Germany prepares new stimulus boost

The German government’s second fiscal stimulus could reach €50bn ($68bn, £47bn), nearly double the amount expected just a week ago, senior officials said on Monday, as leaders of Chancellor Angela Merkel’s coalition met in Berlin to hammer out an agreement on the package.

Volker Kauder, parliamentary leader of Ms Merkel’s Christian Democratic Union, said measures – a combination of infrastructure investments, modest tax cuts, job-supporting measures and help for business – would stretch over 2009 and 2010 and cost up to €25bn a year.

Although Germany has been criticised by her European partners for acting too slowly to counter the econ­omic slowdown, a fiscal boost on this scale would bring its growth-boosting measures so far to about 1.5 per cent of gross domestic product, matching and in some cases exceeding the measures enacted in neighbouring countries.

The admission underlines both Berlin’s concerns about the severity of the economic downturn – Berlin now expects Europe’s largest economy to shrink by 2 per cent this year – and its determination to stick to Europe’s fiscal rules.

“If we have a 2 per cent recession, we can spend €25bn over two years and still abide by the stability pact,” a senior chancellery official told the Financial Times, adding that Berlin was still keen to act as an example of fiscal prudence in Europe. “If the recession gets worse, then things will be difficult.”

Dirk Schumacher, economist at Goldman Sachs, said a two-year, €50bn package “would be bigger than we thought but it would still not do justice to the size of Germany’s economy and its comparatively good financial position”.

The package would add to the fiscal boost enacted by the government last November, which totalled just over €12bn over two years. Separately, the government agreed another €20bn in growth-boosting measures before the outbreak of the financial crisis in September.

The two parties in Ms Merkel’s fractious coalition are still at odds as to the exact shape and range of the second package. Coalition insiders said a final decision would come at a second top-level coalition meeting scheduled for next Monday at the latest.

In a last-minute concession to critics within her political camp, Ms Merkel dropped her opposition to limited tax cuts at a meeting with political allies on Sunday, ending a long-standing dispute with the Christian Social Union, the CDU’s sister party in Bavaria.

The new CDU/CSU plan would include a 4 per cent rise in the yearly income not subjected to income tax to €8,000 per person as well as a cut in the lowest income tax rate bracket. The plan also proposes to cut mandatory health insurance contributions by 0.9 percentage points.

Like the Social Democratic party, junior partner in the coalition, the CDU/CSU envisages a vast programme of infrastructure investments in areas including transport, energy, education and communication networks.

But the two camps in the coalition are still far apart on the issue of tax. The SPD, led by Frank-Walter Steinmeier, foreign minister and vice-chancellor, is pushing for a €40bn stimulus partly financed by a €2bn increase in taxes for people earning more than €125,000 a year.

By Bertrand Benoit in Berlin
Published: January 5 2009 12:45 | Last updated: January 5 2009 17:51

Source: Financial Times

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