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 in Berlin and steps passed in November bring Germany’s fiscal stimulus to 82 billion euros over two years, about 1.6 percent of gross domestic product, Europe’s biggest. It underscores Merkel’s election-year shift away from a focus on eliminating the budget deficit.
“If we’d failed to do what we did last night, we’d have risked the collapse of parts of our industrial base such as the car industry,” Volker Kauder, parliamentary leader of Merkel’s Christian Democratic Union, said today on ZDF television. “We’re in an exceptional situation.”
Merkel is not the only European leader crafting new measures to counter the deepening economic slump. U.K. Prime Minister Gordon Brown yesterday proposed 500 million pounds ($734 million) to spur hiring and said he’d introduce measures this week to ease lending. French President Nicolas Sarkozy is preparing a second package for banks worth 10.6 billion euros.
Infrastructure, Tax Relief
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 proposal by the Social Democrats, Merkel’s coalition partners, to raise the highest rate of income tax was rejected.
Germany’s benchmark DAX index of the 30 top companies was trading at 4,668.86 as of 9:38 a.m. in Frankfurt, down 1.1 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. “Companies and consumers will be left to their own devices until then.”
‘Behind the Curve’
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.
Merkel faced domestic and international criticism from business lobbies, unions and economists last year 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, two reports published Jan. 8 showed.
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 to offset declines in deliveries. German car sales fell to the lowest level since reunification in 1990 last year as tight credit eroded purchases.
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 worst contraction since 1949. The German government is scheduled to release new economic growth forecasts on Jan. 28.
Political Gains
Merkel will probably reap any political gains from the second stimulus package rather than Foreign Minister Frank- Walter Steinmeier, her Social Democratic 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.
The coalition parties reached agreement last night on infrastructure investment of 18 billion euros to be targeted at improving education facilities, Peter Struck, Social Democrat parliamentary leader, said on ZDF.
Tax Cuts
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. Income-tax cuts will lower the tax burden by 9 billion euros a year, said Kauder.
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.
The parties also agreed to lower tax rates for low and medium-income earners to alleviate “cold progression,” the erosion of net wage increases from moves to higher tax classes, said Kauder. He ruled out a third stimulus package.
The Cabinet will consider a plan to cut the ballooning budget deficit at a Jan. 28 meeting, Ronald Pofalla, CDU general secretary, said on N24 television.
Germany’s public-sector deficit will jump above 6 percent of GDP this year as new borrowing surges to 60 billion euros, Steffen Kampeter, Christian Democrat budget spokesman, told the Rheinische Post newspaper.
“We’re getting to be like America,” Kampeter was cited as saying.
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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