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Merkel's Cabinet Agrees to Seek $97.5 Billion in Budget Cuts Through 2014

German Chancellor Angela Merkel’s Cabinet approved levies on banks, air travel and nuclear-power plants as part of what she called an “unprecedented” round of budget cuts, rejecting U.S. calls to spur growth.

The program, a mixture of spending cuts and revenue-raising steps, amounts to 81.6 billion euros ($97.5 billion) from 2011 through 2014, the government said. Equivalent to about 2.7 percent of last year’s gross domestic product, the package also includes welfare reductions and a restructuring of the armed forces and pushes back plans to rebuild Berlin’s royal palace.

Merkel is reining in the deficit to thwart a sovereign-debt crisis three weeks before a gathering of Group of 20 leaders. The savings clash with a June 5 call by U.S. Treasury Secretary Timothy F. Geithner for Europe to promote “stronger domestic demand” and risk angering voters who opposed Germany’s 148 billion-euro share of a European plan to backstop the euro.

“I’ll have some fairly difficult negotiations at the G-20, because they’ll say that Germany in the current situation actually should spend more money,” Merkel told reporters in Berlin today after a special two-day Cabinet session. “That’s why we’ve decided not to save in investment areas, not to make savings for future-oriented areas.”

‘Cold Light’

Merkel may find the savings program is “difficult to sustain in the cold light of implementation,” Eckart Tuchtfeld, a Frankfurt-based economist at Commerzbank AG, said by phone. He said there are clear savings of about 50 billion euros, with those scheduled for later years “fuzzy.”

“Mr. Geithner needn’t be perplexed about this program denting economic growth,” Tuchtfeld said, citing “at most” 0.5 percentage points shaved from growth each year if the program is implemented in full.

The euro fell 0.2 percent to $1.1939 at 5:27 p.m. in Frankfurt. German 10-year bond yields were near a record low as concern the debt crisis may spread boosted demand for the perceived safety of the 16-nation currency’s benchmark securities. The yield fell two basis points to 2.56 percent as of 4:18 p.m. in London. According to Bloomberg generic data, it fell to 2.54 percent, the lowest since at least 1989, the year the Berlin Wall fell.

Merkel and French President Nicolas Sarkozy postponed talks planned in Berlin for later today, citing a scheduling clash. The meeting was rescheduled for June 14.

Roubini on Stimulus

While countries with large debt such as Italy should trim deficits and contain wages, Germany should spend more and raise wages to help fuel demand in the euro area, Nouriel Roubini, the New York University economist who predicted the financial crisis, said in an interview on June 5.

“Germany can afford having more stimulus not just this year but next year,” Roubini said in Trento, Italy.

Merkel, who faced U.S. criticism last year for not doing enough to stimulate the economy, Europe’s biggest, said Germany must set a budgetary example to fellow euro-region countries.

“The last few months showed, in connection with Greece and other euro countries, the overriding importance of solid finances,” Merkel said. “We won’t succeed in Europe” if governments don’t cut budget deficits. “2011 is the first year of the exit strategy.”

‘Painful’ Cuts

Banks have to help pay for the cost of the crisis “through a financial transaction tax that we are pushing for at the international or the European level,” Merkel said. That is expected to bring in about 2 billion euros per year, she said.

The government will also charge Germany’s four nuclear plant operators -- Dusseldorf-based E.ON AG, RWE AG of Essen, Vattenfall AB, which is based in Stockholm, and Karlsruhe-based EnBW Energie Baden-Wuerttemberg AG -- 2.3 billion euros each year from an extension of their operating lifespan to help pay for the disposal of atomic waste.

A levy on air travel paid by passengers departing from German airports will yield 1 billion euros a year, the government said. The amount will depend on factors such as the flight’s noise level and fuel consumption, and will be replaced by a Europe-wide measure once aviation is subject to European Union carbon-emissions trading, it said.

Welfare cuts, including reductions to child payments, will be “painful,” Merkel said.

Germany’s budget deficit is forecast to rise to 5.5 percent of GDP this year. While that’s less than half the 13.6 percent of GDP in Greece last year and smaller than the U.K.’s 11.1 percent for the fiscal year to March 2010, it’s still almost double the European Union’s 3 percent limit.

The government, which is obliged to reduce its deficit thanks to a constitutional brake on debt, aims to cut the deficit to 0.35 percent of GDP by 2016.

“We still have a great deal of work ahead,” Foreign Minister and Vice Chancellor Guido Westerwelle said, citing the need for changes in health care to bring down costs.

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Tony Czuczka in Berlin at aczuczka@bloomberg.net.

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