Germany cabinet approves stimulus plan to help economy

28th January 2009, Comments 0 comments

The raft of measures is Germany's largest stimulus plan since World War II and includes a huge increase in infrastructure spending as well as sweeping tax cuts.

Berlin -- Germany's cabinet sealed a multi-billion euro stimulus package 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.

The cabinet approved the package Tuesday.

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

Merkel, who was heavily criticized from all sides when an initial stimulus package last year was deemed insufficient, has said that proposing the package was "the most difficult decision I have made in domestic politics."

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

But most politicians are agreed that drastic times call for drastic measures 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 by 2.25 percent.

By the end of the year there will be another 500,000 Germans out of work, with the jobless rate rising to an average 8.4 percent over 2009 from 7.8 percent in 2008, the government said in its latest economic forecasts.

The number of unemployed already rose in December above the psychologically important three million mark as the economy officially tipped into recession.

Nevertheless, as the cabinet was putting the final touches on the package, surprisingly strong business confidence data provided a rare glimmer of light that pierced 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.

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.

"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 stabilize in the second half of the year," said Alexander Koch from Unicredit.

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

However, the Ifo institute's president, 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."

Richard Carter/AFP/Expatica

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