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Germany answers critics with new stimulus package

  Germany unveiled a new €50 billion stimulus package on Tuesday in a bid to shield its economy from the biggest recession since World War Two and silence critics who have accused it of doing too little to boost growth.

Chancellor Angela Merkel’s conservatives and the Social Democrats (SPD), who share power in an uneasy coalition, agreed late on Monday on a series of steps that combine new investments in infrastructure with modest tax cuts and guarantees for struggling German firms.

Economists welcomed the package, whose success will be crucial to Merkel’s re-election hopes, but expressed doubt that it would be sufficient to end an economic downturn that pushed Germany into recession last year and will likely deepen in 2009. “A government growth program like this, combined with measures taken in neighboring countries, cannot prevent recession but can limit its severity. That is the goal,” German Finance Minister Peer Steinbrueck told reporters. “Together with the steps we took in November, this is the biggest growth package since 1949. We are talking about a fiscal boost of over €80 billion,” he added.

Merkel’s government pushed through a package valued at €31 billion late last year, but new government spending accounted for only about a third of the total, opening Berlin up to criticism from other European countries such as France.

After initially resisting the idea of a second package, Merkel bowed to pressure and began work on a new one. Central to the new package, which is worth €49.245 billion ($66 billion), is new investment in infrastructure and education which the government hopes will save jobs.

DEFICIT LIMITS

The federal and state governments plan investments of about €18 billion. In addition, the package envisages a total of €1.5 billion in aid for the auto industry and a fund of €100 billion to provide credit guarantees to struggling businesses.

The coalition partners also agreed to tax relief of €2.9 billion in 2009, rising to 6.0 billion from 2010. The entry level tax rate is to go down slightly, tax-free thresholds will be raised and changes will be made to tax brackets.

Steinbrueck, who has led a drive by Merkel’s coalition to consolidate the German budget over the past three years, said the new spending would vault Germany back above European Union deficit limits next year.

Economists expressed concern that some of the measures would not take effect until mid-year -- too late to ward off the worst of the downturn. “This may kick in only late this year and thus do nothing to help us when the recession is probably at its worst over the current quarter and the next quarter,” Holger Schmieding, an economist at the Bank of America said. (Reuters)