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Merkel launches economic stimulus package
Photo: DPA

Merkel launches economic stimulus package

Published on: 05 Nov 2008 14:40 CET

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"I believe we are agreed that we must act now ... and send a signal that we will have bad news in 2009 but that we want to do something about it," Merkel said. "With this we will build a bridge until things get better again in 2010."

Germany, which accounts for a third of eurozone activity, is widely expected to enter a serious slowdown and may already be in a technical recession if, as expected, output fell for the second straight quarter in the July to September period.

Last Monday, the widely-watched Ifo indicator showed business confidence dropping in October to its lowest point in more than five years, and the government has slashed its 2009 growth forecast to just 0.2 percent, the slowest rate of growth Germany last suffered a recession in 2003.

Merkel has stressed that any measures would be "targeted", with Berlin highly critical of proposals by French President Nicolas Sarkozy - whose country holds the current EU presidency - for Europe-wide state intervention on a massive scale.

Instead the package, which the Finance Ministry said on Wednesday would cost €23 billion ($30 billion), will be smaller-scale, she has said, focusing on tax breaks, state-backed corporate loans and infrastructure projects to keep economic activity ticking over ahead of a hoped-for recovery in 2010.

Berlin also wants to combine the measures with progress on reducing the country's carbon footprint by hiring construction firms to make public buildings such as schools and hospitals more energy efficient, and through tax incentives on low-emission cars.

This in turn is aimed at giving a helping hand to Germany's huge but struggling automakers like Volkswagen, Daimler and BMW, who so far have been hit hardest by the global cool-down. Merkel also wants to switch to an emissions-based car tax system.

Ten months ahead of an election, Merkel's left-right cabinet was also expected to put in place measures that will help mitigate an expected rise in unemployment next year.

Berlin has already rushed through a €480-billion ($605-million) rescue package for the country's banks including making available €80 billion in fresh capital to stricken banks to shore up their battered balance sheets.

One casualty of the government's efforts - coupled with an expected fall in tax revenues because of the slowdown - has been Merkel's aim to achieve a balanced federal budget in 2011. On Tuesday Merkel said the new aim was to manage this in the next legislative period, which runs to 2013.

Gernot Nerb, chief economist at the Ifo institute, told AFP said that many of the measures such as the state-guaranteed loans, making certain assets and costs tax deductible and bringing forward infrastructure investment would help stimulate economic activity.

But other experts say the measures do not go far enough, and the public is also sceptical: An Emnid opinion poll in Bild am Sonntag suggested that 70 percent of Germans feel that Merkel's measures will prove futile.

The package comes a day before the European Central Bank was widely expected to provide further support to the economy by slashing interest rates, a month after the ECB, the US Federal Reserve and five other central banks lowered rates in an exceptional coordinated action to boost financial markets.