Merkel Says Weighing Calls to Expand Economic Stimulus Program

By Brian Parkin

Nov. 12 (Bloomberg) -- Chancellor Angela Merkel said the German government may be open to expanding its economic stimulus program, heeding calls from advisers and some in her coalition to spend more as a bulwark against impending recession.

The government's council of economic advisers, in an annual report handed over to the chancellor in Berlin today, calls for additional measures on top of the 50 billion-euro ($63 billion) package agreed on by Cabinet last week. The panel advocates a wider package amounting to as much as 1 percent of gross domestic product, or about 25 billion euros, ``as a start.''

``There's no big difference between what we plan and what the advisers recommend to strengthen the economy,'' Merkel told reporters as she received the document. ``We will review the proposals to see whether there's extra scope.''

Merkel's coalition may have little choice other than putting on ice plans to balance the federal budget by 2011, according to the panel, which in previous years was a champion of fiscal discipline. It said the economy, Europe's biggest, is unlikely to grow next year -- just as the coalition parties prepare to fight national elections in September 2009.

The panel's recommendation to let the deficit expand met support from machine makers and Economy Minister Michael Glos, who renewed his call for tax cuts. Glos said in a statement that the advisers' report supports his call to lower income tax.

Sooner the Better

``The earlier such a reform comes, the better it is for economic growth and jobs,'' said Glos, a member of the Christian Social Union, Bavarian sister party to Merkel's Christian Democrats. Merkel and Finance Minister Peer Steinbrueck, a Social Democrat, have repeatedly rejected tax cuts.

The five-strong ``wise man'' group said in its 550-page report that the economy will probably shrink in the first quarter of 2009. ``Targeted'' steps forged by the Cabinet including help for the car industry and small companies are inadequate as a result, it said.

``The shock waves pushed out by the financial crisis have hit Germany full on, if later'' than other countries, said the economists. ``We need more than short-term measures,'' as have been agreed already, ``but should expand the deficit and start a broad government investment program.''

Merkel said Nov. 4 that a core coalition pledge to balance the budget by 2011 will ``obviously'' be affected by the government's stimulus package. While still a ``goal,'' the plan will probably be put off until the next legislative period, which ends in 2013, she said.

New Cars

The government's stimulus package, agreed on Nov. 5, is a two-year program ranging from tax breaks for buyers of new cars to greater financial help for improving buildings' energy efficiency. The measures will cost 23 billion euros in the four years through 2012, of which 10.9 billion euros will come out of the federal budget, the Finance Ministry said. The program is intended to unlock investment of about 50 billion euros, equivalent to about 2 percent of GDP.

The German public sector, striving to cut debt, has rolled back investment in education, including universities, as well as in road and rail. The three levels of government -- federal, the 16 states and municipalities -- should expand net credit requirements in 2009 that were close to zero last year, the advisers said.

Germany's VDMA machine makers federation backed the panel's proposals, including a recommendation to reinstall tax relief for loans raised by companies at foreign units that was crimped by the government this year.

Exports of machines and cars that fueled the fastest economic growth this decade in 2006 and 2007 will barely grow next year, the panel said. In 2009, foreign sales of goods and services may expand by just 0.4 percent following 4.2 percent this year, it said.

As inflation ebbs in 2009, the European Central Bank may see further scope to lower its benchmark interest rate, the group said.

The five advisers, all university professors, are chairman Bert Ruerup, Beatrice Weder di Mauro, Wolfgang Wiegard, Peter Bofinger and Wolfgang Franz.

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net.