Berlin is expecting a fraught week of hard bargaining and bickering before a government treaty is in the bag as the basis for incoming conservative Chancellor Angela Merkel's work.

She is confident that the two negotiating sides will succeed in forging a solid power-sharing alliance despite all the recent turbulence.

"We -- and that means all sides involved -- will make a concerted effort to form a grand coalition... that addresses the real problems of the country and leads to solutions," Merkel said over the weekend after a meeting of her Christian Democrats (CDU) in Berlin to define their room for maneuver on a range of economic and foreign policy issues before the self-imposed Nov. 12 deadline to form a "grand coalition" government.

Wishful thinking?

But Merkel's assumption may just be wishful thinking.

Most crucial issues, such as reforms of the labor market and the health sector, have so far been dodged. Negotiators have been embroiled instead in debates about tax hikes.

In a bid to plug a 43 billion euro ($50 billion) budget hole by 2007, the camps have signaled their willingness to increase value-added tax by up to 4 percent. This may go hand in hand with an extra tax for the wealthy. There are also plans for a 3 percent increase in income tax for individuals earning more than 250,000 euros a year and families making more than half a million euros per year.

Outgoing Social Democrat chief Franz Müntefering is one of the staunchest supporters of such a tax hike.

"Everything is interconnected. If the burden is to be spread evenly, you simply can't exclude the most affluent from the equation," he said.

Words of caution against tax hikes

But Müntefering's party colleague and state premier in Rhineland-Palatinate Kurt Beck warned against jumping the gun. He said the future government should not repeat the mistakes made in recent decades and put tax hikes before cuts on government spending.

"I believe that we should not get distracted from doing things in the right order," Beck said. "In the talks to come this week, the coalition partners must first concentrate on reducing public spending and cutting obsolete subsidies. Only after this should we resort to tax hikes, including a higher wealth tax, depending on how big the budget hole still is."

CDU unhappy with coalition talks

Christian Democratic state premier in Lower Saxony Christian Wulff is displeased with the way coalition talks have been going so far.

He has openly criticized CDU chief Angela Merkel for sacrificing far too much of the conservatives' own election manifesto in the talks. He pointed out that the conservatives wanted to reform the labor market and the social system to make the country competitive again but argued the CDU's position has been watered down beyond recognition.

Wulff said that all the current debates about tax hikes are counterproductive.

"I think it's important to see the grand picture," Wulff said. "A higher wealth tax is certainly an option, he said, adding "It's more important to reduce bureaucracy in the country and provide incentives for a more robust labor market and more efficient industry policy. And it's certainly important to reduce spending."

Damaging consequences loom

Whether the negotiating partners will be able to agree on a large-scale reduction of state subsidies is still uncertain.

Until now, there's only talk about slashing benefits for private home builders. But that won't do much to fix the budget, as there's already agreement to spend more elsewhere.

There are plans for fresh incentives to boost the economy which will cost billions of euros. But a failure to fix the budget would have far reaching consequences.

Should Germany not be able to meet EU deficit criteria yet again in 2007, it'll have to pay a fine of at least seven billion euros.