German cabinet backs Merkel fiscal austerity plan

Angela Merkel at parliament in Berlin, 19 May Chancellor Merkel says Germany cannot live beyond its means

German Chancellor Angela Merkel has been given the backing of her coalition cabinet for a fiscal austerity programme.

Berlin will cut the budget deficit by a record 80bn euros ($96bn; £66bn) by 2014.

The plan would cut the deficit by about 3% of GDP. The total deficit in 2009 was 3.1%, but is projected to grow to more than 5% this year.

"Germany has an outstanding chance to set a good example," said Mrs Merkel.

Germany is reluctantly providing the biggest national share of the euro rescue package and the bailout for Greece.

Palace postponement

Among the measures agreed were a plan to slash 30bn euros from the welfare budget, including a cut in subsidies to parents who stay at home.

Start Quote

The last months showed the significance of stable finances”

End Quote Angela Merkel

Up to 15,000 government jobs could be cut over four years, and there will be higher taxes on nuclear power, netting 10bn euros.

The government also wants to levy an environmental charge on passengers flying from German airports.

In the longer term, there are also plans to reform the military - potentially cutting 40,000 roles from the 250,000-strong force.

The three-party cabinet also made one high-profile cut close to home, when it agreed to postpone plans to rebuild the baroque Stadtschloss palace in the heart of the capital city.

Trade surplus

"I think that the last months showed the significance of stable finances, in relation to Greece and other euro-countries," Mrs Merkel said.

"They are the precondition for us to be able to live in stability and prosperity, for the economy to work, and for the rate of unemployment to fall again."

However, many economists - notably US Nobel laureate Paul Krugman - have been critical of German budget plans.

They argue that with so many of the southern European governments under pressure from markets to slash spending, German budget cuts are the last thing that the European economy needs.

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