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Stimulus Package with Extras

Germany Considers 100 Billion Euro Fund for Ailing Industry

Chancellor Angela Merkel's government is close to agreeing on the details of a €50 billion economic stimulus package now that Social Democrats have given up their opposition to tax cuts. In addition, Berlin wants a €100 billion fund for German industry.

Prior to the holidays, Germany's governing coalition hinted that the new year would see a second economic stimulus package aimed at softening the expected blow from the global financial crisis and resulting economic downturn. This week, Berlin is taking important steps toward hammering out the details of such a package.

On Wednesday, reports emerged that the Social Democrats are prepared to drop their categorical opposition to tax cuts as a possible element of the package. Party head Franz Müntefering told German television station ARD on Wednesday morning that his center-left party would be willing to compromise. Referring to Germany's conservative camp, Müntefering said, "if, for neurotic reasons given by the Union, there is no other solution, then it has to be done."

Separately, the Financial Times Deutschland on Wednesday reported that Berlin is weighing the establishment of a €100 billion ($132.7 billion) fund to provide German companies with liquidity should they run into refinancing difficulties. "We can't allow momentary difficulties to drive companies into bankruptcy," an unnamed conservative politician told the paper.

According to Wednesday's Süddeutsche Zeitung, Chancellor Angela Merkel's Christian Democratic Union (CDU), together with its Bavarian sister party, the Christian Social Union (CSU), has pulled away from drastic tax cuts. Currently under consideration is an increase to the minimum taxable income from the existing level of €7,664 to €8,000. Other minor adjustments may also be made.

The apparent compromise clears one of the major hurdles out of the way of Germany's second stimulus package, likely to be worth €50 billion over two years. The first one, passed last autumn, was widely criticized for being little more than a collection of measures already approved by Merkel's governing coalition. With economic indicators increasingly pointing towards a difficult 2009, pressure had grown on Berlin to come up with a new plan.

The new collection of measures will focus largely on infrastructure investments such as road building and the refurbishment of schools. Chancellor Merkel herself had originally come out against tax cuts of any kind, but recently relented in the face of stiff pressure from within her conservative camp. The SPD shift makes a quick agreement seem likely. The parties hope to reach an agreement by next Monday, paving the way for final passage in February.

Chancellor Merkel would also like to see the proposed €100 billion fund for private industry agreed to by next Monday. In addition to making it difficult for banks to maintain liquidity, the financial crisis has also limited the ability of companies to borrow money at reasonable prices. Berlin, according to the Financial Times Deutschland, is concerned that "pillars of German industry" could become endangered.

Concern is growing that the various measures planned by Berlin could result in a breach of the deficit rules imposed on those European countries belonging to the euro single currency zone. The Maastricht Treaty allows budget deficits of no greater than 3 percent of gross domestic product. According to Volker Kauder, floor leader for the CDU, Germany has some €50 billion in leeway before it violates the pact -- roughly the amount of the stimulus package under consideration. A number of euro zone countries have argued recently that the stability pact rules should be loosened.

cgh -- with wire reports