Merkel Locks In Balanced-Budget Pledge as German Coalition Goal

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  • Four-party talks trying to square the circle: ING’s Brzeski
  • Weeks of government-building talks ahead for German chancellor

Whatever policies German Chancellor Angela Merkel’s next government pursues, deficit spending probably won’t be among them.

After a round of talks that ended early Wednesday, the four parties exploring a coalition pact to underpin Merkel’s fourth term laid down a balanced budget as one of their first goals. Though the Green party expressed reservations, the outcome underscores the political pressure for fiscal discipline long associated with ex-Finance Minister Wolfgang Schaeuble.

Hours after Schaeuble shifted to his new role as president of the Bundestag, or lower house of parliament, his and Merkel’s Christian Democratic Union won a joint pledge from its Bavarian CSU sister party, the fiscally conservative Free Democratic Party and the Greens that all sides “want a balanced budget.”

“We’re very satisfied with the outcome tonight,” CDU general secretary Peter Tauber told reporters.

Read more: Merkel’s Fourth Victory Comes With Some Big Caveats: QuickTake

More than a month after Merkel’s bloc emerged victorious but weakened from a national election, the early-morning joint statement is a preliminary step and contains caveats related to spending plans and middle-class tax cuts that have yet to be agreed. The exploratory talks are tentatively scheduled to conclude by mid-November, clearing the way for formal negotiations on a coalition pact.

“It is clearly a comfortable common denominator on paper,” Carsten Brzeski, chief economist for Germany and Austria at ING Diba in Frankfurt, said in a note to clients. “It looks as if they want to square the circle, sticking to budget surpluses, while at the same time providing tax relief and agreeing on more investment.”

As Merkel seeks to mesh four parties that have never governed together nationally, a signal of the tough bargaining ahead came from Michael Kellner, the Greens’ general secretary.

While “a working basis was established,” the medium-term spending plan of Merkel’s previous government with the Social Democrats as junior partner will need to be reviewed, Kellner said. That includes “exorbitant increases in defense spending,” he said.

All sides agreed to consider tax relief for households, including a cut in subsidies “that run counter to climate goals” and phasing out a surcharge on income-tax bills that was introduced to rebuild the formerly communist east after German reunification 27 years ago.

Funding for energy-efficient homes, affordable housing and research and innovation should be increased, according to the joint statement.

The potential coalition partners said they’ll seek to adhere to Germany’s constitutional debt limits and refrain from raising taxes on capital assets. Exploratory talks continue on Thursday with European policy on the agenda.

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