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ANALYSIS

Merkel faces reform test

AFP, Frankfurt
The new coalition of German Chancellor Angela Merkel will likely boost Europe's top economy but analysts questioned Monday how far she will pursue crucial but contentious reforms.
The (HTinan Association of (Chambers of Commerce and Industry (DIHK) called her victory in Sunday's election "a clear vote for courageous reform." Its president Hans Heinrich Driftmann said corporate tax cuts should now be "high on the agenda. "
The Federation of German Wholesale and Foreign lYade called for "simplified taxes, less bureaucracy and more entrepreneurial freedom."
But analysts wondered how far the con servative Merkel would go in making pain ful reforms after she stressed the need to "maintain a balance between those who create jobs and workers."
During her first campaign, Merkel had called for major changes to Germany's economic system. It provides generous social benefits and its heavy reliance on exports left it exposed during the global economic downturn.
"Over the last four years her position has become quite blurred" while she governed with the centre-left Social Democrats in a cumbersome "grand coalition," Goldman Sachs economist Dirk Schumacher told AFP.
"Where does she actually stand" now on the issue of restructuring the German social economic model, he asked.
The new government faces a mountain of serious challenges, including rising unemployment and a huge public deficit that stems from efforts to buffer Germans from the worst of the international crisis.
At the same time, Merkel's new coalition partners, the business-friendly Free Democrats (FDP), have gained in strength and will push formulti-billion-euro (dollar) tax cuts and a simpler tax code.
"The new government must therefore manage a tricky balancing act between fiscal consolidation and implementing new strategies for supporting growth," UniCredit economist Alexander Koch wrote.
Business daily Handelsblatt said FDP leader Guido Westerwelle "should demonstrate the courage of new thinking and demand a super ministry of economy and finance - - and then lead it himself."
But Commerzbank chief economist
Joerg Kraemer noted that "scepticism of the Germans against capitalism has risen significantly," despite the FDP's strong showing.
"This makes a general shift in economic policyquiteunlikely," he said.
The country's crumbling demographic base could eventually force Germans to retire later, and education reform is needed to help disadvantaged youths gain full access to the jobs market.
"Otherwise you'll have a growing percentage of the population who are just dependent on government transfers and who won't be able to get a job, " Schumacher
warned.
The jobless rale has been largely held in check by state-subsidised shorter working hours but is still expected to climb from its present level of 8.3 percent.
"The silver bullet would be a lower tax and social security burden in order to avoid another round of stagnating real income," Koch wrote.
But he agreed that the fiscal leeway in the next few years is slim." since Germany expects to breach EU deficit rules until 2013 at the earliest.
Bank of America Merrill Lynch European economist Holger Schmieding therefore
anticipated "some tax cuts, spending restraint and modest structural reforms to strengthen the incentives to work, invest and create jobs."
The Sueddeutsche Zeitung daily said Merkel's inner drive for change was not lost however, and quoted her as saying recently that "Germany is in a global competition and can take nothing for granted."
She warned Germans again Sunday: "We have a lot of work ahead of us. ’
Schumacher concluded that "if that's the genuine Merkel, then we ll see some kind o& more pronounced reforms" in the next few< years.