The German economy has seemingly made a remarkable recovery since the onset of the financial crisis with GDP growth of 3.6 % in 2010, the same level expected in 2011 and unemployment now below 3 million, giving the best results for 20 years. A major factor has been the labour market proving more flexible than expected, enabling costs and productivity to be held at more competitive levels than e.g. the weaker members of the Euro-zone such as Greece, Portugal and Ireland which are now requiring financial bailouts. In reality, the German economy is now back to where it was in 2009 and the current growth rate is not considered typical, underlying growth being around 1.2 % according to Stefan Kooths of the Kiel Institute.
However, despite this growth in business and manufacturing adding an unexpected Euro 135 billion in extra revenues, the financial crisis has still left the German federal government finances weaker than before. There are structural threats to the economy from local public authority indebtedness, a costly social security system and a health system with a Euro 11 billion deficit. Half the total income of Berlin comes from federal sources and e.g. Frankfurt as a major financial centre with a population of 600,000 raises three times as much in local taxes as Berlin, which has a population of 3.5 million and a debt mountain of over Euro 60 billion. In common with the north of the UK, the former industrial heartland of the Ruhr region is still trying to replace jobs in iron and steel with new businesses in high technology and services such as the media, as the financial health of many cities in the region has steadily declined. The city of Bremen in the north of Germany has a debt of Euro 20 billion on a budget of Euro 4.5 billion and Saxony-Anhalt has the highest debt of any German state outside Berlin, with around Euro 20 billion of debt equivalent to 40 % of income.
Therefore, as is the case with the Coalition government in the UK, the German federal government is faced with having to reduce its debts (currently 83 % of GDP) by what some might well consider, however, a less than ambitious although substantial Euro 80 billion, considering the large tax gains from growth in the previous year (and indeed what the government in the UK is still struggling to replicate from growth in the British economy). It is aiming to achieve this mainly through cuts to the social service budget and family benefits, together with redundancies amongst civil servants and tax increases. Local authorities are also being forced to find new sources of income from taxes and cutting costs by withdrawing support for e.g. libraries, sports programmes, parks, playgrounds and swimming pools.