12 Jan, 2009

Berlin Moves toward 50 Billion Euro Package

First Merkel said Germany didn’t need a new economic stimulus package. Then she said there would be no tax cuts. But on Friday, her party presented its proposal for a 50 billion euro plan, complete with lower taxes. And it comes not a moment too soon. Germany’s first economic stimulus package didn’t go well. Announced with great fanfare by Chancellor Angela Merkel last autumn, the plan was quickly shredded by economists and politicians alike for not being ambitious enough. Merkel’s European colleagues rapidly isolated her. Now, though, Berlin is trying again. On Monday, Merkel’s conservatives are meeting with their Social Democratic coalition partners to hammer out the details on what is expected to be a €50 billion collection of measures aimed at jumpstarting Germany’s suddenly moribund economy. For weeks, the two sides have been bickering in the press about how best to boost business. On Friday, Merkel’s Christian Democrats (CDU) presented their ideas. And as expected, it is heavy on infrastructure investments and also includes tax reductions and a cut to public health insurance contributions. Furthermore, the CDU expressed its support for a fund to provide German companies with liquidity should they run into refinancing difficulties. An amount wasn’t proposed, but earlier this week, numerous reports indicated the fund could total as much as €100 billion. Merkel’s government had for months resisted calls for a second stimulus package, saying Berlin would take a closer look at the German economy this spring. But signs that 2009 will be a difficult one for the economy have mounted. Just on Thursday, it was revealed that German exports, a major pillar of the country’s economic health, had plunged in November. The Federal Statistical Office said that November exports were a hefty 10.6 percent lower than in October and 11.8 percent lower than in the same month in 2007. The plunge in exports likely means that Germany’s economy has shrunk for three consecutive quarters. Fourth quarter statistics are not yet available, but the country’s economy entered recession in November, generally defined as two successive quarters of negative growth, after poor second and third quarter showings. Most economists in Germany anticipate 2009 shrinkage of at least 2 percent. Earlier this week, unemployment in Germany ticked upwards after years of steady decline. Still, politicians are divided as to how best to turn the economy around. Merkel spent months resisting calls from the Christian Social Union (CSU), the Bavarian sister party to the chanceller’s CDU, for tax cuts before giving in. Recently, the SPD said it too might be willing to support limited tax cuts. The CDU proposal is to increase the minimum taxable income from the existing level of €7,664 to €8,004. The conservatives said they would not back an SPD proposal to increase taxes for the country’s top earners to compensate. Both the SPD and CDU agree that the lion’s share of any new package will go toward infrastructure projects like new roads and refurbished schools. Many politicians from both sides of the aisle have said this week that they expect the second stimulus package to be quickly agreed to with final passage likely to come in February. That, though, may not be the end of calls for government action. On Friday, new criticism was voiced of Berlin’s €500 billion bank bailout plan, passed in October, for not being accessible enough. Gerhard Stratthaus, who is the co-head of the bailout fund, told the Financial Times Deutschland that the strict rules imposed on banks which use the fund have made many shy away from the government help. He says that there are many German banks that could use the help, but they haven’t asked for it because of the conditions imposed by the bailout plan. Others say that the bailout package has done nothing to encourage banks to begin lending to each other again. In other words, even if Berlin manages to push through a second stimulus package, its work may not yet be done. (credit: spiegel.de)

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