The heads of the parties in Germany's grand coalition government began meeting on Monday to discuss a fresh economic stimulus program of up to €50 billion ($68.4 billion). The talks are likely to prove tough because the center-left Social Democrats (SPD) are opposed to conservative demands for tax cuts as part of the package.
In talks on Sunday night, Chancellor Angela Merkel's Christian Democrats had given in to their Bavarian conservative allies in the Christian Social Union who had demanded tax cuts.
The two parties agreed to raise the income tax base threshold to €8,000 from €7,664 and to start eliminating so-called "cold progression" under which tax payers are bumped into higher tax brackets even if inflation-adjusted incomes haven't grown.
However, the SPD, which shares power with the conservatives in Merkel's grand coalition, doesn't want tax cuts and has even said it wants to raise taxes for top earners. "It will be very difficult to reach an agreement on the tax issue," SPD deputy chairwoman Andrea Nahles said.
She said the conservative tax cut plans would mainly benefit medium and high-income groups and that it made more sense to cut welfare contributions because this would also help low-income households and thereby boost consumer spending.
The talks started early Monday afternoon and another meeting has been set for January 12 to iron out details. The figure of up to €50 billion envisaged by the conservatives would apply to 2009 and 2010.
The conservatives and the SPD agree on broad outlines of the package which envisages increased spending on infrastructure projects to safeguard jobs in the coming downturn.
The SPD at the weekend presented its own proposal for a €40 billion program which includes a "Germany Fund" worth €10 billion for municipal investment in daycare centers, schools and sports facilities. The program also includes cuts in welfare contributions and increases in Germany's child benefit, a monthly government cash payment to parents with children.
The program now being discussed is on top of a €32 billion package agreed last month which was widely criticized as too small to avert recession in Europe's biggest economy.
The parties are under mounting pressure from business leaders to take tougher action to protect the economy, and their performance will be assessed in a general election in September and a number of regional elections beforehand, starting with a January 18 vote in the western state of Hesse.
Meanwhile the president of one of Germany's leading economic research institutes, Hans-Werner Sinn, said Germany was on the brink of its worst economic downturn since 1945.
"The German economy is facing the worst recession in its post-war history," Sinn, president of the Ifo institute, told Bild newspaper on Monday. "We don't see a recovery for 2010 either," he said.
German unemployment, currently at just below 3 million, would rise by half a million by December 2009 and could reach 4 million in 2010, Sinn added.