The incumbent chancellor and Christian Democrat (CDU) leader Angela Merkel, Horst Seehofer of the CDU's sister party, the Christian Social Union (CSU), and Free Democrat (FDP) leader Guido Westerwelle put their signatures to the agreement in Berlin on Monday evening, paving the way for the new cabinet to be sworn in.

The new government takes over from a CDU-led so-called “grand coalition” with the Social Democrats, who suffered record losses at last month's general election.

Earlier, Chancellor Merkel's Christian Democrats approved the new coalition deal with the Free Democrats at a party conference in Berlin. The CSU later followed suit at a party gathering in the city of Munich.

The nod from Merkel's conservative bloc came after the FDP endorsed the coalition deal on Sunday, following three weeks of negotiations that concluded early on Saturday.

Merkel told her fellow Christian Democrats that the proposals agreed with the FDP would work to combat the economic crisis.

"This is why we have decided to follow a path that focuses entirely on growth," the CDU leader said, adding that this justified an increase in public debt.

Merkel defended her plans to pursue billions of euros in tax relief in the face of rising debt. The centerpiece of the policy blueprint she agreed with the pro-business Free Democrats is a plan to slash income taxes by 24 billion euros ($36 billion), with a focus on reducing the tax burden on families with children and reforms to corporate and inheritance tax.

“Tax relief the only responsible option”

In her speech to party members, Merkel dismissed criticism, saying tax relief was the only responsible option for an economy that is just starting to emerge from its worst downturn since World War Two.

However, she warned that the country's future remained unpredictable, saying that although they were focusing on growth, "there are no guarantees it will work, but it gives us a chance.”

“A path of saving, saving and more saving would offer us no chance," she added, hitting out at critics.

It is unclear how her new government will fund the tax relief. The finance minister-designate, Wolfgang Schaeuble, has already said he cannot guarantee the cuts will happen given Germany's shaky finances, in what analysts say is a sign that of divisions even before the new government has taken office.

Some analysts have expressed concern about the prospect of a ballooning budget deficit and trade unions have said the deal will not solve Germany's economic problems.

Other key elements of the coalition deal include the overhaul of health care funding and a reduction in compulsory military service from nine to six months.

CDU to dictate terms

Merkel also made it clear that the CDU will be the dominant partner in the new coalition government.

“We will be the force of the centre. The force that ensures that on the one hand economic growth is possible in our country and that on the other hand, everyone's interests are represented and that we have a heart for all those who need help and solidarity,” the chancellor said.

The new parliament is set to convene on Tuesday, exactly one month after Merkel's conservative bloc and the Free Democrats won a majority in the Sept. 27 federal election. The new government is due to be sworn in on Wednesday.

rb/Reuters/AFP
Editor: Chuck Penfold