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06/07/2010

The German government on Monday announced plans to reduce spending by €80 billion ($95.7 billion) by 2014 in the largest package of cuts since World War II. The austerity program aims at reducing the budget deficit and helping to protect the euro as it continues its slide.

"We have to save €80 billion by 2014 to put our financial future back on a solid footing," Merkel told a press conference on Monday afternoon. She said the budget cuts for Germany, Europe's largest economy, were a "unique show of strength" that signalled her government's commitment to tackling the European debt problems that have plunged the euro single currency into crisis.

"Germany as the largest economy has a duty to set a good example," she said. A number of European nations have fashioned similar austerity programs, with Spain passing sharp cuts last week and Greece having pushed through far-reaching emergency savings measures earlier this year in a last ditch attempt to avoid bankruptcy.

The government plans to cut social spending in such areas as jobless benefits and will also shed many civil service jobs. There will be no reductions in government spending on education and research and no increases in income or value-added-tax, Merkel said.

Business subsidies, however, will be reduced and a new levy will be imposed on air traffic. Power companies will be charged a new nuclear fuel rod tax and there will also be a financial markets tax. The government also plans to save money through a comprehensive reform of the German army, the Bundeswehr, though conscription is to continue, despite musings to the contrary by German Defense Minister Karl Theodor zu Guttenberg.

'We Can't Afford Everything'

Merkel's cabinet also agreed to delay the planned reconstruction of Berlin's city palace by three years from 2011 to 2014 -- a move that will save the government €440 million.

The savings plan is a far cry from the mission Merkel's governing coalition -- which pairs her conservatives with the pro-business Free Democratic Party (FDP) -- set for itself when it took office last October. Together with FDP head Guido Westerwelle, she had hoped to pass significant tax cuts. But the ongoing financial crisis and rapidly developing euro crisis, which has led to the fashioning of a €110 billion bailout of Greece and a €750 billion war chest to prop up the euro, has strapped Germany's already fragile budget.

The savings plan comes as yet another blow to Westerwelle's political fortunes. Tax cuts had become a signature issue for him and his party and he seemed loathe to abandon the plan even as Merkel began talking about austerity measures. Leaders of Merkel's coalition met for 11 hours on Sunday to agree on the plans and then spent longer than expected finalizing them on Monday.

Merkel said there was no alternative to drastic savings. "These are serious and difficult times," she said. "We can't afford everything we would like if we want to be able to shape our future."

The government has to make radical budget savings to meet its commitments to reduce the budget deficit. The Stability Pact governing Europe's monetary union calls for Berlin to reduce the deficit from its current level of 5 percent of GDP to below the 3 percent ceiling by 2013. Furthermore, Berlin recently passed a constitutional amendment requiring that the federal budget be balanced by 2016.

After a brief period of relative stability, the euro fell again against the dollar over the weekend and was trading on Monday below $1.20.