Plans for Sweeping Cuts Germany Tries to Plug Gaping Hole in Its Budget

The task of putting together next year's budget is presenting German Chancellor Angela Merkel with a huge challenge. The government urgently needs to cut costs in order to comply with the country's new debt ceiling rule and to help stabilize the euro. The chancellor wants to set an example for Europe on how best to cut costs.

The Chancellery in Berlin: Angela Merkel and Finance Minister Wolfgang Schäuble are trying to plug the gaps in Germany's budget.

The Chancellery in Berlin: Angela Merkel and Finance Minister Wolfgang Schäuble are trying to plug the gaps in Germany's budget.

By , and Merlind Theile

It was the afternoon of Sunday, May 16 when Germany's coalition government of the center-right Christian Democrats (CDU/CSU) and the liberal Free Democratic Party (FDP) finally got down to the business of governing -- six months after taking office. In her office on the eighth floor of the Chancellery in Berlin, Chancellor Angela Merkel met with Finance Minister Wolfgang Schäuble, who had just been released from the hospital.

The chancellor briefly asked about the health of her finance minister, who for several weeks had only been able to perform his official duties with difficulty. After being plagued with a surgical wound that refused to heal properly, Schäuble had to be readmitted to the hospital when he had an adverse reaction to a medication.

The two politicians eventually turned to a similarly urgent case, Germany's national budget, which is currently faring almost as poorly as the minister who is in charge of it. By the end of June, Merkel and her finance chief will not only be called upon to assemble an austerity package, but will also have to restructure the government's finances from the ground up.

The Need to Cut Costs

It's an enormous challenge. The German government faces an ongoing gap of €75 billion ($93 billion) between what it takes in and its expenditures, something that economists refer to as a structural deficit. Contrary to previous assumptions, this deficit has risen by another €5 billion because projected tax revenues have turned out to be lower than expected, as the most recent forecast by the relevant experts showed. The need to cut costs is growing, partly as a result of the new "debt brake" or debt ceiling provision that has been incorporated into Germany's constitution, which will require Merkel and Schäuble to reduce the government's budget by an additional €10 billion a year between now and 2016.

The task of putting together the budget is more difficult than it has been in years, and not just because of the sheer magnitude of the necessary austerity package. The success of Merkel and Schäuble's efforts will be critical to nothing less than the fate of the CDU/CSU-FDP coalition government and, even more importantly, the stability of the euro.

The chancellor wants to set an example for Europe on how best to cut costs. She wants to prove that the German debt ceiling works, and she wants to finally go on the offensive with her quarreling coalition, after weeks of defeats, flops and failures.

Merkel spent half a year putting off every unpleasant decision, out of fear of alienating voters in North Rhine-Westphalia in the run-up to a critical state parliamentary election on May 9. Instead, she made handouts worth billions, for example by increasing child benefit and reducing the value-added tax burden for hotels.

Now Merkel's government is short of cash and, after a bitter setback in the North Rhine-Westphalia election, has also lost its majority in Germany's upper legislative chamber, the Bundesrat, which represents the federal states. The loss of its majority will mean the government will need opposition approval for major legislation.

Hail of Criticism

Since the election, Merkel has faced an almost unprecedented hail of criticism from within her own ranks. The Christian Social Union, the CDU's Bavarian sister party, accused her of poor management during the euro crisis. The wing of the CDU that represents the interests of Germany's famous Mittelstand (small and medium-sized enterprises) complained about a "lack of decisiveness" in enacting reforms. And Roland Koch, the governor of the western state of Hesse who announced Tuesday that he was stepping down, lectured Merkel on what her priorities should be in the coming weeks. "The time of caution," he said, "is over."

Now the chancellor must prove that she still holds the reins when it comes to the budget, the central task of this legislative period. As a result, Merkel and Schäuble, during their May 16 meeting, vowed to get down to the business of seriously saving money within the coming weeks.

But because it's also a question of power, Merkel and Schäuble began by laying out a taboo: The budget of Education Minister Annette Schavan will remain exempt from all cuts. As stipulated in the parties' coalition agreement, education expenditures are to be increased to €12 billion by 2013. Merkel and Schäuble reasoned that because today's education is tomorrow's growth, Schavan should not be expected to make any spending cuts.

In doing so, they were clearly giving Merkel's main adversary, Koch, the brush-off. Two weeks ago, the governor of Hesse took every opportunity to demand cutbacks in education spending.

Merkel and her finance minister also decided to generate the necessary savings mainly in the coming year. This means that instead of the €10 billion originally foreseen, Schäuble will have to come up with €15 billion in 2011.


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