Germany approves new stimulus package

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Germany’s coalition government yesterday (12 January) gave the green light to a €50 billion economic stimulus package, the largest for sixty years, comprising a mixture of subsidies, tax relief for families and investment in construction.

Combined with the €32 billion that German government had already approved last November, the package represents the largest in Europe, sending a signal to critics who thought the first stimulus plan did not go far enough to boost Europe’s largest economy. 

The package lowers the entry income-tax rate from 15 to 14%, is expected to relieve the tax burden by €9 billion annually, and will reduce health insurance contributions by 6%. In addition, parents will be granted a one-off €100 bonus allowance per child, while potential car buyers can count on a €2,500 payment for getting rid of their old vehicles. 

Some of the fiscal measures agreed yesterday will come into effect on 1 July, according Peter Struck, parliamentary leader of the Social Democratic Party. A proposal by the SPD to also raise tax for high incomes was rejected by Chancellor Angela Merkel’s centre-right CDU party. 

According to coalition sources, agreement was also reached on a controversial €100 billion bail-out for companies in need, similar to a €500 billion package for banks approved earlier. But further details will not be known until later today or tomorrow.

The adoption of the package came just days after economic indicators had shown that the recession was beginning to negatively impact upon the economy and labour market. Unemployment rose by 100,000 last month, while industrial orders dropped by 6% and exports by as much as 10.6% (EURACTIV 09/01/09). 

Due to the crisis, German car producer Daimler yesterday announced plans to down-grade some 40,000 employees to short-term contracts for the first time in fifteen years. 

‘Confetti politics’ 

The opposition dismissed the new stimulus package for not going far enough, while finance experts warned that it would lead to record-high debt. Steffen Kampeter, a leading CDU politician dealing with budgetary issues, estimated that it would lead to new annual debt of €60 billion. The current record deficit amounts to €40 billion. Kampeter described the agreed measures as “confetti politics” and was sceptical as to whether they would set the country on the right path in the long run. 

Meanwhile, UK Prime Minister Gordon Brown unveiled a €500m, two-year plan to bring 500,000 people back into work. He pledged about €2,500 for every person trained by companies after being unemployed for more than six months, saying the measures were needed to stop temporary rises in unemployment from becoming permanent, as had happened in the past. 

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