German government reforms vetoed

Germany's ambitious package of reforms aimed at kickstarting Europe's largest economy has hit a brick wall.

The opposition-controlled upper house of parliament rejected plans to speed up 15.5bn euros ($18bn) of tax cuts. It also vetoed labour law changes.

The cuts were at the heart of Chancellor Gerhard Schroeder's sweeping reforms - known as Agenda 2010 - aimed at getting Germany's finances back in order.

Mr Schroeder has staked his political future on the success of the agenda.

The measures will now go to a parliamentary arbitration committee for negotiations aimed at finding a compromise by Christmas.

Taxing issue

He hopes that tax cuts, which have helped drive expansion in the US, will also crank up the stagnant German economy.

But conservatives fear that the tax cut will force the government to run up too much new debt.

The country's budget deficit already exceeds the European Union limit of 3% of gross domestic product.

Sputtering growth and stubbornly high unemployment means many politicians are wary of cutting benefits and trimming state revenues.

Outlook

The Bundesrat, where Germany's 16 states are represented, is dominated by the opposition Christian Democratic Union. They have voiced concerns that the proposed reforms will strain public finances even further.

A government report Friday highlighted the ongoing troubles of the German economy.

German industrial production unexpectedly fell in September from the previous month. Output dropped 1.2 % from August.

While the government is forecasting economic growth of as much as 2% percent next year, many analysts warn that may be too optimistic.