By Thomas Escritt and Sarah Marsh
BERLIN (Reuters) -Chancellor Olaf Scholz on Wednesday appealed to parties to pass measures such as raising child benefits and lifting tax thresholds before a February snap election, stressing that Germans did not need to choose between security and prosperity.
Scholz was addressing parliament in political leaders' first public head-to-head since the collapse of the chancellor's ruling coalition last week forced the country into a snap election that will likely take place in February.
With parties already in election mode, Scholz is fighting an uphill battle to keep his job, with polls showing the conservative opposition led by Friedrich Merz set to gain power.
The government's collapse hits Germany at a vulnerable time, with Europe's largest economy facing a second year of contraction and anxieties festering over trade tariffs, future support for Ukraine and the competitiveness of German firms.
Speaking to the Bundestag, Scholz said Europe had a responsibility towards Ukraine but that aid money should not lead to cuts in pensions or care at home.
"Let us work together for the good of the country until the new election," he said. How to finance support for Ukraine would be a key election issue, he said.
"In my view, it cannot and should not be the case that support for Ukraine leads to cuts in pensions, care and health," said Scholz, who has proposed overriding the country's self-imposed debt brake in order to finance Ukraine support.
The leadership in Scholz's Social Democrats (SPD) has so far publicly backed him to stay on as leader despite his low personal ratings and although a majority even of SPD voters would prefer Defence Minister Boris Pistorius in charge.
The parliamentary exchange on Wednesday was unusually tense, with Scholz fidgeting with his hands clasped on his desk, Christian Lindner, whom he fired as his finance minister last week, shifting uneasily back and forth in his chair, and Merz gazing stiffly ahead as Scholz spoke.
SUBSTITUTE GOVERNMENT
Scholz has grappled with how to safeguard Germans' living standards as higher inflation after the pandemic and Russia's full-scale invasion of Ukraine in 2022 pushed up interest rates and fuelled wage demands.
Adding to the gloom, a leading economic council cut its growth forecasts in 2024 and 2025 on Wednesday, making Germany the worst performer among the Group of Seven rich democracies.
Economic worries and higher immigration numbers have helped the rise of the anti-immigration Alternative for Germany (AfD), which is polling in second place, and the leftist Sahra Wagenknecht Alliance (BSW).
Scholz nevertheless urged the opposition to prevent his country from becoming as polarized as the United States.
"There is no democracy without compromises," he said.
Setting out his stall, Merz earlier on Wednesday signaled a willingness to reform a constitutionally enshrined limit on state spending known as the debt brake, provided any reform be used to finance investment rather than social spending.
Speaking after Scholz, he said he was willing to help Scholz's minority government strengthen the constitutional court given the rise of populism.
He would not, however, support anything more from the chancellor's legislative agenda until a confidence vote scheduled for December as he could not trust him to keep any promises given beforehand, he said, without specifying.
"We are not substitute players for your broken government," Merz said.
Merz said the new government must do everything to regain Germany's economic competitiveness. He also said it must regain control over migration by turning away people at the border, but took care to publicly distance himself from the AfD.
"Germany needs a fundamentally different policy, especially in terms of migration policy, foreign security and European policy and economic policy," he said.
Merz also criticized the single-minded focus of Scholz's government on "wind and solar energy, e-mobility and heat pumps", urging instead "an energy and transport policy that is truly open to technology".