By Rainer Buergin and Brian Parkin
Jan. 13 (Bloomberg) -- Chancellor Angela Merkel’s coalition agreed to spend an extra 50 billion euros ($66 billion) this year and next and backed a fund to guarantee loans to companies, seeking to stem Germany’s worst recession since World War II.
The package approved late yesterday plus steps passed in November bring Germany’s fiscal stimulus to 82 billion euros over two years, about 1.6 percent of gross domestic product, the biggest in Europe. It underscores Merkel’s election-year shift away from a focus on eliminating the budget deficit.
The program of economic aid is “the biggest in the history of the Federal Republic of Germany,” founded in 1949, Merkel told reporters in Berlin today. “We will do everything possible to ensure that Germany not only overcomes this crisis, but emerges stronger from it.”
Merkel is not the only European leader crafting new measures to counter the slump. U.K. Prime Minister Gordon Brown has proposed 500 million pounds ($734 million) to spur hiring and will outline measures tomorrow to ease lending for small businesses. French President Nicolas Sarkozy is preparing a second package for banks worth 10.6 billion euros and said Jan. 8 that he will emulate German plans to help companies borrow.
‘More Capable’
“When I look around Europe, I can’t see anyone doing more or doing things more appropriately,” Foreign Minister Frank- Walter Steinmeier, leader of the Social Democratic Party, coalition partner to Merkel’s Christian Democrats, told the same press conference.
Germany’s AAA long-term and A-1+ short term credit ratings, the highest investment grade, were reaffirmed today by Standard & Poor’s. Germany is comparatively “well-positioned to weather the economic crisis” and its economy remains “very competitive,” said S&P.
The German program, forged during a six-hour meeting in Berlin last night, includes investment in schools and roads, steps to lower health-insurance payments, a reduction of the lowest income-tax rate and 100-euro checks for each child. The parties also agreed on a “protective umbrella” for non- financial companies of about 100 billion euros to guarantee loans. A Social Democrat proposal to raise the highest rate of income tax was rejected.
DAX Falls
Industry bodies including the BDI lobby and BGA exporters group welcomed the package. Germany’s benchmark DAX index was trading at 4,605.26 as of 2:03 p.m. in Frankfurt, down 2.4 percent from yesterday’s close.
The stimulus may still be too late to bolster Germany’s export-driven economy in 2009, said Andreas Rees, chief German economist at UniCredit Markets & Investment Banking in Munich.
The package “will have an effect, but after the summer of 2009 at the earliest,” Rees said in a Jan. 11 note to investors.
International Monetary Fund Managing Director Dominique Strauss-Kahn said in an interview on Jan. 9 that western European governments are “behind the curve” in implementing stimulus packages and are “still underestimating the needs.”
President-elect Barack Obama plans a two-year U.S. stimulus program of about $775 billion, or about 2.8 percent of GDP.
Recession Deepens
Merkel faced criticism from business lobbies, unions and economists last year who said that the first stimulus package was insufficient to arrest the deepening recession in Europe’s biggest economy, where one in three jobs relies on foreign sales. Manufacturing orders extended their worst decline on record in November and exports dropped by a record.
Volkswagen AG, Daimler AG and Bayerische Motoren Werke AG are among car manufacturers that have suspended production, canceled shifts and shortened working hours in recent weeks. German car sales fell last year to the lowest level since reunification in 1990.
The “awful” numbers signal a “terrible year for growth,” said Dominic Bryant, an economist at BNP Paribas in London, who expects the economy to shrink 3 percent this year, the most since 1949. The government is scheduled to release new growth forecasts on Jan. 28.
Even so, Merkel, 54, will probably reap any political gains from the second stimulus package rather than Steinmeier, 53, her challenger at national elections on Sept. 27, according to Manfred Guellner, managing director of polling company Forsa.
Three of four polls published last week showed Merkel’s Christian Democrats and the pro-business Free Democratic Party, her favored coalition partner, with 50 percent support or more - - enough to form a government if replicated in September.
Education Investment
Merkel, appearing alongside Steinmeier and Horst Seehofer, leader of the Christian Social Union, the CDU’s Bavarian sister party, said the coalition agreed on infrastructure investments of 18 billion euros, most of which will be targeted at improving education facilities.
Lower taxes in the package comprise a tax-free amount that’s been raised to 8,004 euros from 7,664 euros and a reduction to 14 percent in the lowest income-tax rate from 15 percent. The government will also pay for a reduction in health- insurance contributions shared between workers and employers to 14.9 percent of gross pay from 15.5 percent. Other measures include a 2,500 euro payment for drivers who buy a new low- emission car.
Merkel said the government will use either profits from the Bundesbank or additional revenue from growth to pay for the measures and ensure there is a “brake on debt.”
To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Brian Parkin in Berlin at bparkin@bloomberg.net.
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