Germany said to face $42b budget shortfall
(AP)
Updated: 2005-10-25 09:56

Germany faces a $42 billion budget shortfall, its two main political parties said Monday, signaling tough spending cuts or tax hikes under a planned coalition even as its economy struggles.

Conservative Chancellor-designate Angela Merkel said the sum was the shortfall a right-left coalition government had to make up by the end of 2006 to bring Germany within EU budget limits the following year.

"We face a heavy burden," Merkel said late Monday after a second round of talks with outgoing Chancellor Gerhard Schroeder's Social Democrats.

"We want to master the problems but will have to make big, big efforts" to tackle the problems left by Schroeder's seven-year tenure, she said.

Merkel said there were still "considerable differences" over exactly how to tackle the budget deficit and reform Germany's tightly regulated labor market.

Conservative leader and Chancellor-designate Angela Merkel pauses as she addresses a news conference following the second round of coalition talks with the Social Democrats at her headquarters in Berlin October 24, 2005. The new German government will have to find 35 billion euros ($41.80 billion) in extra revenues and savings to meet European Union budget rules by 2007, political leaders said on Monday. It would be the biggest budget consolidation ever attempted by a postwar German government. "We are facing enormous challenges," Merkel said following talks on forming a power-sharing coalition with the Social Democrats (SPD). [Reuters]

But both she and Social Democrat leaders said they were confident they would find an agreement by mid-November, opening the way for her to become the country's first female chancellor.

Years of sluggish growth have driven unemployment figures into double digits and pushed Germany's budget deficit over the EU-mandated limit of 3 percent of gross domestic product.

Consequently, a new government will have limited room to maneuver, amid warnings that both new taxes and reduced spending could hurt Europe's largest economy.

Conservatives were forced to seek a "grand coalition" with their erstwhile Social Democrat opponents after neither won a majority in Sept. 18 elections.

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