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Germany gets new government, and Merkel becomes Chancellor

08 February 2018

To secure a fourth term as chancellor, Angela Merkel is handing her Social Democrat (SPD) coalition partners control of the finance ministry, giving them licence to spend a record budget surplus, and embracing their demands for European reform.

The finance post represents an important incentive that Social Democrat leaders can offer reluctant party members, who will have the final vote on the blueprint agreed upon with Merkel's Christian Democratic-led bloc on Wednesday.

"It's going to work out", the SPD's Andrea Nahles said on arrival for Monday's negotiations at her party headquarters.

If a deal emerges, it won't immediately stop the clock on Germany's longest postelection period without a new government taking shape.

Carsten Nickel, managing director for Europe at Teneo Intelligence, told CNBC: "Let us make no mistake, the real risk, the real problem for the SPD leadership is still ahead and that is the membership ballot".

The breakthrough over the division of ministries followed a marathon 24-hour negotiating session and will renew a "grand coalition" between Mrs Merkel's conservatives and the Social Democrats (SPD).

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Many Social Democrats argue that being in a coalition with Ms. Merkel is moving their party to the right and eroding its identity, and that entering a new coalition would leave Alternative for Germany as the leading voice of opposition.

Germany's Constitutional Court shrugs off opposition to SPD internal vote on the deal.

SPD leader Martin Schulz, poised to become foreign minister if party members back the coalition deal, has urged the European Union to ensure that Big Tech pays more tax.

If Social Democrat members say no, the new coalition government can not be formed.

"I believe the will is there on all sides", top CSU lawmaker Alexander Dobrindt of Merkel's Bavarian sister party said.

Southern European government bond yields tumbled on Wednesday, extending a recent outperformance over peers on reports that Germany's pro-European, pro-spending Social Democratic party would head the finance ministry in a coalition government.

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The deal is the first German coalition agreement that explicitly criticizes Israeli settlements in the West Bank.

The EU is more likely to succeed "when Paris, Brussels and Berlin are pulling together", said Moscovici, adding that there were "common concepts" between the three capitals.

While Merkel and the SPD are open to the French plans for deeper eurozone integration, the SPD is more enthusiastic about some of Macron's more ambitious proposals such as a joint eurozone budget and finance minister.

Investors and partners had been concerned by Merkel's failure to form a government more than four months after the election, at a time when Europe faces major challenges including eurozone reform and the UK's departure from the EU.

It was not immediately clear how the final sticking points in the negotiations were resolved, such as the SPD's insistence on limiting short-term contracts and overhauling the two-tier healthcare system.

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Germany gets new government, and Merkel becomes Chancellor