Merkel sworn in, policy plans criticised

Angela Merkel faced new criticism of her economic plans yesterday as she began her second term as German chancellor.

Mrs Merkel’s new government, a coalition of her conservatives and the pro-business Free Democrats (FDP), unveiled a policy programme at the weekend which includes billions of euros in tax relief but fails to spell out how the cuts will be financed. The plans have been welcomed by economists and some of Berlin’s allies, but they have also been sharply criticised in the German media and by politicians here who say Mrs Merkel is not doing enough to tackle the rising deficit.

German President Horst Koehler, who swore in Mrs Merkel after she was formally elected by the lower house of parliament, warned her new government yesterday against “unrealistic growth hopes” and said the country must reduce its debt levels.

Luxembourg Prime Minister Jean-Claude Juncker, who as head of the Eurogroup chairs meetings of euro-zone finance ministers, suggested in the Wednesday edition of the Handelsblatt newspaper that Berlin was setting a bad example for the rest of Europe.

“In the coalition agreement, the consolidation elements are underdone and the expansive elements overemphasised,” Juncker said. “If German finance policy loses solidarity, then the other EU states will take more freedom too.” Since the creation of the euro, Germany has acted as a guardian of responsible budget policies but Merkel has argued that fiscal consolidation must now take a back seat to pro-growth measures.

Germany emerged from its deepest recession since World War II in the second quarter of 2009 but faces new headwinds from a rising euro currency and an expected increase in unemployment.

Mrs Merkel is taking a calculated bet that tax cuts will help the economy recover, reducing the need for unpopular spending cuts to rein in the deficit, which is expected to rise to double EU limits next year.