So much for Teutonic austerity. This time last year, Germany was berated by European neighbours for doing too little to stimulate recovery. But the incoming centre-right coalition’s bold tax-cutting plan, on top of measures previously agreed, gives it by far the largest fiscal package in the eurozone. The new coalition partners may have flirted with the idea of spending more, using an off-balance sheet fund – now dropped. But they are sticking to tax cuts, in spite of local criticism. These are a worthwhile gamble.

Additional cuts of €7bn in 2010, on top of €14bn planned by the previous administration, followed by another €24bn annually from 2011, might help strengthen domestic demand and so supercharge an otherwise anaemic recovery. This is all the more important since Germany has adopted a law requiring it from 2016 to limit its structural deficit to 0.35 per cent of gross domestic product. Next year’s budget deficit is set to top 5 per cent of gross domestic product. So to stand a chance of hitting its budget target, Berlin must start cutting spending by 2011. But it is better to go for tax-cutting in the hope of entering the consolidation phase with the economy already on an upswing. Moreover, the new law signals that fiscal discipline will be resumed – assuming Germany respects the rule. That bunds were little moved by the tax-cut plan suggests investors believe it will.