Merkel Sticks to Deficit-Cutting Agenda as Recession Risk Rises

By Rainer Buergin

Aug. 22 (Bloomberg) -- Hans Wormser has taken 15 of his company's 200 trucks off German roads as he struggles with a 28 percent jump in diesel-fuel prices. Next year, he also faces a 60 percent increase in truck tolls.

He blames Chancellor Angela Merkel, who is rejecting calls to ease the pain as she fulfills her pledge to cut the budget deficit despite a slowing economy -- a stance that may cost her votes in next year's national election.

``The economy is shifting into reverse,'' said Wormser, who is also head of the Bavarian LBT truckers' association. ``People are worried about their jobs. Not only are we not getting any help from Berlin, they're even adding to our woes.''

Deficit-reduction is the signal achievement of Merkel's three years at the head of a ``Grand Coalition'' government that includes her Christian Democratic Union and the rival Social Democratic Party, or SPD. The deficit, 31.2 billion euros ($46.4 billion) the year she took office, declined to 14.3 billion euros last year; it is projected to disappear entirely after 2010 -- unless falling tax revenues from the economic slowdown, or increased spending, drive it back up.

``I don't think she's going to cave in,'' Gerd Langguth, a politics professor at the University of Bonn and Merkel biographer, said in a telephone interview. ``Her hands are tied, and an economic-stimulus package costs money she doesn't have.''

Germany's gross domestic product, which accounts for about a third of the euro region's economy, shrank 0.5 percent in 2008's second quarter after expanding 1.3 percent in the first three months.

Recession Risk

There is a ``50-50'' chance of a recession this year, Roland Doehrn of the Essen-based RWI economic institute said in an Aug. 19 interview; the BGA association of wholesalers and exporters says the economy may grow less than 1 percent next year.

Merkel's deficit-reduction hand is strengthened by her alliance with SPD Finance Minister Peer Steinbrueck. The SPD, gearing up to oppose her in the September 2009 election, has blocked her plans to overhaul a health-insurance system that the IW economic institute says fails to reduce costs and an income- tax system that generates bestselling books with titles like ``1000 Perfectly Legal Tax Tricks.''

But the chancellor, 54, and Steinbrueck, 61, ``apparently don't want to expose themselves to accusations they have abandoned one of the key goals of the Grand Coalition: to stabilize and consolidate public finances,'' Hans-Juergen Hoffmann, managing director of polling company Psephos in Berlin, said in an interview.

Ammunition

Their fiscal focus hands ammunition to Oskar Lafontaine, the former SPD finance minister who is now co-leader of the Left Party. Lafontaine, 64, told a party convention in May that the Left, an alliance of former East German communists and labor unionists, plans to campaign by appealing to those who feel let down by Merkel's coalition.

The Left already is the most popular of three main opposition parties, with 11 percent support, according to a poll by FG Wahlen published Aug. 15. That compared with 25 percent for the SPD and 40 percent for Merkel's CDU.

``Strengthening the incomes of the masses'' and ``higher public spending'' are needed to bolster growth, Lafontaine said in an e-mailed statement. The government, through its tax and spending policies, has ``reached deep into people's pockets.''

Even Merkel's camp is seeing growing opposition to giving deficit reduction priority over tax cuts.

`Markedly Pessimistic'

``A clear majority of people in Germany has a markedly pessimistic view of the future'' because high taxes are eroding their purchasing power, said Josef Schlarmann, a Christian Democrat who heads a business lobby representing 40,000 business owners and managers that is allied with the party. ``CDU voters are enormously disappointed.''

Concern is especially high in the Christian Social Union, the CDU's Bavarian sister party. Faced with polls suggesting it may lose its majority in a state election scheduled for Sept. 28, the CSU in May proposed a package of tax cuts and commuter subsidies worth 28 billion euros.

Economy Minister Michael Glos, a CSU member, also favors the plan, to no avail. The commuter-subsidy proposal is ``the only matter of difference'' she has with the CSU, Merkel said in a speech last month to its convention in Nuremberg.

``Wherever there's leeway, we're willing to give something back to the people, as long as we can afford it,'' Merkel said. ``Reliability has to remain one of our core principles. We have to stay our course.''

For Wormser, whose trucking company is based near Nuremberg, that course risks ``hundreds of thousands more unemployed and thousands of insolvent companies, with all the family tragedies involved.'' The chancellor's response ``is going to be decisive for the election,'' he said.

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net.