Fear of Bloated Budget Deficit Germany May Limit New Stimulus Program to €25 Billion

The news, if confirmed, may irk Germany's neighbors in Europe. Newspapers are claiming the second economic stimulus package due to be unveiled next month will total just €25 billion rather than the originally planned €40 billion because Germany doesn't want to give other nations an excuse to breach deficit rules.

Clouds loom over the port of Hamburg: Germany's giant economy is expected to fall into recession next year.
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Clouds loom over the port of Hamburg: Germany's giant economy is expected to fall into recession next year.

Germany's second economic stimulus package due to be unveiled in January will be far smaller than initially discussed because the government doesn't want to give other European Union countries an excuse to break EU deficit rules, two German newspapers reported on Wednesday.

Reports in Süddeutsche Zeitung and Frankfurter Rundschau said the new program to avert recession would amount to €25 billion ($34.9 billion) compared with the figure of €40 billion initially discussed.

The finance minister of the regional state of Rhineland-Palatinate, Ingolf Deubel, confirmed the figure of €25 billion in an interview with the Rhein-Zeitung newspaper following a meeting of regional government representatives with Chancellor Angela Merkel's chief of staff, Thomas de Mazière, in Berlin on Tuesday.

A spokesman for the federal Finance Ministry in Berlin said no decision had yet been taken on the program "so there's no figure yet."

But figures are being leaked to the press. According to Süddeutsche Zeitung, which cited unnamed government officials, the program will include €10 billion in cuts in social contributions, further billions for possible tax cuts and other measures and a "high single-digit billion sum" for public investments.

The government wants to limit the program so as not to break fiscal discipline rules for the members of the euro single currency which state that the public budget deficit must not exceed three percent of gross domestic product.

The rule is enshrined in the euro zone's Stability and Growth Pact, which is aimed at underpinning the strength of the single currency by ensuring that governments don't borrow too much and thereby fan price inflation.

The newspapers said that Germany's regional states and the federal government had decided to adhere to the Stability Pact in 2009 despite the looming recession. The aim is to avoid giving other EU states like France and Italy, which are already destined to breach the pact next year, no additional justification for getting lax with their budgets.

The leaders of the two main parties in Merkel's government coalition, the conservative Christian Democrats and the center-left Social Democrats, are due to meet on January 5 to discuss the stimulus package, which will come on top of a €32 billion economy-boosting program agreed to earlier this month.

One of Germany's leading economic research institutes, IfW, this week predicted that the German economy will shrink by 2.7 percent in 2009, which would be three times worse than the worst downturn Germany has suffered since World War II. In 1975, its gross domestic product shrank by 0.9 percent.

If confirmed, the self-imposed limit to the new stimulus measures and the reason given for it could fuel tension within the EU where Merkel has been criticized for not doing enough to combat recession in Europe's largest economy.

-- cro with wire reports


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