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Merkel's New Government 'Financially Foolhardy and Politically Faint-Hearted'

Chancellor Angela Merkel is taking a big gamble by cutting taxes at a time of record government debt, write media commentators. Her new government is betting that lower taxes will boost economic growth enough to allow her to avoid big spending cuts. Some commentators say she has no choice.

Germany has a new center-right government after three weeks of coalition talks that ended in the early hours of Saturday morning. Chancellor Angela Merkel's conservatives and the pro-business Free Democrats have come up with a program of tax cuts and benefit increases, and have shelved issues they couldn't agree on, for example health policy.

German media commentators say Merkel is taking a big risk by cutting taxes at a time when the government debt is already at record levels in the wake of the financial crisis. In effect, she is gambling that the tax cuts will spur growth and thereby pay for themselves through increased tax revenues once Europe's largest economy starts chugging again.

If that strategy doesn't work, the government will have no option but to slash spending to stop its budget getting out of control. Investors and consumers may have their doubts about whether Merkel's strategy will work. But several commentators say she has no option but to try. Reining in spending now, just when the economy has left recession and embarked on a very fragile recovery, would be even more risky, they say.

Business daily Handelsblatt writes:

"The main defect of this government is that it combines financial foolhardiness with political faint-heartedness. It is foolhardy to pack credit-financed presents on top of record government debt.

"Twenty years after the fall of the Berlin Wall one is reminded of the government of Helmut Kohl which told the Germans that the immense costs of unification could be shouldered without a radical financial reform. Kohl used the first Gulf War in 1991 as an excuse to break his promise and to raise taxes. Merkel has left herself a way out too: her government will compile a 'financial status' in 2011. That will give her the chance to catch up with something that is already clear today: her government will have to reduce debt through a combination of tough spending cuts and new revenue. The uncertainty surrounding the maneuvers and tricks the government will come up with to break its promises is weighing on investors and consumers. That, together with the extent to which the state is tapping the financial market, is weakening the momentum for economic growth.

"There's only one hope left: the new finance minister, Wolfgang Schäuble. His first statements since his appointment reveal the realism that has been sorely lacking in others. He's thick-skinned and is well aware of Germany's European obligations. If he turns the 'financial status' into his agenda, the botched launch of this government can be mended. But that's little more than a hope."

Business daily Financial Times Deutschland writes:

"They haven't come up with any major reforms, and decisive issues such as health reform and energy policy have been left up to working groups. But the question is whether the country now needs major reform. It's far more important that the economy gets going again. And in this central point the new government has laid the right foundations. The conservatives and FDP aren't making the mistake of choking off the delicate recovery with spending cuts. On the contrary: they are trying to support the recovery."

Left-wing Die Tageszeitung writes:

"If one were to find this collection of minor admininstrative steps on a subway one would assume it were the election manifesto of an exhausted ruling party that has run out of ideas rather than the program of a fresh coalition.

Center-left Süddeutsche Zeitung writes:

"This coalition agreement has many shortcomings but so far its creators don't warrant the accusation of social callousness. The first trademark of the coalition is its incompleteness. The government will be sworn in on Wednesday even though the coalition isn't ready for it. The entire agreement contains plans that haven't been fully formulated yet. It resembles a novel that is full of printing errors: whenever things get exciting there's a page missing.

"The incompleteness of the new alliance fits in with the picture that Merkel herself gave during the talks which weren't her best three weeks. The chancellor herself stands for little in this agreement. She wants to stimulate growth but was pushed into making concessions of which she said nothing during the election campaign. During the campaign Merkel spoke of modertate tax cuts of more than €15 billion. Now it's €24 billion."

Mass circulation daily Bild writes:

"The conservatives and the FDP have kept their tax promises. People will get noticeable tax cuts. The coalition is putting all its eggs in one basket and relying on growth. If there's no growth this promise will come to nothing. It's a bold move. But at the moment it's the only possible one."

Conservative Frankfurter Allgemeine Zeitung writes:

"Betting on growth, the way the chancellor is now doing it, is risky. Because it's true what she says: that the crisis isn't over yet."

"It's reckless of the conservatives and the FDP to launch their government without putting a single additional brake on government debt. No one expected the new coalition would pull out of all its crisis aid overnight, halt new borrowing or jettison its tax reform plans. But one had a right to expect that the agreement would not just contain the timetable of tax cuts but also include spending cuts with the same level of commitment, if not for tomorrow then for the day after tomorrow. There's not a word in those 130 pages about how the new government proposes to cut spending."

David Crossland