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Austerity - Germany's turn

Gavin Hewitt | 17:30 UK time, Monday, 7 June 2010

Germany today signed up to Europe's era of austerity. The package of budget cuts and taxes were billed as the biggest austerity drive since World War Two.

Chancellor Angela Merkel said "we can only spend what we bring in". The plan is for Europe's largest economy to save 80 billion euros by 2014.

This was not just about repairing a hole in Germany's finances; it was also about sending a message to other countries in the eurozone that Europe had to put its financial house in order.

"Germany, as the biggest economy, has the outstanding task of setting a good example," said Mrs Merkel.

The example is austerity, living within a country's means.

"I think recent months have shown, in the case of Greece and other eurozone countries, how extraordinarily important sound finances are...they are basic conditions for stability and prosperity," the chancellor said.

Her coalition partner Guido Westerwelle said "80 billion euros can't be saved with a pair of nail clippers".

Some welfare benefits will be cut. The long-term unemployed will lose some entitlements. Over four years 10,000 government jobs will be shed.

Payments to new parents will be reduced. The defence ministry will examine how to lose 40,000 personnel. There will be an environmental tax on domestic air travel. There will be a new tax on the profits made by operators of nuclear power stations.

Like elsewhere in Europe, the German chancellor has tried to share the pain across society. One aim is to get single mothers and those over 50 back into the workforce.

The message that came out of the meeting of G20 finance ministers at the weekend was that the time for slashing spending had arrived. The Canadian Finance Minister, Jim Flaherty, said: "We are concerned as finance ministers with some of the vulnerable countries in Europe that are running large deficits. This cannot continue. They have to fiscally consolidate."

Today in the UK, British Prime Minister David Cameron warned that the forthcoming cuts would "affect our whole way of life". One union leader described it as a "chilling attack on the public sector".

Others have warned of the dangers to growth of so many countries cutting spending together. That is the unknown risk: will these cutbacks choke off a fragile recovery in Europe where growth is currently running at an anaemic 0.2%? Economists disagree on what impact these measures will have. Some even fear that in reducing public spending Europe is repeating the mistakes of the 1930s.

The IMF today challenged Europe's leaders "to take decisive action". That action includes reducing debt, controlling spending, repairing the financial system including the banking sector, and embracing budgetary discipline in the future.


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