Kohl warns Germans of huge cuts in welfare state

Germany must make savage cuts in the welfare state in order to prevent it from going bust, Chancellor Helmut Kohl admitted yesterday.

"We will be forced to introduce massive savings in 1997," Mr Kohl said. "We must do everything to limit the rise of the deficit." Though the Chancellor gave no details, pensions, unemployment benefit and the national health service are likely to be the main targets, but infrastructure projects will also suffer. The government's costly move to Berlin in 1999 could be the most spectacular casualty.

The shortfall between government revenue and expenditure also threatens another important undertaking scheduled for 1999: European monetary union. Under the rules of the Maastricht treaty, aspiring members must bring the budget deficit down to 3 per cent of GDP, a goal which eluded Bonn last year.

As the economy bumps along the bottom, tax revenue is not keeping pace with the welfare state's burgeoning expenditure, weighed down by payments to 4.3 million jobless - the highest since the Second World War. While Bonn predicts an upswing in industry this year, the opposition argues it will not beenough to cut the dole queues.

The number-crunchers are only now coming to grips with the effects of the unforeseen recession, and their figures make horrendous reading. Yesterday, the opposition Social Democrats claimed that there would be a DM100bn (pounds 44bn) shortfall in tax revenue in 1997, and similar gaps in 1998 and 1999. On that basis alone Germany, and therefore Europe, can say goodbye to monetary union, especially if Bonn sticks to a pledge repeated by Mr Kohl yesterday not to raise taxes.

The government's true intentions will not be revealed, however, until this Sunday's elections in three Lander where the fate of Mr Kohl's coalition partners, the Free Democrats, hangs by a thread. An adverse vote could undermine the government, so the Chancellor has been understandably reluctant to divulge the diagnosis for the economy's ills. Though the Finance Minister, Theo Waigel, last week announced a token budget freeze, his savings target of DM500m was well short of the DM16bn believed to be missing from this year's kitty.

With the elections soon out of the way, the day of reckoning approaches. "We are rebuilding the welfare state, not dismantling it," Mr Kohl vowed yesterday.

One project Mr Kohl wants ring-fenced from the builders is monetary union, destined to be the Chancellor's crowning achievement. But his government is vulnerable to the charge that it is placing the destiny of Europe above the fates of Germany's unemployed. The Chancellor is therefore planning a relaunch of his Euro-campaign by arguing that postponement of monetary union would send the deutschmark sky-high, crippling exports and putting millions more out of work.

He might be able to sell that to the voters, but then he will still be left with one Herculean task: making the numbers add up by 1998, the year applicants to EMU are weighed in.