Chancellor Angela Merkel’s ruling coalition on Wednesday (3 June) agreed a bumper stimulus package to speed up Germany’s recovery from the coronavirus. It includes a reduced VAT rate and beefed-up electric vehicle purchase premiums.
Speaking at a news conference after marathon talks that extended well into the night, Merkel said the package would amount to €130 billion and include lower value-added tax (VAT) to boost consumption.
“The size of the package will amount to €130 billion for the years 2020/2021, 120 billion of which will be spent by the federal government,” Merkel said. “So we have an economic stimulus package, a package for the future.”
The stimulus programme follows a €750 billion rescue package agreed in March which encompassed a debt-financed supplementary budget of €156 billion.
Germany’s measures, which together with liquidity aid and loan guarantees equal more than 30% of its economic output, go substantially beyond any other national emergency programmes launched by other euro zone countries.
Merkel said VAT will be reduced from 19% to 16% for six months starting in July 1. A lower VAT rate for hospitality of 7% would be lowered by two points over the same period. The overall cost of the VAT measures amount to €20 billion.
As part of the plan, the size of subsidy granted to buyers of electric vehicles will double to €6,000. But a controversial idea for a cash-for-clunkers scheme that also covers petrol and diesel cars did not materialise after noisy environmental protests.
The youth environmental movement “Fridays for Future” had organised some 60 protests nationwide on Tuesday, with demonstrators asked to wear masks and keep their distance in line with coronavirus-fighting measures.
Bavaria state premier Markus Söder, who had pushed for help to the automobile sector, defended the package, saying the VAT cut will benefit sales of all classes and types of vehicles.
The increased rebate for electric cars is aimed meanwhile at giving consumers the incentive to switch to cleaner vehicles, said Söder, whose state hosts BMW and Audi.
In looks to have been a concession to the SPD by Merkel’s conservatives, while the SPD appears to have partly given up on a €57 billion package to help municipalities, especially those with high debt.
Finance Minister Olaf Scholz said the package will be partly financed by additional net new borrowing. Some €60 billion of the €156 billion in new debt approved in March have not been tapped, he added.
Germany can afford generous spending splurges given it had a balanced budget since 2014 and had a debt to output ratio of 60% before the pandemic, well below eurozone partners like Italy, Spain and France.
“We can do this because we economised well in recent years,” said Scholz. “We want to come out of this crisis with vigour.”
The package also includes at least €10 billion a year to help municipalities struggling with lower tax receipts with public spending on infrastructure and housing.
The sheer scale of Germany’s new spending splurge has raised concerns among officials from economically weaker countries that the discrepancy in aid measures could worsen imbalances in the bloc and distort the European Union’s single market.
The measures also include a one-time, €300 stipend per child to help families.
Germany has weathered the crisis better than many of its European neighbours.
Widespread testing, a robust healthcare system and restrictive measures have helped it keep deaths relatively low. The economic impact of the crisis has also been cushioned by a decision to keep factories and construction sites open as well as generous government financial assistance to businesses and freelancers.
The economy is expected to shrink by 6.3% this year, sinking into its worst recession since World War Two.