EU Ministers to Tell Germany to Cut Spending Starting in 2011

By Rainer Buergin and Meera Louis

March 10 (Bloomberg) -- The next government in Germany, Europe’s largest economy, should start to cut spending by 2011 at the latest to help achieve a balanced budget, European Union finance ministers will say today, according to a draft document obtained by Bloomberg News.

After conducting “expansionary” fiscal policy this year and next to combat its deepest recession since World War II, Germany should “reverse the fiscal stimulus in order to support significant budgetary consolidation,” the EU finance chiefs say in the document, which will be discussed at a meeting in Brussels today.

As the global financial and economic crisis intensified, European governments pumped billions of euros into their economies in an effort to revive growth, swelling budget deficits. The EU forecasts the 27-nation bloc’s overall budget shortfall will more than double this year to 4.4 percent of gross domestic product, the biggest in at least 13 years.

Chancellor Angela Merkel’s government forecasts the German budget, which was almost balanced last year, will show a deficit of 3 percent of GDP in 2009 and 4 percent next year. To reduce new borrowing, the government to be formed after the Sept. 27 elections should implement a planned budget rule for the federal level and the nation’s 16 states that seeks to bring the combined budget close to balance, according to the EU document.

Public Finances

Finance Minister Peer Steinbrueck said yesterday the government is “not discussing any additional measures” to support the economy, highlighting his concern that public finances may become unsustainable. The government last month more than doubled the fiscal-stimulus package to about 80 billion euros ($101 billion), including tax cuts and subsidies to encourage consumers to buy new cars.

German unemployment rose in February for a fourth straight month as falling exports and the worsening recession prompted companies to cut production and fire workers. Heidelberg-based Heidelberger Druckmaschinen AG, the world’s biggest printing- press maker, is cutting 2,500 jobs amid a slump in demand from customers hurt by the financial crisis.

Ludwigshafen-based BASF SE, the world’s largest chemical company, reported its first quarterly loss in seven years last month and is closing plants and shrinking its workforce to preserve cash and counter deteriorating markets. ThyssenKrupp AG, Germany’s largest steelmaker, plans to halt one of its four active blast furnaces as orders tumble, spokesman Erwin Schneider said on March 5.

Steel Production

German raw iron and steel production plunged in February as industrial output fell and manufacturing orders extended the worst decline on record. The International Monetary Fund expects the German economy to contract 2.5 percent this year, its worst postwar performance.

The deepening slump has pushed yields on German bonds lower even as spending increased. The yield on the benchmark two-year note closed yesterday at 1.27 percent, down from 2.27 percent in December. The price of the 2.25 percent security due in December 2010 finished yesterday at 101.69 euros.

The euro has slid 10 percent against the U.S. dollar so far this year after a 4.3 percent drop in 2008. The 16-nation common currency traded at $1.2637 as of 10:43 a.m. in Tokyo today, down from a record $1.60 last April.

As Germany’s elections approach, growing concern that job losses will increase is turning voters away from the parties in Merkel’s coalition of Christian Democrats, their Christian Social Union sister party and the Social Democratic Party, surveys show.

Forsa Poll

Support for the CDU/CSU dropped one percentage point to 33 percent, according to a Forsa poll released on March 4. That’s more than two points below their score in the 2005 election that forced Merkel into a coalition with the Social Democrats.

The Social Democrats, Merkel’s rivals in the Sept. 27 vote, rose one point to 24 percent support. That is still 10 points below their 2005 score. In a separate Forsa poll, 84 percent of respondents said they are either very or somewhat worried about rising state debt.

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