Germany joins EU austerity drive with €10bn cuts

• Germany faces a budget deficit of £71bn this year
• Greece plans to sell state-owned firms to raise €3bn

• Helena Smith in Athens
• guardian.co.uk,
• Sunday 6 June 2010 20.39 BST
• Article history

German chancellor, Angela Merkel warns that Germany can no longer live beyond its means the country needs to cut €10bn a year until 2016. Photograph: Julien Warnand/EPA

German chancellor Angela Merkel today began a two-day meeting with ministers to hammer out a savings plan for the country's budget that could include cuts to federal staff, lower social welfare benefits or tax rises, in the latest effort to get Europe's massive debts under control.

The meeting follows the weekend G20 summit of finance ministers and central bankers in South Korea, which called on indebted countries to speed up the pace of austerity drives, marking a significant change in tone from April's meeting, which said governments should maintain support for their economies until the recovery was on a more solid footing.

Germany faces a budget deficit of more than €86bn (£71bn) this year and has said it needs to cut at least €10bn annually until 2016. "The main concern of citizens is that the national deficit could take on immeasurable proportions," said the finance minister, Wolfgang Schäuble, adding that the plans are an attempt to ensure future prosperity.

Merkel stressed that Germany can no longer live beyond its means, insisting "we can only spend what we take in".Cuts to thousands of public service jobs, a reduction of handouts to new parents, cuts in military spending and increasing taxes for energy providers are among the measures being considered in Berlin to bring the national deficit back down.

Germany has a rapidly ageing population that is poised to strain the nation's generous social welfare system. Schäuble has said the measures may be "stricter than necessary" to allow more room for manoeuvre at a later stage, leading some economists to express fears that Europe's biggest economy could cut too deeply and stall the eurozone's recovery. On Friday, the euro fell to a four-year low against the dollar amid continuing fears about the sovereign debt crisis in the eurozone. Markets were spooked when officials warned that debt-laden Hungary, which is not even a part of the single currency, could be the next Greece.

The Greek government announced plans last week to press ahead with the nation's biggest privatisation programme in an effort to reduce its runaway public debt, six weeks after it asked to be bailed out to the tune of €110bn (£91bn). In an ideological volte-face, the ruling socialists have said they will sell off state-run businesses ranging from railways, roads and ports to postal services and water utilities to raise more than €3bn in revenue over the next three years.

Under the austerity programme agreed in return for the unprecedented EU-IMF sponsored rescue package, the prime minister, George Papandreou, promised draconian economic reforms that included the privatisation of public companies.

The plans were outlined ahead of next week's arrival of IMF inspectors to monitor the progress the government has made since seeking the bailout. Instalments of further aid will depend on the pace of reforms. Past attempts to privatise state assets have always run up against fierce protests from Greece's powerful unions.

But finance minister George Papaconstantinou insisted the administration's priority would now be the sale of 49% of the loss-making railway company OSE and 39% of loss-making Hellenic Post.

The government's target of raising €1bn a year could "easily be exceeded", he said. "Our estimates are definitely higher."

The socialists are also eager to attract foreign investment. Obstructed by bureaucracy, foreign investment in Greece remains on the same level as Libya. The government has been courting Chinese and Arab investors and announced the establishment of firms holding state real estate assets with a view to listing them on the stock exchange to attract private investment. As the biggest landowner after the Greek Orthodox church, the state has surprised many observers by emerging as the owner of prized properties that are lying idle and unused.