Merkel back to work after Berlin Wall party

BERLIN (AFP) – Fresh from the euphoria of celebrations for the 20th anniversary of the fall of the Berlin Wall, Chancellor Angela Merkel pulled no punches Tuesday as she outlined the hefty challenges facing Germany.

In her first major policy speech since being sworn in for a second four-year term last month, Merkel, 55, said that despite tentative signs of recovery, Europe's biggest economy was still in its worst post-war slump.

"The problems are going to get bigger before the situation improves," Merkel told the German parliament as she outlined a 24-billion-euro (36-billion-dollar) package of tax cuts to get the economy moving.

"As a consequence of the crisis, Germany now finds itself in the worst recession in its history. The economic contraction is five times worse than the previously worst slump in the early 1970s," she said.

"There are the first faint signs of recovery but large parts of industrial production are still well under their pre-crisis levels. Important banks are still dependent on the state, the financial system is still far from capable of supporting the German economy, and in particular a recovery."

Export-dependent Germany as a whole has been hit hard by the global recession, pushing it into its steepest slump in six decades, leaving the country's public finances and its reputation for fiscal rectitude in tatters.

The government expects output to shrink by five percent this year before recovering only slightly in 2010, but Merkel said unemployment was set to rise next year.

"The full effect of the results of the crisis will hit next year," she said.

The answer of Merkel's conservatives and their new pro-business coalition partners is a raft of tax cuts, even though this will further increase Germany's ballooning debt pile and leave future generations to pick up the tab.

Merkel also pledged a simplification of Germany's complex tax system.

She rejected criticism that Germany should seek to cut spending in order to keep its deficit under control, saying that the growth spurred by the tax cuts would help cover the cost.

"Creating growth, that is the aim of our government. I say quite openly, there is no guarantee that it will work ... But what this offers is the chance," Merkel said.

"Without growth, no investment. Without growth, no jobs. Without growth, no money for education. Without growth, no support for the weak."

"With growth, investment, jobs, money for education, support for the weak, and most importantly, the trust of the people."

Longer term, Germany, like many advanced economies, is faced with a rapidly ageing population, something set to add to the strain on the public purse and that is making it harder and harder for firms to employ educated youngsters.

"There are now more people over 65 in this country than under 20," Merkel said. "In 2020, there will be three and half million fewer people under 25 than in 2007 ... That is 15 percent. In the same period the whole population will fall just two percent. This shows the scale of the challenge facing us."

On Monday, Merkel and leaders past and present feted 20 years to the day since the authorities in communist East Germany gave in to immense public pressure and threw open the border on the evening of November 9, 1989.

The highlight of Monday's commemorations was a procession of leaders through the historic Brandenburg Gate that was blocked off to West Berliners for the 28 years of the wall's existence and which is now a symbol of German unity.

A thousand giant dominoes along the former path of the hated concrete barrier were toppled before the night sky exploded with fireworks and live music entertained the more than 100,000 rain-soaked revellers.