German Chancellor Angela Merkel will on Monday agree a package of budget cuts with her cabinet and outline her policy agenda through 2014, hoping to shore up the euro and her own authority.
Ministers resumed talks on Monday after working late into Sunday night. Merkel was due to announce the results of the 2011 draft budget and financial planning for the next four years at a news conference at 3 p.m. (1300 GMT).
Some commentators say the up to 10 billion euros ($11.94 billion) of annual cuts, possibly with limited tax rises, will be Germany's biggest austerity programme since World War Two.
Merkel wants to set an example of fiscal tightening to try to restore investor confidence in the euro — shaken by bulging deficits in Greece and other euro zone states.
But she must find a delicate balance to ensure her cutbacks do not choke off a fragile recovery in Europe's biggest economy.
Germany's public deficit is likely to exceed 5 percent of gross domestic product this year — lower than in many other euro zone states, but still over the EU's 3 percent cap.
Merkel's political authority is also at stake.
Dogged by a slump in her own party's popularity and accused of weak leadership in the euro zone crisis, she needs to regain the political initiative and come up with an effective package that voters — and unions — will swallow.
"WILD SOW"
She is also trying to control flaring tempers within her centre-right coalition, especially between Bavaria's Christian Social Union (CSU) and the pro-business Free Democrats (FDP) who share power with her conservative Christian Democrats (CDU).
Last week, the CSU torpedoed plans for a flagship health reform drawn up by FDP Health Minister Philipp Roesler, infuriating the FDP.
"The Christian Social Union has acted like a wild sow, it has shown itself to be purely destructive," FDP deputy health minister Daniel Bahr told one Bavarian newspaper.
But Merkel is hoping for a show of unity from ministers.
"This cabinet meeting will give an important direction for Germany in coming years, years that will be decisive," Merkel told reporters on Sunday, just before the start of the talks.
She has promised to protect education and pensions, but has earmarked social security spending as an area for cuts.
Selected reductions in unemployment benefit look likely, as do cuts to parental benefit for the unemployed, a move that could save about 400 million euros.
Some 10,000 civil service jobs will go, German media say, and cuts in the defence budget of about 600 million euros for 2011, rising to 1.1 billion euros in 2012, have been earmarked.
Coalition sources said the government would not eliminate VAT discounts on certain items or increase income tax, but would cut energy-related tax breaks by 1 billion euros in 2011 and by 1.5 billion in 2012-2014.
Also likely is a tax on the burning of nuclear fuel rods for firms benefiting from a planned extension of the lives of some nuclear plants. And state-owned rail operator Deutsche Bahn will have to pay 500 million euros from profits to the government.
UPPER HOUSE PROBLEM
Merkel may still struggle to get the draft budget through the Bundesrat, the upper house, as her coalition lost its majority there after a drubbing in a regional vote last month.
Compounding her misery, German media outlets, including the weekly Der Spiegel and the mass-circulation Bild am Sonntag, have backed the opposition candidate for president, meaning she may face a battle to get her choice elected on June 30.
The opposition Social Democrats (SPD) and Greens put forward Joachim Gauck, a charismatic former human rights activist and pastor from eastern Germany who fought communism, to challenge Merkel's candidate, the conservative Christian Wulff.
Merkel nominated Wulff, the Lower Saxony state premier, last week as the coalition's candidate for the largely ceremonial post after the shock resignation of Horst Koehler.
