German Chancellor Angela Merkel will formally inaugurate her third term as Germany’s uncontested leader following a coalition agreement between her Christian and Social Democratic Union (CDU-CSU) and the Socialist SPD party.

The major point on which the agreement was nailed was the introduction of a minimum wage of €8.50 per hour which will come into effect in 2015. This was a long-standing demand of the Socialist SPD. Germany has no minimum wage and its massive export surplus is partly based on extremely low paid work carried out by a massive underclass of workers estimated to form at least 30 per cent of the country’s active workforce.

In return, the SPD agreed there would not be more debt or increased taxes. However, the rank and file of the SPD must vote in favour of the agreement for it to go into force. That vote is scheduled for December 15.

The idea of a Grand Coalition between the right and the left is not new. Ms. Merkel headed a similar coalition between 2005 and 2009. That coalition proved disastrous for the left wing SPD’s popularity.

Germany has been without a proper government since elections were held last September 22. Ms. Merkel scored a resounding victory but CDU-CSU’s junior coalition partners, the Free Liberals, failed to get the required number and therefore did not win a single seat in parliament. Since Ms. Merkel’s alliance fell short of an absolute majority, she was forced into coalition talks with the Centre Left SPD.

At a press conference announcing the new coalition, Ms. Merkel said the new agreement would have little impact on the country’s overall finances. Money for the increased minimum wage and pensions would come from the social security fund, she suggested.

A failure to win the approval of the 470,000 SPD members would force Ms. Merkel to turn to the Green party. However, she does not see eye to eye with the Greens on the crucial question of energy and a second failure to negotiate a coalition would lead to new elections, a scenario all parties wish to avoid.

SPD leader Sigmar Gabriel said the agreement would promote a “fair and just” Germany with greater social equality.

The package of measures agreed upon by the conservative CDU-CSU and the left-wing SPD includes pension increases for persons having worked for over 45 years and liberalisation of laws on citizenship for German-born foreigners.

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