Policy deals give Merkel breathing space at home

BERLIN, June 19 (Reuters) Germany's ruling parties reached a compromise early yesterday on two contentious policy issues, averting a coalition crisis that threatened to haunt Chancellor Angela Merkel as she prepares a key EU summit this week.

The compromise on extending minimum wage coverage and reforming nursing care insurance allows the chancellor to focus on her plans to cut a deal on a new treaty for the bloc at the June 21-22 meeting of EU leaders in Brussels.

Prior to today's agreement between Merkel's conservatives and their Social Democrat (SPD) partners, relations in the coalition had been marred by bitter infighting as the SPD sought to shore up its flagging support among voters.

Merkel has had to strike a delicate balance to reconcile the interests of her conservatives and the SPD -- two political groupings which have spent most of the past 60 years as bitter rivals, but who were forced into a coalition in 2005.

While her reputation abroad has grown thanks to successes on the international stage, most recently with a G8 agreement to push for a new accord on global warming, her domestic agenda has been held back by conflicting interests within the coalition.

Merkel will aim to build on her success at the Heiligendamm G8 summit when she goes to Brussels in search of agreement on a new treaty to replace the defunct EU constitution. Germany holds the EU's rotating presidency until the end of June.

At the meeting in the chancellery that began yesterday evening, coalition leaders agreed to extend a law which would enable more sectors of the economy to set their own minimum wage, a compromise that had been widely predicted by analysts.

The SPD, which recent opinion polls have shown lagging their rivals by nearly 10 percentage points, had been pushing for the introduction of a flat minimum wage for the entire economy.

Conservatives had rejected this proposal outright.

Today's compromise foresees extending the so-called 'Entsendegesetz'' law to additional industries.

A deal was also reached to raise mandatory contributions -- split between workers and employers -- towards statutory nursing care insurance by 0.25 percentage points of gross wages.

The increase is due to take effect from July 2008, though in return, contributions to unemployment insurance will fall by 0.3 percentage points from the beginning of next year.

The leaders failed, however, to agree on what to do about Deutsche Post's domestic mail monopoly.

Conservatives maintain that the monopoly should be scrapped at the end of this year as planned, while the SPD says it should be upheld until other EU countries have followed suit.

REUTERS RJ VC1325