Merkel admits economy is in 'desolate' state

German chancellor Angela Merkel tried to ease growing doubts that her grand coalition can fulfil its reform mandate yesterday, but admitted that Germany was a "case for rehab" and that its finances were in a "desolate" state.

The doubts, among politicians, business leaders and the public, come as the Bundestag debated the new federal budget yesterday - six months late, a record €38 billion in the red and the fifth breach of the euro-zone deficit ceiling.

"The budgetary situation is desolate - and I'd like to emphasise this - like can hardly be imagined," said Dr Merkel to the BDI employers' federation yesterday.

Germany should have begun social and economic reforms 20 years ago, she said, "but there's no use crying over spilt milk".

"The time is gone. The people want an answer today, from us," she said, outlining her government's reforms so far.

But BDI chief Jürgen Thumann said he was "getting restless" after seven months of the grand coalition. "I often ask myself why policy makers are so fainthearted," he said at the BDI conference. "Now is the window of opportunity for the federal government to tackle things forcefully."

Pessimism is growing about the reform challenges ahead: a poll for Der Spiegel magazine this week found that just one-third of voters think the grand coalition government of Christian Democrats (CDU) and Social Democrats (SPD) is capable of serious reform.

Just three weeks ahead of the summer break, feverish rounds of horse-trading continued yesterday between the CDU and SPD over healthcare and social welfare reforms. Wolfgang Böhmer, CDU state premier in Saxony-Anhalt, told Die Welt newspaper: "The timeframe for the reforms is unrealistic."

Unless compromises are agreed in time, the reforms cannot come into force next year, throwing a spanner into the budget works of finance minister Peer Steinbrück. He opened the four-day budget debate in the Bundestag yesterday warning that this year he had "seriously limited room to manoeuvre".

The German finance minister has inherited a national debt of €1.5 trillion, or €18,300 for every German citizen, and an overburdened budget where, out of every €1 raised, 70 cent is spent on social welfare.

Next year's VAT hike of three percentage points will raise an estimated €7 billion for the exchequer, but other savings are dependent on additional reforms.

The highest priority is reform of Germany's century-old healthcare system, financed by employee and employer contributions that now runs a multibillion euro deficit.

The coalition plans a new health fund, halving contributions to around 6-7 per cent and topped up with funds from a new payroll tax. The government says the reform will give insurers fixed per-head monthly fees and increase competition, but critics say that it will just create more bureaucracy.

The unpredictable factor in all this is Bavaria's Christian Social Union (CSU). It is unhappy about key details of the healthcare bill and is at odds with its CDU colleagues over plans to abandon tax credits for married couples in favour of credits for parents.

Dr Merkel defended her government's record so far, pointing out that it jettisoned the childrens' allowance in favour of a new parents' allowance of 67 per cent of income for 13 months to boost the birth rate. An overhaul of the corporate tax system is underway and a simplification of the complicated federal-state lawmaking process is likely soon.

But while German business confidence is near a post-unification high, unemployment remains fixed well above the 10 per cent mark, with 4.54 million Germans looking for a job.