Sparks flew at a meeting in Berlin on Sunday evening with her Christian Democratic Union (CDU) with the Christian Social Union (CSU), its powerful Bavarian sister party.
The usually calm waters of the conservatives, senior partners in the governing coalition, have of late become distinctly choppy, with Germany facing its biggest economic challenge in its post-war history.
In November Berlin unveiled a first package of measures, but amid gloomy economic data and accusations from all sides that not enough has been done, the government has promised a second boost by mid-January.
The CSU wants these measures, to be discussed Monday by all the coalition partners, including grand coalition partners the Social Democrats (SPD), to include tax cuts.
Merkel, to date, has dismissed such demands, except for a vague promise in her new year’s address. Her stance is supported by the SPD.
CSU chief Horst Seehofer fired an opening salvo in favour of tax cuts in an interview with Germany’s mass-circulation Bild am Sonntag newspaper on Sunday.
The aid package “should be based on the three pillars of tax cuts, infrastructure investments and cuts in social security contributions,” he said. “Granting relief to individuals with two or three euros … is not enough.”
Meanwhile Economy Minister Michael Glos, also from the CSU, told the Frankfurter Allgemeine daily on Friday: “My proposal for cutting income taxes combines what is necessary in the short term with what makes sense in the long term.”
This was echoed in a joint call from the country’s main industry lobby groups, urging the government to cut taxes for firms, as well as non-tax wage contributions for workers and employers alike.
Comments from the CDU’s secretary general, Robert Pofalla, also in Bild, indicated that the two sides will gloss over their differences.
But this will seem like child’s play when the conservatives sit down with the SPD on Monday and in another meeting next week.
The governing coalition is wearily entering the fourth year of a rocky marriage, and both main parties are looking ahead to elections in September when they hope to jump into bed with someone else.
Agreeing on anything since 2005 has meant both sides having to give ground, and the looming elections – Germans also vote in European and several state-level polls in 2009 – make a compromise on a second stimulus package even harder.
“We are going into the talks with a clear position: The SPD says no to tax cuts,” SPD deputy chair Andrea Nahles warned in the Bild am Sonntag.
Finance Minister Peer Steinbrück, an SPD man, who last month slammed Britain’s tax cuts and increased borrowing as “crass Keynesianism,” has also drawn a line in the sand.
A better way to put cash in German consumers’ pockets is to cut the amount of money docked from their salaries for health insurance, pensions and unemployment insurance, he has said.
He also wants to spark economic activity by spending more on infrastructure projects like new roads, renovating schools and more broadband Internet connections. More of a boost for the auto industry is also on the cards.
Steinbrück is also fearful that cutting taxes will create a massive hole in Germany’s public finances, and combined with falling tax receipts because of the recession, may cause Berlin to fall foul of EU budget rules.
“What we do must be intelligent, fair to future generations and reap future benefits,” Steinbrück told AFP in a recent interview. “Making temporary cuts in value added tax (VAT), for example, fulfils none of these criteria.”