New German government faces massive budget hole

BERLIN - The new German government will have to find 35 billion euros ($60 billion) in extra revenues and savings to meet European Union budget rules by 2007.

It would be the biggest budget consolidation ever attempted by a postwar German government.

"We are facing enormous challenges," conservative leader and Chancellor-designate Angela Merkel said following talks on forming a power-sharing coalition with the Social Democrats (SPD).

"We will naturally have to use the full range of instruments, that's to say consolidating spending, but also taking full account of growth possibilities," she said.

The comments underline the huge budgetary problems facing the next government, expected to be made up of both the main parties following last month's inconclusive election result.

After years of sluggish growth, high unemployment and the massive costs of paying for reunification, Germany is on course to breach the EU borrowing caps established under the Maastricht treaty for the fourth year in a row in 2005.

"If we want to meet the Maastricht criteria - and we do, that was our joint understanding - we have a considerable consolidation requirement which in the next 14 months amounts to some 35 billion euros," Merkel said.

Politicians on both sides have said they want to bring the total deficit of federal and regional governments back under the limit of three per cent of gross domestic product by 2007 but getting there will require massive sacrifices.

"This is the greatest act of budget consolidation in the history of the Federal Republic of Germany," Bavarian state premier Edmund Stoiber, one of the senior conservative leaders, said after the talks.

Merkel gave no details of concrete policy steps, saying the core elements were likely to be decided in a packet towards the end of the coalition talks in mid-November but said: "There are no taboos."

Major differences exist between the two sides on tax and spending priorities but the leaders said these had not been discussed at Monday's meeting.

Social Democrat leader Franz Muentefering said the 2006 federal budget could probably be covered by a range of one-off measures but the situation would be dramatic thereafter.

"There's a gap of around 35 billion euros which has to be filled in 2007," he said.

Details will be thrashed out in smaller working groups over the coming weeks before an agreement is put to special party meetings on November 14.

- REUTERS