German coalition eyes plan to revive ailing economy

BERLIN - Germany's political leaders meet on Monday to assemble a new raft of stimulus measures the government hopes will help steer it through an election year that many fear may bring the country's worst post-war recession.

By (Reuters)

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Published: Sun 11 Jan 2009, 9:04 PM

Last updated: Thu 2 Apr 2015, 4:16 AM

Chancellor Angela Merkel's coalition of conservatives and Social Democrats (SPD) has said a plan worth up to 50 billion euros ($67 billion) over two years could be agreed, comprising investment in public services, tax cuts and other economic aid.

Merkel is seeking re-election in September and heads into the campaign with the economy in recession and the labour market entering a downturn for the first time since she took office.

"It looks as though the grand coalition should sort this out without any major rows now that the SPD has surprisingly decided to go along with the idea of cutting taxes," said Uwe Andersen, a political scientist at the University of Bochum.

Having long opposed cuts, SPD Finance Minister Steinbrueck on Friday mooted lowering the lowest rate of income tax, paving the way for a potential compromise aimed at shoring up demand.

A global downturn has battered Germany's manufacturing sector, sparking a record decline in exports and fuelling fears Europe's largest economy could sink into a deep recession.

Since World War Two, the German economy has never contracted by more than one percent, but some analysts believe there is a tangible risk it could shrink by four percent or more this year.

A senior government source told Reuters the government expected gross domestic product to contract by three percent or more this year if no new stimulus measures are passed.

"But that won't be the case because the new economic stimulus plan will help offset the downturn," he said.

UNDER FIRE

A November stimulus package the government said was worth 31 billion euros came under fire from industry leaders and some of Germany's main political allies abroad. Critics complained the figure was massaged and included previously announced measures.

"I wish the government had taken much faster and more decisive action," said Gustav Adolf Horn, director of the IMK economic research institute, a union-backed think tank.

"For a time it simply refused to face up to the crisis. It didn't recognise the European dimension to it," he added.

Horn said assuming coalition leaders agreed on a 50 billion euro package when they meet in Berlin on Monday evening, it might not be enough to prevent a record recession this year.

"Once again, it looks as though we're heading for another compromise which doesn't do enough to address the huge problems we're going to see this year," Horn said.

The second package may include a credit fund for struggling firms which parliamentary sources told Reuters could offer guarantees worth some 100 billion euros. Some senior conservatives have, however, balked at this idea.

On Saturday, Merkel's Christian Democrats (CDU) adopted their own set of proposals for tackling the crisis. These focused on tax cuts, protecting jobs via added spending on schools and infrastructure, and setting up the fund for firms.

After falling sharply since 2005, unemployment is rising again, and at least one bank has warned the jobless total could double to 6 million if analysts' worst fears are realised.

If voters had the impression Germany's two main parties had mismanaged the crisis, others on the political fringes could profit, said Andersen at the University of Bochum.

"That's always the big risk," he said. "But I'm hopeful that the population is reacting sensibly so far given that unemployment is not rising as fast as one might have feared."


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