Election in Germany to shape economy's direction

[September 25, 2009]  FRANKFURT (AP) -- Economic recovery is the main issue in Germany's elections Sunday, and Chancellor Angela Merkel says tax cuts should be used to spur more growth -- something her challenger disputes.

The conservative leader's current government -- a "grand coalition" with the center-left Social Democrats -- has won respect for taking a levelheaded approach to the crisis in Europe's biggest economy, launching massive bank bailout and stimulus packages and keeping unemployment down.

But Merkel says her Christian Democrats need a different political partner to get the economy back on track -- the pro-business Free Democrats. Polls suggest that the combination may win a thin majority Sunday, but it is far from certain.

The economy returned to modest growth in the second quarter and business confidence is rising, but Germany's gross domestic product is still expected to shrink by 5 percent or more this year -- easily the worst performance since World War II.

"I am pleased with the positive signals, but the crisis is not over when we reach the bottom," Merkel said recently. "The crisis will be over when we are back where we were before the crisis."

To preserve German prosperity, "we need growth-oriented policies," Merkel said. "I think we can implement this growth-oriented policy better and with more determination in a new government" with the Free Democrats.

For both the CDU and FDP, the recipe for recovery centers on tax relief.

Merkel's campaign centers on modest middle-income tax cuts that she says will ultimately boost spending and tax revenue. The Free Democrats want a far broader overhaul of the income tax system, under which bottom and top rates both would sink significantly. Neither says when the changes should be implemented.

Merkel has made clear she has no intention of going along with the Free Democrats' proposal to loosen laws protecting workers from dismissal, which they say would give companies more flexibility.

While Merkel appears overwhelmingly likely to remain chancellor, she may not have the votes to change coalition partners. If she's forced into another "grand coalition," it's not so clear what the recipe for recovery would be.

Her Social Democratic challenger for the chancellery, Foreign Minister Frank-Walter Steinmeier, says overall tax cuts are unrealistic when the government has increased debt to deal with the economic crisis. His party wants to increase the top income tax rate, while cutting the bottom rate.

The two partners also have a long-running disagreement over the Social Democrats' call for the introduction of a national minimum wage, which Merkel's conservatives say would destroy jobs.

Whoever ends up in government likely will be dealing with a steady rise in unemployment for the next year.

Merkel has made much of the fact that unemployment -- now at 8.3 percent, with some 3.47 million people out of work -- is well below the level when she took office four years ago.

However, it remains to be seen how far employers' use of shorter work hours under a government-backed plan will continue to keep layoffs in check.

Germany's overall economic health will depend to a large extent on how the rest of the world recovers. The country is heavily dependent on its exports -- of cars, machinery, consumer goods and other products.

The auto industry in particular will need demand abroad to pick up after a popular euro5 billion government program that gave Germans a bonus for scrapping old cars and buying new ones expired earlier this month. The program gave sales a powerful boost.

"We believe this bonus helped build a bridge to auto workers," Merkel said. "That we will sell fewer cars next year is obvious, but we think exports will pick up by then."

[Associated Press; By GEORGE FREY]

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