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Stimulus all the rage except for Germany

  As recession extends its tentacles across the globe, it is getting hard just to track the hundreds of billions of dollars governments are throwing or promising to throw at the problem.


With unemployment surging and the car industry screaming for survival aid, governments in Washington, Beijing, Tokyo and the bulk of Europe appear to agree one thing -- that urgent fiscal stimulus is needed to support demand and limit the damage. What is striking is that Germany, Europe’s largest economy, appears unconvinced so far, or is at least reluctant to follow the rest of the pack into a spending splurge after years devoted to bringing the country’s public finances back into balance.

However, the fact that the European Central Bank is expected to cut interest rates heavily again on Thursday, as is the Bank of England, demonstrates the seriousness of the deterioration in the economic climate. But with much of the industrialized world now in or sliding into recession, economists believe it is time to deploy the fiscal guns alongside the monetary weaponry, and not just in the slower-growing industrialized world. “It is clear that significant fiscal stimulus is needed both in the OECD countries and in emerging markets,” said Torsten Slok, New York based economist for Deutsche Bank.

China has announced a stimulus package worth CNY 4 trillion, or roughly $586 billion. And Tokyo plans a stimulus worth ¥5 trillion ($52.5 billion), though it plans only to submit the extra budget to parliament in the new year. Washington has spent or committed trillions of dollars and is expected to come up with another big package -- some economists believe it may be worth upwards of $400 billion -- as soon as President-elect Barack Obama takes over in January. And the European Commission has proposed that the 27-country European Union come up with an EU-wide package worth €200 billion, or 1.5% of EU gross domestic product.

While economists believe the announced plans mix new and old money in some cases, Germany’s reticence is a more vexing question and one which casts a shadow on the EU-wide package to be discussed by finance ministers this week and which will be put to EU leaders for approval mid-December.

German Chancellor Angela Merkel says she does not want to get into a “race for billions”, which is worrying some other governments in Europe, according to officials in other capitals. And it is troubling economists too. “Germany’s reluctance to pull its weight in fighting the global recession betrays lack of vision, lack of leadership, and a temptation to free-ride that, if widely mimicked, would truly condemn the world economy to a new great depression,” says Marco Annunziata, chief economist at UniCredit bank.

Jim O’Neill, chief economist at Goldman Sachs, notes that domestic consumption in export-dependent Germany has barely budged in what will soon be 20 years since the fall of the Berlin Wall. And that is something that should change. Europe’s largest economy should do itself and the rest of the world a favor by raising wages, reducing sales tax, and thereby supporting higher levels of consumption, O’Neill argued in an article in the London Financial Times. Berlin will get a chance to explain its stand when European Union finance ministers meet on Monday and Tuesday to discuss how they might deliver on the proposal for an EU-wide stimulus package worth €200 billion ($260 billion).

France is preparing its contribution, due to be announced by President Nicolas Sarkozy on Thursday, and Italy Prime Minister Silvio Berlusconi announced a package on Friday which he says is worth €80 billion. London has already announced a plan it says is worth £20 billion. Many economists believe a lot of the figures being announced involved a mixture of truly new money and recycling of existing commitments, so it remains hard to evaluate the impact. Something must be done in any case, they say, at a time when unemployment is back on the rise and could surge.

European data last week showed that the unemployment rate ticked upwards to 7.7% in October from 7.6% the previous month, and more ugly numbers are expected this coming Friday in the United States. Bank of America economists highlighted in a research note that employment as measured by the monthly non-farm payrolls data fell 77,000 a month on average in the H1 of 2008, but by three to four times that amount in September and October. For the November data due on Friday, the prediction is that the fall will be 316,000, according to a poll conducted by Reuters, after a drop of 240,000 in October. (Reuters)