'Not Exactly Ambitious': Bundesbank Head Attacks Merkel's Budget Plans

Berlin has announced a roadmap for balancing the federal budget by 2016. But for Bundesbank head Jens Weidmann, the plans aren't ambitious enough. He has slammed the policies of Chancellor Merkel, his former boss, in an interview. Germany has a special duty within Europe to reduce its deficit, he says.

Jens Weidmann gives Angela Merkel a piece of his mind (July 2011 photo). Zoom
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Jens Weidmann gives Angela Merkel a piece of his mind (July 2011 photo).

Since becoming head of Germany's central bank, the Bundesbank, in May 2011, Jens Weidmann has surprised observers with his independence and outspoken views. When it comes to dealing with the euro crisis, the 43-year-old banker has been fearless in contradicting the stated strategy of his former employer, Chancellor Angela Merkel. Now he has openly attacked the Merkel administration's budgetary policies.

In remarks to the Thursday edition of the Süddeutsche Zeitung newspaper, Weidmann, who previously served as a top economic adviser to Merkel, criticized the German government's budget consolidation plans as inadequate. He admitted that Germany had recently made considerable progress toward a balanced budget, and was doing relatively well compared to other European countries. "But it's not exactly ambitious when the federal structural deficit is expected to rise this year, and the federal government only wants to balance its budget in 2016," he said.

Weidmann lamented the fact that Germany had missed opportunities to reduce its budget deficit in years when the economy was doing well. "The mistakes of the past should not be repeated," he said. He also emphasized that Germany has a special duty within Europe to swiftly reduce its deficits on all levels.

With these latest remarks, Weidmann is cementing his reputation as an economic policy hardliner who does not shy away from conflict. In recent months, he has repeatedly attacked the European Central Bank's relaxed monetary policy, putting him in conflict with Merkel and her finance minister, Wolfgang Schäuble.

ECB Leader More Complimentary

European Central Bank head Mario Draghi, however, only had kind words for Berlin's approach to consolidating its finances. "Germany is a role model," he said. "The old European social welfare state model is dead, because it often could not get by without debts. The Germans have reinvented it -- without excessive debts."

Berlin is the biggest contributor to EU bailouts to help crisis-stricken countries, but has also insisted that other countries should do more to reduce their deficits -- something that has caused resentment in Greece and elsewhere against what is perceived as German high-handedness. Merkel also made the so-called fiscal pact a cornerstone of her strategy to fight the euro crisis. The pact, which 25 European countries agreed to at a summit in January, will oblige countries to balance their budgets and make it easier to punish deficit offenders. SPIEGEL reported recently, however, that the German government had fallen far short of its own austerity goals in 2011.

On Wednesday, the cabinet in Berlin approved the basic outlines for the 2013 budget as well as a financial plan for the period until 2016. According to the plan, the German government will only reach its goal of essentially balancing the budget in 2016. A constitutional amendment known as the "debt brake" obliges Germany to reduce its federal structural deficit -- which excludes one-off or short-term factors -- to just 0.35 percent by 2016. If that happens, it would be the first time since 1969 that Germany has balanced its budget.

The structural deficit is, however, expected to rise from 0.7 percent of GDP in 2011 to 1.0 percent in 2012. The government will have to significantly increase its borrowing in 2012 to finance its paid-in capital to the European Stability Mechanism (ESM), whose launch was brought forward to mid-2012.

Merkel Rejects Criticism

There has been speculation this week that Germany may come around to the idea of letting both euro rescue funds -- the temporary European Financial Stability Facility (EFSF) and the ESM which is due to replace it -- run in parallel, increasing the total funds available for bailouts. But that would mean that the German government's share of loans and guarantees for the funds could rise to €280 billion ($370 billion) instead of the planned €211 billion.

The roadmap for balancing the budget by 2016 has been criticized by some members of the coalition government, made up of Merkel's conservative Christian Democratic Union, its Bavarian sister party the Christian Social Union and the business-friendly Free Democratic Party. Certain parliamentarians want more ambitious austerity plans. Opposition politicians have also slammed the timetable. Carsten Schneider, budgetary policy spokesman for the center-left Social Democratic Party, said that the consolidation plans did not reflect any real effort on the part of the government. The government, he said, was not cutting spending. "The additional tax revenue is reducing the deficit by itself." Germany's healthy economy has recently resulted in better-then-expected tax revenues for the federal government.

Merkel, however, rejected such criticism, saying that her goal was the right mixture of consolidation and measures to stimulate growth.

The Finance Ministry announced on Thursday that tax revenue in February rose to €42.3 billion, a 6.9 percent increase on the previous year. The government's plans for balancing the budget are based on the assumption that tax revenues will continue to be healthy over the coming years. That, however, will only be the case if the economy remains robust.

dgs -- with wires

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