The crucial talks in Berlin were seen as a last-ditch effort to win support for Angela Merkel's first major tax cuts package.

Merkel's second term as chancellor since her re-election at the end of September has not been as agreeable as she may have hoped.

The short period since the new coalition government – led by her conservative Christian Democratic Union (CDU) and sister party, the Christian Social Union (CSU), with the Free Democrats (FDP) as junior partners – took office in late October has been marked by squabbles over how best to boost the economy. A controversial airstrike in Afghanistan has also forced the resignation of a minister.

At the heart of the coalition's roadmap to recovery after Germany's worst recession since World War II, is a program of tax cuts aimed at putting more money in consumers' pockets and cutting recession-hit firms some slack.

The Bundesrat, parliament's upper house, was due to vote on the first wave of tax cuts on December 18. But several premiers of Germany's 16 debt-ridden states fear the new package would lead to lower state revenues.

A false start?

Some analysts say a failure to pass the new government's first piece of legislation would be a demoralizing development. The Die Zeit weekly said it "would complete the impression of a false start."

In a last-ditch effort to ensure that the proposal becomes law, Merkel on Sunday met with the main opponent, fellow Christian Democrat and premier of the northern state of Schleswig-Holstein, Peter Harry Carstensen.

Carstensen wants his cash-strapped state to be compensated but the German chancellor has ruled out "buying out" any opposition. Other states have threatened to block the bill if Schleswig-Holstein gets special treatment.

Carstensen said his talks with the chancellor had been productive but no decision had been taken.

"We got the impression that the government takes our worries seriously and understood them," Carstensen said after meeting Merkel in Berlin. "The government won't leave us alone."

Carstensen has demanded compensation for losses that will result from federal measures to cut 8.5 billion euros ($13 billion) in taxes in 2010. He has said his state cannot afford the losses caused by the tax cuts.

Guido Westerwelle, foreign minister and head of the business-friendly Free Democrats, told the Welt am Sonntag newspaper that he expected to "win over the states with good arguments."

"If you want growth, if you want jobs, then you have to pass this law," he said in Berlin on Friday.

More cuts could follow

The proposed cuts, worth some 8.5 billion euros ($12.5 billion dollars), would just be the tip of the iceberg, with Merkel and her FDP partners aiming for almost three times that amount, despite Germany's ballooning budget deficit.

Germany plans to double net new borrowing next year and increase public spending to support a fragile economic recovery which it expects will gather some pace in 2011.

The government expects the economy, Europe's largest, to grow by 1.5-2.0 percent in 2011, up from a forecast 1.2 percent next year, a government source told Reuters.

"Those who have experienced how hard Merkel is fighting now ... have only to imagine how it is going to be in a year's time when we're talking about far greater sums," the Sueddeutsche Zeitung daily said in an editorial.

Analysts expect further trouble over reforms to how Germany taxes its citizens and firms that the FDP is demanding as well as over how to patch up the ailing healthcare system.

Rift over Afghan mission

It's not just the discord over the tax cuts issue that is troubling Merkel – the unpopular move to increase troop numbers in Afghanistan is also proving a divisive issue.

Last week, Horst Seehofer, head of the CDU's Bavarian sister party the CSU, annoyed the chancellor by talking down the chances of sending more Bundeswehr troops to Afghanistan. Berlin has put off a decision on the issue until after an international conference on Afghanistan scheduled to be held in London on January 28.

The Afghan mission, already unpopular among voters, has become even more contentious in recent weeks owing to an airstrike ordered by a German commander in September, which is believed to have killed around 140 people, including dozens of Afghan civilians.

That controversy has already claimed the heads of a minister and two senior military officials. Just over two weeks ago, Franz Josef Jung, who was defense minister at the time of the airstrike, quit his new job as labor minister over his handling of the affair.

Now his successor, Karl-Theodor zu Guttenberg, and Merkel herself are feeling the heat.

rb/AFP/AP
Editor: Sonia Phalnikar