Merkel defends her government's agenda

Nov 25, 2005, 19:10 GMT

Dusseldorf - German Chancellor Angela Merkel on Friday strongly defended her new government's agenda, saying she planned to substantially reduce the country's high labour costs.

In a speech to the German Confederation of Skilled Crafts (ZDH) in Dusseldorf, Merkel said she wanted to wind back German labour costs to where there stood about 16 years ago just after the Berlin Wall was breached.

It was also her first major domestic German speech since being sworn in as the nation's first woman Chancellor on Tuesday.

But having come under fire from business for appearing to retreat from some of her election campaign promises and for her planned mix of tax hikes and spending cuts to address the nation's budget deficit, Merkel set out to defend her new government's plans.

While she Merkel insisted that revenue from the proposed three percentage point's increase in consumption tax could help to offset Germany's high labour costs, she admitted that she would have liked to have done more to boost labour market flexibility.

Instead of easing Germany's tough hire-and-fire laws for companies employing up to 20 workers as was contained in Merkel's campaign manifesto, her new grand coalition government is to extend the probation period for new employees from six months to two years.

The new chancellor also highlighted the need to help underpin small businesses by dismantling bureaucracy and to push on with reforming Germany's cumbersome federal government system.

Merkel's conservative Christian Democrat-led alliance was forced to forge a grand coalition with former Chancellor Gerhard Schroeder's Social Democrats after September's inconclusive national election.

The new grand coalition government she heads up had decided with a 'heavy heart' to focus on knocking Germany's state finances into shape, Merkel said.

Merkel is also planning to use about one third of the eight billion euros (9.4 billion dollars) generated by the January 2007 rise in consumption tax from 16 to 19 per cent to lower non-wage costs to below 40 per cent.

But pointing to high labour costs as the main problem facing Europe's biggest economy, Merkel said she wanted to eventually to cut non-wage labour costs to 36 or 37 per cent of overall employment costs.

Although she admitted that this could not be achieved during the present four-year parliamentary term she is to preside over as Chancellor, she insisted that non-wage costs would remain under 40 per cent over a long period of time.