Wake up and smell the austerity! Shock Doctrine come to Europe.

[Magda Hassan]

Merkel Unveils Austerity Package for Germany

By JUDY DEMPSEY

Published: June 7, 20

BERLIN — Chancellor Angela Merkel on Monday unveiled a major austerity package aimed at finding savings of more than €85 billion by 2014, but it was immediately criticized by the opposition and trade unions, which pledged that they would unite to fight cutbacks they claimed would undermine the country’s generous social welfare system.
“The savings offer no perspective whatsoever,” said Michael Sommer, leader of the German Federation of Trade Unions.
Speaking after two days of intense talks in the Chancellery, Mrs. Merkel said the savings program — the largest in the country’s postwar history — was the only way for Germany to “stand on its legs.”
She said the cuts were designed to bring the budget deficit under control and, more important, comply with a legal ruling whereby Germany is bound by the “Schuldenbremse,” or debt-brake, which the German Parliament passed into law last year. The law stipulates that the government has to limit its debts to a maximum of 0.35 percent of gross domestic product by 2016, which puts immense pressure on the government to find savings between now and then. Net borrowing, which soared to €85.8 billion, or $125 billion, this year, about €48 billion more than 2009, was the largest figure since World War II.
Justifying the savings, Mrs. Merkel insisted they would make the German economy more efficient and more competitive. “I am optimistic about our goal,” she said.
But it is not a view shared by many economists — and certainly not by those at the U.S. Treasury — who argue that trimming spending is not the road to economic recovery.
Timothy F. Geithner, the U.S. Treasury secretary, over the weekend urged “stronger domestic demand growth” in European countries, especially in Germany, Europe’s largest economy, which has a large trade surplus.
Opinion polls published Monday indicated that Germans were not willing to spend and instead would save because of the fear of losing their jobs. This is despite the fact that the unemployment rate in Germany fell for the 11th month running in May, a rare exception among euro-zone countries.
The decline pushed the adjusted jobless rate down to 7.7 percent in May from 7.8 percent in the previous month, according to the Federal Labor Office.
A combination of wage restraint and more flexible labor contracts has helped to make the German economy more efficient and encourage companies to begin hiring again, according to Deutsche Bank Research. But Germans have been very cautious about spending.
Mrs. Merkel said savings for next year would amount to €11.1 billion, rising to €17.1 billion in 2012, €25.7 billion in 2013 and €32.4 billion in 2014.
She said the savings will include cutting 10,000 jobs in the federal administration, reducing special parental allowances for the unemployed and trimming the armed forces.
Defense Minister Karl-Theodor zu Guttenberg had wanted to introduce radical cutbacks by reducing the number of soldiers to 150,000 from 250,000 and even abolishing conscription, which will already be reduced next month to six months from nine months. It became clear during the past two days that Mrs. Merkel’s conservative bloc was so divided over abolishing conscription that she had agreed instead to establish a special commission to consider how the armed forces can be modernized.
“Everything is up for discussion,” Mrs. Merkel said.
Whatever the outcome of that commission, the armed forces, which have a budget of €30 billion for 2010, will make cuts of €4 billion between 2013 and 2014.
At the same time, certain subsidies for the energy sector will be abolished and a special environmental surcharge will be imposed on airline passengers.
None of the savings are to be financed by an increase in the value-added tax, sales tax or any other taxes, said Guido Westerwelle, foreign minister and leader of the pro-business Free Democratic Party. His party, which is committed to a major tax reform and tax cuts, fought tooth and nail during the negotiations to prevent any tax increases.
Mrs. Merkel will present her proposals in the coming weeks to the Bundestag, the lower house of Parliament, where she is expected to be receive a very tough reception from the opposition.
The opposition, consisting of the Social Democrats, Greens and Left Party, are in a combative mood, capitalizing on Mrs. Merkel’s political woes.
Her own popularity and that of her conservative bloc have been falling, even more after Horst Köhler resigned as president last week and a leading conservative premier, Roland Koch, quit, saying that he had had enough of politics.
Even more worrying for Mrs. Merkel is the surge of public support for Joachim Gauck, an Eastern German and former head of the special committee overseeing the secret police files of the former East Germany. Mr. Gauck was nominated Monday by the Social Democrats and the Greens as their presidential candidate. The Left has yet to decide whom to nominate.
Mr. Gauck, 70, could pose a formidable challenge to Christian Wulff, the conservative premier of Lower Saxony, who was selected by regional party leaders as presidential candidate over Mrs. Merkel’s preferred candidate, the labor minister, Ursula von der Leyen.