Merkel faces ugly coalition row before euro summit

Fri Oct 21, 2011 12:07pm EDT

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By Erik Kirschbaum

BERLIN, Oct 21 (Reuters) - German Chancellor Angela Merkel faced fresh domestic turmoil on Friday when one of the three parties in her centre-right coalition openly balked at surprise plans to cut taxes ahead of the next election in 2013.

Compounding her woes ahead of crucial meetings on the euro zone crisis, Merkel found her coalition badly split over tax cuts presented by her finance and economy ministers .

The opposition ridiculed the unusually public display of infighting in Merkel's centre-right government, with one Social Democrat (SPD) leader dubbing it the "chaos coalition".

Horst Seehofer, the powerful chairman of the Christian Social Union (CSU) that is the Bavarian sister party to Merkel's Christian Democrats (CDU), said he had not agreed to tax cuts the two ministers unveiled on Thursday.

"It doesn't work like that -- presenting facts in the public and expecting us to rubber stamp them," Seehofer said. "That's just not on."

Seehofer, who reportedly learned about the tax cuts in media reports, abruptly cancelled a meeting with Merkel and Economy Minister Philipp Roesler of the Free Democrats (FDP), junior coalition partners in her three-way coalition.

Finance Minister Wolfgang Schaeuble unexpectedly appeared at a Roesler news conference on Thursday that was only scheduled to discuss the country's economic growth forecasts.

After long opposing tax cuts demanded by Roesler's FDP, Schaeuble appeared at the Economy Minister's side to announce the 6- to 7-billion euro tax cuts in 2013 -- before elections set for later that year when Merkel will seek re-election.

German media speculated that Schaeuble, after two years of resisting the FDP's demands, had caved in to win their backing for measures to bolster the euro zone rescue fund to be agreed at EU summits this weekend and on Wednesday.

Schaeuble and Roesler want to cut taxes by reducing the so-called "cold progression", or "bracket creep", in Germany's tax code that generates billions of euros in revenues for the treasury because tax brackets are not adjusted for inflation.

The system has not been changed since 1958 and the state took in an extra 76 billion euros from 2005 to 2010. It has been taking in about 22 billion euros a year from 2010.

But Seehofer and his Bavarian CSU oppose those plans, saying there are other ways to reduce revenue that would not require approval from the upper house, or Bundesrat, where the centre-right coalition has no majority.

The opposition SPD, who rule the key states of North Rhine-Westphalia and Baden-Wuerttemberg, have already said the Roesler/Schaeuble tax cut plan has no chance.

"Debt-financed tax cuts as a gift to voters are irresponsible," said Hannelore Kraft, SPD state premier in North Rhine-Westphalia. Hans Schmid, finance minister in Baden-Wuerttemberg, added: "We're not going to be the henchman for this chaos coalition."

Merkel's spokesman, Steffen Seibert, said he was confident the three parties would be able to reach an agreement at some point.

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