Party leaders, Angela Merkel of the Christian Democratic Union, Horst Seehofer (right) of the Christian Social Union and Sigmar Gabriel of the Social Democratic Party in Berlin yesterday. Photo: Reuters

Chancellor Angela Merkel clinched a coalition deal with the Social Democrats (SPD) yesterday that rolls back decade-old reforms of the German welfare state but preserves Berlin’s strict approach towards struggling European partners.

The agreement, spelled out in minute detail in a 185-page policy document entitled “Shaping Germany’s Future”, was struck two months after Merkel emerged victorious from an election but fell just short of a parliamentary majority.

The result forced the popular 59-year-old Protestant pastor’s daughter from East Germany into negotiations with the arch-rival SPD, with whom she ruled in an awkward “grand coalition” during her first term from 2005-2009.

The SPD is still smarting from that experience, and its leadership has agreed to put the new deal to a vote of the party’s 474,000 card-carrying members, adding an element of uncertainty to Merkel’s goal of having a new government in place by Christmas.

“We entered negotiations with very different ideas, and that is why things took a little time,” Merkel told a news conference, sitting between SPD Chairman Sigmar Gabriel and Horst Seehofer, leader of the Bavarian Christian Social Union.

SPD must first get green light from party members

Gabriel said he was sure a “broad majority” of SPD members would back the deal in the mail-in vote, the results of which are due to be published on December 14.

All three politicians praised the atmosphere in the talks, with Gabriel and Seehofer joking with reporters about whether they could now address each other with the informal “du” in place of the formal “sie”.

“Perhaps that changes after you win the poll of your members,” quipped Seehofer.

The deal was greeted with a sigh of relief by investors. It was also welcomed by officials in Brussels and other European capitals. The lengthy talks have delayed movement on major European reforms, including progress on “banking union”, an ambitious project designed to prevent a recurrence of the euro zone’s crippling debt crisis.

“It’s positive news,” Italian Prime Minister Enrico Letta told reporters in Rome. “A lot of time has passed and there’s a need for a German government as soon as possible.”

Merkel stood firm against SPD demands for tax hikes on the rich, but to clinch the deal she agreed to introduce a minimum wage of 8.50 euros per hour, which some economists have warned could push up unemployment, particularly in eastern Germany.

To reduce that risk, the parties agreed to phase it in over a period of years, with exceptions alloweduntil 2017.

The SPD also secured concessions from Merkel on pensions and labour market rules, softening elements of the “Agenda 2010” reforms introduced a decade ago by Merkel’s predecessor as chancellor, Gerhard Schroeder of the SPD.

In the future, people who have worked for 45 years can earn full pensions from 63, four years earlier than the statutory 67-year threshold. The use of temporary workers by German firms will also be restricted to 18 months under the deal.

“At a time when other euro zone members are undertaking important reforms to the welfare state, Germany is conspicuously shirking them – and even backpedalling on them,” said Nicholas Spiro, head of Spiro Sovereign Strategy.