UPDATE 3-Germany answers critics with new stimulus package

Tue Jan 13, 2009 3:20pm GMT

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(Adds Merkel quotes, EU and auto industry reaction, details)

By Noah Barkin and Madeline Chambers

BERLIN Jan 13 (Reuters) - Germany unveiled a new 50 billion euro ($66 billion) stimulus package on Tuesday to shield its economy from the worst recession since World War Two and silence critics who have accused it of doing too little to boost growth.

Chancellor Angela Merkel's "grand coalition" of conservatives and Social Democrats (SPD) agreed to billions of euros in new investments in infrastructure, modest tax cuts and state guarantees for struggling German firms.

Economists welcomed the package but said it was unlikely to have more than a marginal effect on Europe's largest economy, which fell into recession last year and is expected to contract by 2 percent or more in 2009, its worst post-war performance.

"A government growth programme like this, combined with measures taken in neighbouring countries, cannot prevent recession but can limit its severity. That is the goal," German Finance Minister Peer Steinbrueck told reporters.

The performance of the German economy and success of the stimulus package will be crucial to Merkel's re-election hopes in September's federal vote.

Merkel's government pushed through a package valued at 31 billion euros late last year, but new government spending accounted for only about a third of the total, opening Berlin up to criticism from other European countries.

French President Nicolas Sarkozy last month accused Berlin of "thinking" while Paris was "working".

At first, Merkel denied there was any need to do more, a stance that earned her the nickname "Madame No". But she changed tack last month and entered talks with her coalition partners on a new package.

"The reality is that the world has changed, it has changed dramatically over the past months," Merkel said on Tuesday when asked about her government's reversals.

Her Foreign Minister Frank-Walter Steinmeier, an SPD leader who will challenge Merkel in September's election, said: "When I look around Europe I can't see that anyone else is doing more or taking better steps than we are."

DEFICIT RISK

Central to the new package, which is worth a total of 49.245 billion euros over two years, is about 18 billion euros in new investments in infrastructure and education which the government hopes will save jobs.

The package also envisages 1.5 billion euros in aid for the auto industry and a fund of 100 billion euros to provide credit guarantees to struggling businesses.

Germany's VDA auto association welcomed the stimulus plan, saying it would give a boost to domestic carmakers like Daimler (DAIGn.DE) and BMW (BMWG.DE), which have seen sales plunge.

The coalition partners agreed to tax relief totalling 2.9 billion euros in 2009 and 6.0 billion from 2010. The entry level tax rate is to go down slightly, tax-free thresholds will be raised and changes will be made to tax brackets.

Finance Minister Steinbrueck, who has led a drive by Merkel's coalition to consolidate the German budget over the past three years, said the new spending would vault Germany back above European Union deficit limits next year.

Nevertheless, the European Commission welcomed the plan, saying Germany had "room for manoeuvre" to adopt further measures to revive the economy.

Economists, however, expressed concern that some of the measures would not take effect until mid-year -- too late to ward off the worst of the downturn.

The German economy has relied heavily on exports in recent years. Domestic stimulus steps will have little affect on foreign demand for German goods.

"Germany's export-led economy is expected to feel the impact of the deterioration in the international economic environment quite strongly," ratings agency Standard & Poor's said in a note on Tuesday.

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