UPDATE 5-Merkel's conservatives make big concessions to SPD in coalition deal

* SPD to get foreign, finance, labour ministries -source

* CDU to get economy and defence ministries -Bild

* Bavarian CSU to get interior ministry (Adds details from coalition agreement, reaction from business association)

BERLIN, Feb 7 (Reuters) - German Chancellor Angela Merkel's conservatives made major concessions to the centre-left Social Democrats (SPD) to agree a coalition deal on Wednesday that should give Europe's powerhouse a new government after four months of uncertainty.

In a move likely to herald a shift in Germany's euro zone policy, a source involved in the negotiations said the SPD would take the finance ministry, a post held until recently by conservative Wolfgang Schaeuble, widely despised in struggling euro zone states during his eight-year tenure for his rigid focus on fiscal discipline.

SPD leader Martin Schulz said earlier this week that his party had ensured an agreement with the conservatives would put an end to "forced austerity" and set up an investment budget for the euro zone.

Handing over the crucial finance ministry suggests the conservatives had to make big concessions to get the SPD to agree to renew the 'grand coalition' that has governed Germany since 2013 and secure Merkel's fourth term in office.

Merkel said the difficult coalition talks had been worth it and the government would be a stable one.

Schulz said the agreement reached with the conservatives would mean a change in direction for the European Union.

Bruised by its worst election result in the post-war era, the SPD had planned to revamp itself in opposition and only agreed to the coalition talks reluctantly. Its 464,000 members still have the chance to veto the deal in a postal ballot.

Julian Reichelt, editor of Germany's biggest selling paper, Bild, suggested they had got the better end of the deal, tweeting: "This is the first SPD government led by a CDU chancellor."

While the talks have dragged on, Europe's biggest economy has moved into overdrive, suggesting that there may be increased scope for government spending and investment.

In a message posted alongside a photo of Schulz and other SPD negotiators smiling, the SPD negotiators wrote: "Tired but happy. There is an agreement! Finally. Now the final details are being worked into the text."

The deal should allow Germany to resume its leading role in international affairs and, at least for now, put an end to questions about how long Merkel will stay in her job.


Investors and partner countries had been concerned by Merkel's struggle to assemble a government at a time when Europe faces multiple challenges, including the need for euro zone reform and Britain's looming departure from the EU.

In a 177-page coalition document, the parties laid out plans to develop the euro zone's bailout fund into a full-blown European Monetary Fund and support budgetary means to shield the euro zone from crises.

"We want a (European Union) budget for future spending geared toward bringing more benefits for Europe," they wrote, adding that they backed structural reforms championed by French President Emmanuel Macron.

A negotiating source said the SPD would have the finance and labour ministries while media reported it would also secure the justice, family and environment ministries.

Bild newspaper reported that Schulz would become foreign minister, despite having previously vowed not to take a cabinet position under Merkel. Newspaper Sueddeutsche Zeitung said Schulz would quit as SPD leader and parliamentary floor leader Andrea Nahles was ready to take over.

Hamburg Mayor Olaf Scholz is slated to take over as finance minister, according to sources familiar with the negotiations.

Merkel's Christian Democrats (CDU) will get the economy, defence, education and agriculture ministries while their Bavarian allies, the Christian Social Union (CSU), will provide the interior minister in the form of Horst Seehofer, who talks tough on migration, media reported.

The conservative bloc and the SPD began talks about renewing their alliance after Merkel's coalition talks with two smaller parties collapsed last November.

The two blocs, whose support has waned in polls since the election, had aimed to strike a deal on Sunday, but repeatedly extended that deadline as they grappled with reforms to health insurance and employment policy demanded by the SPD.


After a session lasting more than 24 hours, the parties ultimately agreed to cap at 18 months fixed-term contracts imposed by employers without justification, down from 24 months under current rules, a source said.

The SPD had wanted to give employees more security by totally banning employers from imposing short-term contracts without justification. But conservatives balked, arguing that firms needed hiring and firing flexibility to be competitive.

On healthcare, the parties agreed to set up a commission to work on a joint fee structure for private and public patients, a negotiating source said, adding that whether it was ultimately introduced would depend on its feasibility.

Doctors tend to get more money for treating private patients under the current system, so often favour them over public patients.

Florian Hense, an economist at Berenberg, said the labour and healthcare reforms, along with more generous pension entitlements, could be expensive. "Germany may pay a price for them with slightly reduced trend growth and a less solidly financed budget after the next recession."

That prospect may be a way off, however. The DIHK Chambers of Industry and Commerce raised its 2018 growth forecast for the German economy to a robust 2.7 percent as consumers with rising wages, secure jobs and low borrowing costs spend more while exports and company investments rebound.

"Companies have never been more upbeat," DIHK said in its latest business survey, adding that German firms are boosting investment plans at an unprecedented pace.

Germany's BDI industry association said the coalition agreement lacked ambition. "They've got it wrong in terms of spending - they're heading towards redistribution rather than shoring up the future," it said.

Alice Weidel, parliamentary leader of the far-right Alternative for Germany (AfD), the biggest opposition party, tweeted: "Things could not get worse for Germany," calling the coalition deal "insane" as it did not contain an upper limit for migration. (Additional reporting by Holger Hansen, Michael Nienaber, Joseph Nasr, Thorsten Severin and Andrea Shalal; Writing by Michelle Martin; Editing by Kevin Liffey)