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Germany under pressure to do more for economy – questions+answers

  Germany is under pressure to do more to boost Europe’s biggest economy and help the region withstand the effects of a deep recession.

 

Below are some questions and answers about the measures Germany has taken so far, why it has chosen the current policy path and whether it could change in the coming months.

 

WHAT IS IN GERMANY’S ECONOMIC STIMULUS PROGRAMME?

Steps include raising funding for building work, speeding up and boosting investment in transport and introducing tax breaks on new cars, especially those with low emissions. It also allows firms to get credit more easily. Most of the measures, passed by Germany’s parliament last week, take effect from January 1, 2009.

HOW MUCH IS IT WORTH?

The government says it is worth about €31 billion over two years, or about 1.25% of gross domestic product (GDP). It also says it will generate €50 billion overall in new contracts and orders. But the amount of new spending is far below those figures. The government has said the package will result in an extra €10.9 billion burden on the federal budget from 2009 to 2012.

HOW DOES IT COMPARE WITH OTHER COUNTRIES’ PLANS?

France values its plan at €26 billion, or 1.3% of GDP, including 10.5 billion in direct investment. Britain plans to pump £20 billion into the economy, including tax cuts and £3 billion of capital spending. The European Commission’s €200 billion spending plan is worth some 1.5% of the bloc’s GDP. Plans announced by US President-elect Barack Obama dwarf Europe’s plans. He wants to boost the US economy with an infrastructure-building package estimated at $500 billion.

WHAT IS THE CRITICISM OF GERMANY?

Critics say many of the measures in Germany’s stimulus plan are old plans that have been repackaged and complain the government has come up with little new money. They say Germany, which has worked hard to consolidate its budget in the last three years, is in a strong position to spend its way out of recession and doing more would help the region.

WHY DOESNT GERMANY DO MORE?

Chancellor Angela Merkel’s government is loath to bust its diligently consolidated budget, partly because it sees the cut in Germany’s deficit over the past years as one of its biggest accomplishments. Ahead of a September election, it would be hard for the government to explain to debt-wary Germans why they were effectively subsidizing other EU countries that had been less careful fiscally.

The government also argues that tax cuts or consumption-boosting steps are unlikely to work as Germans tend to save, not spend, their extra cash. It would also be tough for the two ruling parties -- Merkel’s conservatives and the Social Democrats (SPD) -- to agree a new program as an election campaign gets going.

WHAT MORE COULD GERMANY DO?

Merkel says she will review the situation in January but has ruled out tax cuts until after the election. SPD Finance Minister Peer Steinbrueck has said there will be no additional economic package before Easter. Merkel meets ministers, bankers and experts on December 14 but says this is to assess the outlook rather than agree new steps.

Coalition leaders meet in the first week of 2009 and Merkel has played down the chances of a new package being passed then. But with an election looming, pressure to introduce new measures is likely to intensify, especially if the downturn proves worse than expected.

There have been calls for tax cuts, notably for a reduction in sales tax, and for spending vouchers to boost flagging domestic consumption. Other ideas include more investment in infrastructure projects and cutting corporate and payroll taxes to help protect jobs. (Reuters)