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Mid-crisis, Germany prepares to tighten belt

Officials overseeing huge spending cuts that critics say might bring recovery to a halt. -AFP

Wed, Jun 09, 2010

BERLIN, GERMANY (AFP) - At the gleaming shopping centre in Berlin's iconic Potsdamer Platz, business is brisk. Bag-clutching Germans bustle in and out of the shops as if the economic crisis were half a world away.

But only a short hop away from the glittering halls, at Chancellor Angela Merkel's office, officials are overseeing a huge package of spending cuts that critics fear could bring the recovery of Europe's top economy to a halt.

Further afield, in Brussels, Paris and Washington, experts worry that Germany may be squeezing itself too hard at a time when many are looking to Berlin to haul Europe out of its crisis.

Merkel won re-election to a second term in September on a platform of tax cuts but has since been forced into reverse as the Greek debt crisis showed the importance of fiscal discipline.

Faced with a projected budget deficit this year nearly double the EU maximum, Merkel unveiled a mammoth austerity package Monday that foresees 86 billion euros (102 billion dollars) in spending cuts by 2014.

Among the measures are a special tax on flights, higher taxes for tobacco and brutal cuts across all government departments, hitting social welfare spending the hardest.

In all, Merkel wants to save around 11.2 billion euros next year, to comply with a new law that the country must have an approximately balanced budget by 2016.

"These are serious times, these are difficult times. We cannot afford everything we would like if we hope to plan for the future and that is why the budget has been laid out like this for the coming years," she said.

However, Berlin's hair-shirt approach has caused consternation in some of its biggest trading partners.

Janusz Lewandowski, EU budgetary commissioner, said last week: "Germany is an island of stability in the crisis and does not need to make many savings."

French Finance Minister Christine Lagarde ruffled German feathers when she suggested that Berlin should "do a little something" to help its eurozone partners, proposing tax cuts to spur the economy.

On a recent visit to Berlin, US Treasury Secretary Timothy Geithner, complained that his country could not be the only engine driving global growth.

"The Americans simply do not understand why we have to step so hard on the brake," business daily Handelsblatt quoted a member of Merkel's inner circle as saying.

Domestically too, analysts and business leaders have warned against throttling growth with overly strict austerity measures.

Dennis Snower, president of the IfW economic institute, told the Bild daily: "The recovery is not yet stable, so strict savings measures now would be dangerous and could push us back into recession."

Moreover, the budgetary tightening represents a political headache for Merkel, with the junior partners in her centre-right coalition, the pro-business Free Democrats, passionately opposed to tax hikes.

However, Merkel appears to have the public on her side. A recent poll for ZDF television showed nearly two-thirds of Germans thought tax cuts were a bad idea given the parlous state of the country's finances.

Most of the shoppers in Potsdamer Platz seemed to agree.

Ernst Hofmann, a 68-year-old retired writer said: "With the current economic crisis in this country, the tax cuts that were promised are simply impossible."

But for 33-year-old teacher Brigitte Metzger at least, the belt-tightening will not dampen her retail habits.

"I might think longer about bigger purchases but it will not stop me shopping," she said, fresh from snapping up a new skirt.

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