Angela Merkel reaches an agreement with the SPD, but another grand coalition is by no means a done deal

Chancellor Angela Merkel reached a preliminary agreement with the centre-left Social Democrats (SPD) on Friday to end Germany’s three-month political impasse.

The coalition, however, is by no means a done deal, with opposition to idea running high among the SPD’s rank-and-file members, who feel that the party lost its identity in the previous coalition with the conservatives between 2013 and 2017.

Formal negotiations on a new grand coalition can only start once a special SPD party conference in Bonn later this month has given the green light. If it doesn’t, Ms Merkel can try to form a minority government, a scenario favoured by some Social Democrats, or push for a repeat election.

A future coalition deal would ultimately have to be put to the entire SPD membership for approval. If SPD members do agree a new partnership, it will be the third grand coalition since Ms Merkel took office in 2005.

In September’s Bundestag election, Ms Merkel Christian Democratic Union, its Bavarian sister party the Christian Social Union and the SPD obtained their worst results since the creation of the federal republic in 1949. The far-right Alternative for Germany (AfD), meanwhile, entered the Bundestag for the first time. Ms Merkel’s decision to let in more than 1 million mainly Muslim asylum-seekers at the height of Europe’s refugee crisis in 2015-2016 was seen as the chief reason for her CDU/CSU alliance’s dismal election performance.

After the election, SPD passionately pro-EU leader Martin Schulz firmly ruled out another coalition with Ms Merkel’s conservatives. Talks between Ms Merkel’s conservative alliance, the pro-business Free Democrats (FDP) and the environmental, left-leaning Green party, the so-called Jamaica coalition, collapsed spectacularly in November. The failure to strike an unprecedented three-way coalition government raised questions about the future of Ms Merkel and weakened Germany’s international reputation.

The German President Frank-Walter Steinmeier, a former SPD foreign minister, and SPD senior members urged Mr Schulz to reconsider to avoid the disruption of a new election. The SPD abandoned its promise to go into opposition and agreed to holds talks with Ms Merkel.

Mr Schulz wants to create a “United States of Europe” by 2025 and backs a eurozone budget and finance minister, but the large part of the CDU/CSU alliance is deeply sceptical about these ideas, saying that German taxpayers would end up footing most of the bill for European federalism.

The agreement says that a new grand coalition will support turning the European Stability Mechanism (ESM), which provides emergency financial help to stricken eurozone economies, into a full European Monetary Fund (EMF). It also says that Germany is prepared to pay more into the EU budget and the EU should use budget funds to stabilise the economies and support structural reforms.

There will be a reduction in the solidarity surcharge, a special tax to fund economic development in eastern Germany, for people on low and middle incomes. Employers will have to contribute more to their workers’ health insurance. The state pension, which is projected to fall to 47.6 per cent of average lifetime salaries by 2020, will be fixed at its current level of 48 per cent until 2025.

On immigration, the agreement says that the number of refugees allowed into Germany every year will be limited to between 180,000 and 200,000 and there will be tough restrictions on family reunification for asylum seekers.

Germany enjoys a vast budget surplus – €38.4 billion in 2017 – and record low unemployment. Europe’s largest economy grew 2.2 per cent in 2017, the fastest pace since 2011. A current account surplus is the largest in the world in nominal terms. There will be no tax increases at all and Ms Merkel’s government will continue to balance the budget.

Photo: Arno Mikkor (EU2017EE)

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