Germany's tardy stimulus package bound up by red tape

By Brian Rohan - Analysis

BERLIN (Reuters) - Billions of euros in stimulus spending designed to shield Germany from its deepest post-war recession are unlikely to filter through to the real economy until late next year when growth has already picked up.

With big chunks of state aid still tied up by red tape six months after Berlin unveiled the second tranche of its 81 billion euro stimulus package, critics are seeing their worries about the government's initial sluggishness confirmed.

Transparency and effectiveness may be the good intentions behind lengthy application and planning procedures for state aid, but they are resulting in red tape that will make much of the package miss its most effective window.

The delays mean the small and medium-sized businesses forming the backbone of the German economy may continue to suffer well into 2010, dragging the broader economy down with them.

"Municipal investment projects have yet to get off the ground," said Heiko Stiepelmann of the HDB industry association.

He said federal road building was likely the only area that would launch stimulus-related projects in 2009.

"Small- and medium-sized construction firms will feel the pinch this year, and the stimulus has yet to reach them."

The drag from the delayed stimulus risks hitting Europe's largest economy just as it starts to recover. Last week a senior government official said Germany may have exited recession in the second quarter after a record contraction in the first.

"I am worried about the third quarter, there won't be much of an effect (from the stimulus packages) at all then," said DekaBank economist Andreas Scheuerle.

Germany faced criticism from France and Japan earlier this year for doing too little to boost growth but it now looks as if its efforts may instead have been too late.

In January, the government unveiled a second stimulus package worth 50 billion euros over two years, complementing initial measures totalling 31 billion euros.

The packages include funds for public investment, loans and guarantees, with the second programme including a "cash for clunkers" measure that has boosted the auto sector.

But as the effects of the car-scrapping incentive wane, concerns have surfaced that there will be little stimulus left for the second half of this year, when a fragile recovery may take hold, requiring all the support it can get.

BOTTLE-NECKS

Of nearly 20 billion euros destined for public investment -- around a third of which will end up renovating schools -- only a trickle has ended up so far in infrastructure projects, which traditionally require lengthy planning.

"The municipalities who have the money can't spend it yet. Plans have to be drawn up, they have to be eco-friendly, and that takes time," said Andreas Schmieg, chairman of Essen-based construction firm Torkret AG in western Germany.

German media have evoked local bureaucracy and hesitancy on the part of the government as part of the problem.

"It's not so simple for more modest towns to pull together the resources -- we for example are dependent on regional government that is subject to an austerity plan," said Kerstin Gosewisch from city council of Goerlitz, Germany's easternmost city of some 58,000 inhabitants.

For its part, the government argues the programmes are coming along, and that it has always said the full effects would take time to be felt. One estimate from auditors Ernst and Young shows a schedule lagging only partly behind initial plans.

"Around 20 percent less stimulus -- 1 billion euros -- will be spent this year on investment projects than the government had initially expected in legislation last March," said Michael Janetschek, an Ernst and Young partner who led a study tracking the programme.

Government-backed loans that are another main part of the stimulus are also unlikely to have a big effect this year.

Only around a billion euros worth of loans have been granted by state bank KfW, the clearing house for stimulus lending, although it has received applications for another 7 billion worth and is authorised to lend 40 billion.

"Chances are high that the large part of those loans won't come until next year," said Bank of America's Holger Schmieding.

KfW says that if all proper information is provided, it only takes 10 days to for a loan to be approved, but many applications it has received are incomplete.

PRO-CYCLICAL IMPACT

Most economists say the government did not respond quickly enough when the economy slowed.

"It would have been more useful if the stimulus had come in the first half of the year," said DekaBank's Scheuerle. "As it is, a large part of its impact will be pro-cyclical, arriving in the second half of 2010."

Scheuerle also said the government should have put the aid on a faster track.

"The bureaucracy has held things up in some places -- it shouldn't really last this long, and it is repeatedly delayed. The government could have tried to make the process quicker."

Nonetheless, some stimulus measures have had a more immediate effect -- three billion euros in tax relief in 2009 has helped average consumption remain stable at a time when unemployment is on the rise.

But with the German economy expected to contract around six percent this year, the threat of new layoffs lingers, and with it a whole other round of secondary effects and extra costs.

"The fourth quarter of 2008 through the second quarter of 2009 was when the stimulus was most needed. It should have come faster," Bank of America's Schmieding said.