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Germany Prepares for $13 Billion 'Debt Guillotine'

The German government is to begin a drastic budget austerity program next year to set an example to the rest of the euro zone, and comply with a “debt guillotine” that has been written into the German constitution.

Reichstag Parliment building, Berlin, Germany
Maremagnum | Getty Images
Reichstag Parliment building, Berlin, Germany

The cuts are expected to total at least €10 billion ($13 billion, £9 billion) a year until 2016, ­government officials said.

Tax rises as well as reduced spending are likely to be considered, in spite of a previous promise by the coalition to put tax cuts at the centre of its program. Lower state subsidies and the abolition of tax exemptions and allowances are a top target.

Wolfgang Schäuble, finance minister, suggested, in an interview published on Sunday, that reforms of unemployment and social benefits could provide some of the savings if they helped to boost employment rates. He promised that there would be no budget “trickery” in the cuts, and that education and training would be protected.

His proposal was instantly condemned by the centre-left opposition Social Democrats as an attack on the poor. Sigmar Gabriel, SPD leader, called instead for tax rises on the bankers and speculators who had caused the crisis.

The cuts were consistent with repeated promises by Angela Merkel, the chancellor, and Mr Schäuble, to reduce their €80 billion record net borrowing requirement from next year. But the scale of the measures was likely to shock the other 15 members of the euro zone who have to impose austerity programs as part of the €750 billion stabilization package for the common currency. They were hoping Germany would be the one source of economic growth for the monetary area.

The euro zone crisis, and German calls for urgent agreement on international financial market regulation, will be top of the agenda when Tim Geithner, the US Treasury Secretary, meets Mr Schäuble in Berlin on Thursday. Mr Geithner, who was expected to criticize lack of consultation over Berlin’s unilateral move last week to ban naked short selling, has called for Germany to do more to boost domestic demand. Mr Schäuble insists he cannot do so by deficit spending.

The German savings plan is intended to bring the budget deficit down from more than 5 per cent of gross domestic product to 3 per cent – in line with the long-standing EU stability and growth pact target – by 2013, Mr Schäuble said. It was also needed to meet the new debt rule in the German constitution, which calls for a cut in the structural deficit, excluding cyclical effects, to 0.35 per cent of GDP by 2016.

Ms Merkel has summoned a closed-door conference of the leading members of her centre-right coalition in two weeks to decide on guidelines for the proposed cuts to be laid out in the 2011 budget.

Strains were emerging in public, however, between the coalition’s parties and within Ms Merkel’s Christian Democratic Union, over where the cuts should fall, and whether also to raise taxes.

Mr Schäuble rejected the suggestion of a regional baron of the ruling party – Roland Koch, CDU prime minister in the state of Hesse – that cuts should cover education, research and care services.

“Savings in those areas would be wrong,” Mr Schäuble told the Frankfurter Allgemeine newspaper. “They would reduce the chances of increasing our growth potential.”

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

Three CDU state premiers, including Mr Koch, have called for targeted tax increases to be considered. They would be opposed by the Free Democrats, junior partners in the coalition, who have had to delay their plans for a €16bn tax-cutting package, and the Bavaria-based Christian Social Union.

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