Cabinet seals stimulus plan to stem crisis

The German cabinet has agreed on a second stimulus package worth 50 billion euros over two years, its largest since WWII. Chancellor Angela Merkel called it "the most difficult decision I have made in domestic politics".


AFP - Germany's cabinet sealed a multi-billion stimulus package on Tuesday aimed at hauling Europe's biggest economy out of what is feared could be its worst slump for six decades.

The raft of measures -- worth 50 billion euros (66 billion dollars) over two years -- is Germany's largest stimulus plan since World War II and includes a huge increase in infrastructure spending as well as sweeping tax cuts.

Thrashed out in early January amid political wrangling within Berlin's uneasy "grand coalition" of Chancellor Angela Merkel's conservatives and the centre-left Social Democrats, the package must now be approved by parliament.

Merkel -- heavily criticised from all sides when an initial stimulus package last year was deemed insufficient -- said later Tuesday that proposing the package was "the most difficult decision I have made in domestic politics."

"This package is our answer to the international economic crisis and we believe that the extraordinary international economic situation calls for such extraordinary measures," Merkel told a news conference.

Germany would emerge "stronger from the crisis than we were as a country when we entered it," she pledged.

The plan forces Germany to take on a significant amount of new debt and Finance Minister Peer Steinbrueck has acknowledged his country will next year break EU rules aimed at keeping down public deficits.

However, Merkel said, "to do nothing now would put us in a deeper crisis and in a worse budgetary position," adding, "we have no time to lose and must ensure that the measures take effect as quickly as possible."

Her chief spokesman, Ulrich Wilhelm said the package should pass through both houses of parliament by the end of February.

With the "biggest stimulus package in the history of the Federal Republic of Germany," Merkel hopes to stave off the worst effects of the economic crisis as the world's largest exporter spirals ever deeper into recession.

Berlin expects 2009 to be among the worst in its history, with growth shrinking 2.25 percent and 500,000 more Germans out of work by the end of the year.

Nevertheless, as the cabinet was putting the final touches on the package, surprisingly strong business confidence data provided a rare glimmer of light to pierce the general economic gloom.

The closely-watched index published by the Munich-based Ifo institute posted a slight gain in January, surprising analysts who thought confidence would fall even further than last month's all-time low level.

The index rose to 83.0 points in January from 82.7 points in December. Economists polled by Dow Jones Newswires had forecast a drop to 81.3 points.

While the firms surveyed had a gloomier view of their current situation than in December, they had a more bullish view for the next six months, prompting some analysts to suggest Germany may have seen the worst of the crisis.

Alexander Koch from Unicredit said, "today's end of the free-fall in expectations is a strong ray of hope that the vicious circle is broken and the German economy will manage -- not to rebound strongly -- but to stabilise in the second half of the year."

Jennifer McKeown from Capital Economics said German firms might be "seeing some light at the end of the tunnel," cheered by the stimulus package as well as a series of interest rates cuts from the European Central Bank.

However, the Ifo institute's head, Hans-Werner Sinn warned against over-interpreting the data. "We can't deduce from this that an economic turning point is in sight," Sinn said.

Heinrich Bayer, an economist from Postbank, was similarly cautious.

"Of course, one must be careful when interpreting this. One rise should not be over-estimated. For a turning point to have been reached, the result will need to be confirmed in the coming months," he said.

Holger Schmiedling from Bank of America said, "It's almost too good to be true: Just as Germany is passing its second stimulus programme, the first leading indicators suggest that the economy could stabilise over the summer."

However, Schmiedling cautioned that the data should be taken "with a full bucket rather than just a grain of salt."

"To feel more confident that the economy will stabilise over the summer, we would need to see three significant gains in Ifo expectations in a row," he said.

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