Lower German deficit an example for Europe: Berlin

5th July 2010, Comments 0 comments

Germany's federal deficit is set to be much lower than expected, a draft budget suggested on Monday, as Berlin holds up its tough line on spending as the best way for Europe to exit its debt crisis.

Helped by an unexpectedly strong economic upturn, the deficit in Europe's top economy will amount to about 65 billion euros (81 billion dollars) this year compared to a previous estimate of 80 billion euros.

Next year, the deficit will be 57.5 billion euros, nearly 20 billion less than feared, according to figures in the draft budget, obtained by AFP.

"Overall, this is a timely chink of light with respect to fiscal woes," said Padhraic Garvey from ING bank.

The draft budget bill set to be discussed in cabinet on Wednesday said the lesson from the debt crisis in Greece was that countries must slash budgets to emerge from the crisis.

"The recent developments in Greece and other euro countries are a clear sign that public budgets must not be strained endlessly. It would be grossly negligent for politicians to ignore these obvious warnings," says the draft.

Germany "has a role model function within the eurozone with regards to budget consolidation," added the bill.

German Chancellor Angela Merkel's coalition government is aiming to cut at least 80 billion euros from public spending by 2014, including more than 11 billion euros next year.

It has also passed a "debt brake" law that binds Berlin to a balanced budget by 2016 at the latest.

Berlin's hair-shirt approach to saving has not been without its critics, with Washington in particular warning that countries should not throttle a nascent recovery with over-harsh austerity measures.

But Economy Minister Rainer Bruederle insisted that far from hindering growth, fiscal consolidation would in fact foster economic development.

"For me, the recovery of our economy is the top priority. But we will only achieve the required growth if we make our economy fit for the future," Bruederle told business daily Handelsblatt.

Despite the warnings from the United States, leaders from the world's top 20 economies agreed at a G20 summit in Toronto last month to halve budget deficits by 2013 and put long-term deficits on a sustainable path by 2016.

Germany is not the only European economic powerhouse striving to tackle its deficit problem.

On Sunday, Britain's coalition government ordered ministries to plan for cuts of up to 40 percent, the latest step in laying the ground for a spending review in October that is expected to be the toughest since World War II.

After its worst economic slump in more than 60 years last year, with output shrinking by 4.9 percent, Germany's economic fortunes have turned around swiftly, driven primarily by exports.

Berlin has projected growth of 1.4 percent this year, a forecast that is too pessimistic according to many experts.

--Dow Jones Newswires contributed to this report--

© 2010 AFP

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