German Chancellor Angela Merkel told reporters after talks in Berlin that her Christian Democrats (CDU) had reached agreement with their junior coalition partners, the pro-business Free Democrats (FDP), on the thorny issue of tax breaks.

The tax break plan is to encompass six billion euros ($8.3 billion), which will be paid out in two- and four-billion-euro instalments, in 2013 and 2014, respectively.

Merkel said the agreement, which she described as being "drawn by eye," was aimed at establishing "more justice" in the German tax system.

Hatchet buried

FDP head Phillip Rösler called the agreement "the beginning of the end" to the dispute that has damaged relations between his party and the CDU.

"This agreement is about making sure that we continue to motivate the people who bring forth results in German society," he said.

However, the plan will mean an increase in costs for care-givers, which are to be raised by one percent starting in 2013, resulting in 1.1 billion euros in extra revenues.

The agreement also contains pledges for investments in transportation, which Merkel called "central" to German growth. She added that Germany had to remain an "anchor of stability" in the face of the eurozone debt crisis.

Author: Gabriel Borrud (AFP, dpa)

Editor: Ben Knight