Merkel sworn in, policy plans criticized

Germany's Chancellor Angela Merkel receives her applause after her election during the second meeting of the Bundestag in Berlin, October 28, 2009.

BERLIN (Reuters) - Angela Merkel faced new criticism of her economic plans on Wednesday as she began her second term as German chancellor.

Merkel's new government, a coalition of her conservatives and the pro-business Free Democrats (FDP), unveiled a policy program at the weekend which includes billions of euros in tax relief but fails to spell out how the cuts will be financed.

The plans have been welcomed by economists and some of Berlin's allies, but they have also been sharply criticized in the German media and by politicians here who say Merkel is not doing enough to tackle the rising deficit.

German President Horst Koehler, who swore in Merkel after she was formally elected by the lower house of parliament, warned her new government on Wednesday against "unrealistic growth hopes" and said the country must reduce its debt levels.

Luxembourg Prime Minister Jean-Claude Juncker, who as head of the Eurogroup chairs meetings of euro-zone finance ministers, suggested in the Wednesday edition of the Handelsblatt newspaper that Berlin was setting a bad example for the rest of Europe.

"In the coalition agreement, the consolidation elements are underdone and the expansive elements overemphasized," Juncker said. "If German finance policy loses solidarity, then the other EU states will take more freedom too."

Since the creation of the euro, Germany has acted as a guardian of responsible budget policies but Merkel has argued that fiscal consolidation must now take a back seat to pro-growth measures.

Germany emerged from its deepest recession since World War Two in the second quarter of 2009 but faces new headwinds from a rising euro currency and an expected increase in unemployment.

Merkel is taking a calculated bet that tax cuts will help the economy recover, reducing the need for unpopular spending cuts to rein in the deficit, which is expected to rise to double EU limits next year.

"We need to focus on sustainable growth. The economy will contract by 5 percent this year and we need to get out of this lowpoint first," Merkel told ARD television in an interview.

"The patient is sick and the first order of business is making the patient healthy."

Earlier, Merkel was formally elected in the Bundestag, with 323 of the lower house's 622 members backing her.

The result was something of a setback as nine parliamentarians belonging to parties in her new coalition withheld their support.

Merkel, 55, became Germany's first female chancellor in 2005 and is its first leader to have grown up in the former communist East.

After her full cabinet was sworn in by Koehler, Merkel presided over the first cabinet meeting of the new government and was then due to travel to Paris for a dinner with French President Nicolas Sarkozy.

The two leaders are expected to prepare an EU summit which starts on Thursday and discuss French plans to make Armistice Day, a solemn commemoration of the end of World War One, into a day to celebrate Franco-German friendship.

(Reporting by Noah Barkin and Madeline Chambers; Editing by Angus MacSwan)