Germany puts together €480-billion rescue plan

Chancellor Angela Merkel announced an unprecedented €480-billion ($643-billion) rescue package for Germany’s banks on Monday, as part of coordinated international effort to stem the global financial crisis.

Germany puts together €480-billion rescue plan
Merkel will need more than pocket money. Photo: DPA

The government will provide some €80 billion in fresh capital and some €400 billion in guarantees for interbank lending.

“Today’s measures are the first element of a new financial market charter … but it can only be worthy of the name if it is followed by a second element, namely a change in international rules,” Merkel said at a press conference in Berlin.

The Finance Ministry hammered out the rescue package over the weekend as Merkel attended an emergency EU summit in Paris to deal with the ongoing financial crisis.

“I know that today we decided on extensive, far-reaching and in part radical measures,” Merkel said. “They have one aim: They should help to bring new trust, trust between banks, trust in the economy, trust in people.”

She added she expected Berlin’s rescue package, which will require the government to set aside €100 billion in the budget to fund the measures, to become law by Friday. Merkel also warned the financial crisis made it likely the government would have cut its growth forecast for next year and that it would make it difficult to balance the budget as planned by 2011.

However, bosses of those banks which decide to take the government aid can expect to have their pay capped, according to the parliamentary floor leader of Merkel’s Christian Democrats Volker Kauder.

“Wherever we take action, we will also change the compensation system for the upper levels of management,” Kauder told public broadcaster ARD.

And the German state is expected to take stakes in the banks in a partial nationalisation similar to plans announced in Britain in return for any capital injection.

Last week Berlin put together a €50-billion rescue of Hypo Real Estate, the country’s fourth biggest bank, but this took the form of guaranteeing badly needed credit lines rather than the state taking a stake in the stricken commercial property lender.

Now though a drying up of the amount of liquidity held by German banks – as markets have tumbled in the past week and short-term lending has become even harder to secure – has forced a re-think in Berlin.

It has also became clear that the worst hit are not private German banks like Deutsche Bank but the Landesbanks, the regional lending powerhouses that are owned by Germany’s 16 states.

Merkel has been at pains to stress, however, that the rescue package is not a blank cheque and that banks in future will face much tougher regulatory scrutiny.

Taxpayers “have the right to expect that if they are contributing to the stability of the financial system that this will be honoured,” Merkel said in Paris on Sunday.


German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.