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German cabinet backs Merkel fiscal austerity plan

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June 7, 2010

(BBC)  German Chancellor Angela Merkel has won the backing of her coalition cabinet for a fiscal austerity programme.

Berlin will cut the budget deficit by a record 80bn euros ($96bn; £66bn) by 2014.

The plan would cut the deficit by around 3% of GDP. The total deficit in 2009 was 3.1%, but is projected to grow to over 5% this year.

“Germany has an outstanding chance to set a good example,” said Mrs Merkel.

Among the measures agreed were a cut in subsidies to parents, 10,000 government job cuts over four years, and higher taxes on nuclear power.

The three-party cabinet also made one high-profile cut close to home, when it agreed to postpone plans to rebuild the baroque Stadtschloss palace in the heart of the capital city.

Trade surplus

However, many economists – notably US Nobel laureate Paul Krugman – have been highly critical of German budget plans.

They argue that with so many of the southern European governments under pressure from markets to slash spending, German budget cuts are the last thing that the European economy needs.

Moreover, Germany has run a large trade surplus with other European economies in recent years.

Economists say that this surplus helped exacerbate the debt problems that built up southern Europe, and now needs to be reversed.

However, if German households and companies do not increase spending, then the government’s budget plans will actually exacerbate the country’s surplus.

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