seehofer, head of the CSU, the Bavarian sister party to Merkel's CDU.

In other areas, agreement came more easily for the two parties, who have a long history of being in coalition, governing together for 28 years in the modern era.

According to leaked details, they plan to scrap the 2000 decision to abandon nuclear power by around 2020 by extending the life of some reactors, much to the annoyance of environmentalists, who have promised to hit the streets.

They also agreed on the broad outlines of reforms to the health care system, although the details will be left to a new committee to work out, and no changes will happen before 2011.

In foreign policy, they want to press for the Afghan government to take on more responsibilities so that Germany's 4,200 troops can come home.

The FDP succeeded in softening somewhat Merkel's position on Turkish membership of the European Union, meaning that the door will remain open, while stressing that Turkish membership is neither automatic nor guaranteed.

In terms of ministerial appointments, wheelchair-bound CDU veteran Wolfgang Schaeuble, current interior minister and the former right hand man of ex-chancellor Helmut Kohl, was set to become finance minister.

The aristocratic Karl-Theodor zu Guttenberg, economy minister and Germany's most popular politician, was set to move to defence, while the openly gay Westerwelle was to be foreign minister.