Germany pledges record €80bn of budget cuts

Chancellor Angela Merkel yesterday unveiled Germany's biggest savings package on record in an effort to shore up the troubled euro and boost the popularity of her ailing coalition of conservatives and liberals.

The savings plan envisages €80bn-worth of cuts over the next three and a half years and involves proposals to slash defence spending, abolish military conscription and postpone plans to rebuild a replica of Berlin's former Prussian imperial palace.

Ms Merkel said the cuts would show that Germany was "setting an example" for the rest of Europe. "These are serious and difficult times. We can't have everything we want if we are to shape the future," she added.

The programme also contains a number of controversial measures which include extending the lifespan of Germany's nuclear power plants, imposing a "flight tax" on air travel and cutting spending on welfare and unemployment benefits. Thousands of civil service jobs will also be axed.

However income tax, VAT and spending on pensions and education will remain at present levels.

Ms Merkel insisted that there was no alternative to the cuts package. But her government has faced criticism abroad for cutting too much and thereby putting growth at risk.

Radical plans put forward by the Defence Minister, Karl Theodor zu Guttenberg, include scrapping conscription, in place since Germany's post-war rearmament, and cutting the armed forces' manpower from 250,000 to 150,000. Ms Merkel insisted that her government was committed to a thorough reform of the armed forces but said the details still had to be worked out.

The package was seen as a test of the German government's ability to govern. Ms Merkel's coalition of conservatives and pro-market liberal Free Democrats has failed to implement many of the reforms it pledged to introduce on being elected eight months ago and has instead become immersed in bickering.

The coalition's popularity hit a four-year low last month amid allegations that Ms Merkel's handling of the euro crisis had been "inept" and had unfairly burdened German taxpayers with the task of bailing out bankrupt EU member states such as Greece.

The euro crisis has also upset the normally well-oiled Franco-German relationship, with the countries at odds over how to safeguard the currency. Ms Merkel was meeting President Nicolas Sarkozy in Berlin last night to try to iron out their differences before an EU summit on 17 June.

Ms Merkel's conservatives lost power in Germany's most populous state in regional elections last month. As a result her coalition has lost its majority in Germany's upper house and may find it difficult to get all of its budget cuts passed. Opposition Social Democrats and Greens have said they will fight many of the budget proposals.