BERLIN, Sept 10 (Reuters) - Chancellor Angela Merkel must steer a plan to extend the lifespans of Germany's nuclear reactors through parliament this autumn if she aims to reverse a poll slump in time for a string of elections next spring.
Germany’s ruling centre-right coalition last weekend thrashed out a deal to extend the lives of the country’s 17 nuclear power stations by 12 years on average, but the plan still faces big protests and lawsuits aimed at derailing it.
The administration is also at loggerheads with the country’s biggest utilities, on which it wants to impose a nuclear fuel tax intended to bring in some 2.3 billion euros annually.
Merkel still may risk a backlash from her party base due to her pointed criticism of Thilo Sarrazin, a central banker who resigned after making divisive remarks about Muslim immigrants that outraged many but won praise from conservative voters.
Although poll ratings for her alliance of conservatives and pro-business Free Democrats (FDP) have stabilised, the two remain well behind the leftist opposition parties.
Critics say the government is suffering because it has been bogged down too long in squabbles rather than pushing through reforms. As a result, Merkel’s Christian Democrats (CDU) risk losing control of a major state they have ruled nearly 60 years.
Record economic growth and a steady decline in unemployment to pre-crisis levels have failed to quell negative headlines.
Following are some of the key factors to watch:
GOVERNMENT WORRIES
The coalition, which lost control of the Bundesrat upper house of parliament after a regional election loss in May, faces opposition to its nuclear plans from the centre-left Social Democrats (SPD) and Greens, whose previous administration passed a law to phase out atomic power by 2021.
The government says it does not need Bundesrat approval for the plan to extend the lives of nuclear plants, but the opposition has threatened to fight this in court if necessary.
The coalition also aims to pass a health care reform bill and hammer out a plan to simplify Germany’s tax system, two targets many lawmakers believe must be met if they are to breathe new life into the troubled government.
Merkel, whose poll ratings slipped this summer to their lowest level since she became chancellor in 2005, has seen the departures of many powerful conservative allies due to a spate of retirements, reshuffles and resignations.
Through the Bundesrat, the left-wing opposition parties can block or interfere with much of Merkel’s planned legislation, and polls suggest they could bolster their position in the upper house next year, when six states have elections.
Recent survey have shown the SPD and Greens ahead of Merkel’s coalition in Baden-Wuerttemberg, which goes to the polls in March. With an economy the size of Poland’s, the state has been ruled by the CDU since 1953.
Support for the FDP has been so lacklustre that some Free Democrats have said time may be running out for Foreign Minister Guido Westerwelle, who has led the party since 2001.
This could plunge Merkel’s junior coalition partner into an internal power struggle, sidetracking the main policy drives.
What to watch:
— Aside from threatening legal suits against the government, opposition parties are planning massive demonstrations against the nuclear bill. Legal experts are still debating whether the Bundesrat need be consulted on it.
— The government’s plans to consolidate the federal budget by 80 billion euros over the next four years depend partly on the nuclear fuel tax. The government has said it could consider alternatives but that the 2.3 billion euros must be raised.
— Some conservatives have pushed for consolidation plans to be pared back to avoid hitting the poorest too hard — or to increase taxes for the rich to sweeten the pill. This could prompt more mud-slinging between the CDU and FDP.
— The fate of legislation like the health bill should be determined after parliament reconvenes later in September.
— The three states voting in March have a combined population of 17 million people, with Baden-Wuerttemberg easily the biggest. Protests are running high in the state capital Stuttgart over ambitious plans to revamp its train station. Some analysts say it could hurt the incumbent CDU-FDP government.
ECONOMY
Germany’s economy grew by 2.2 percent in the second quarter of this year, the fastest quarterly expansion since the country reunified in 1990. State-owned development bank KfW has forecast the economy could grow by a record 3.6 percent this year.
Germany relies heavily on exports for growth, which has prompted key trading partners to accuse Berlin of not doing enough to boost domestic demand, a charge the government denies.
Despite the strength of the job market, retail sales have struggled to gain traction, and doubts persist about the strength of global economy, particularly the United States.
Some economists also say productivity could suffer if firms use a state subsidy for reduced hours for too long, inflating their cost base by artificially protecting the labour market.
What to watch:
— Germany’s economic recovery may start to sputter if demand dries up abroad, and recent surveys have suggested that growth in the manufacturing sector is already cooling.
— If Germany continues to profit from the global rebound and countries such as France fail to benefit from it, disputes over economic policy in Europe may intensify.
— This may cast a shadow over efforts to reach agreement on reform of the bloc’s budgetary rules, which Germany hopes will raise pressure on profligate states to comply with the EU’s deficit cap of three percent of gross domestic product (GDP).
DEBT
Bank bailouts, labour market subsidies and stimulus measures to boost growth have all added to Germany’s debt burden.
As Europe’s benchmark issuer of sovereign debt, the federal government has seen strong secondary market demand for its bonds, lowering the cost of servicing new borrowing.
Some new issues, however, have seen lacklustre demand.
At the local government level, a number of large western cities are nearing bankruptcy, a situation which may have encouraged the city of Duisburg to host the Love Parade techno music festival that ended with the deaths of 21 people in July.
The city is one of several heavily indebted western cities whose finances have been further weakened by having to pay towards the redevelopment of the former East Germany until 2019.
What to watch:
— The deterioration in local finances has deepened splits Between Berlin and the regions, and fuelled discontent among westerners who say they have already paid enough for the east.
— Some leading western politicians have said they will seek to cut the burden on their cities when the law governing the so-called "solidarity charge" for the east is reviewed.
— Auctions will provide a clearer picture of how demand for German bonds is holding up. A 10-year Bund top-up is due on Sept. 15 and the sale of a new 5-year Bobl note on Sept. 22.
