Germany's ruling political parties agreed on a two-year €50 billion stimulus plan, the biggest since World War II, at a meeting on Monday night to help Europe's largest economy weather the financial and economic crisis.
Representatives of Germany's governing coalition met in the Chancellery and consulted late into Monday evening on the new stimulus package.Foto: AP
The plan envisages €18 billion of new investment in the construction and repair of roads and the rail network and of schools and universities. Some of the money will also be used for faster Internet communication networks.
Taxes are also being cut, with the tax threshold being raised to €8,004 from €7,664, and the entry rate of tax will be lowered to 14 percent from 15 percent on July 1.
The German system of "cold progression," under which taxpayers are shifted into higher tax brackets even when real incomes have not grown, is also going to be changed, thus bringing tax relief. Under the current system, the tax brackets aren't adjusted for inflation.
Employees' health insurance contributions will be lowered, a measure that will cost the government around €9 billion and will benefit employees and employers in equal measure. Under the German system, they share the cost of social insurance contributions.
The plan also includes incentives worth €2,500 euros for new car purchases if the purchaser deregisters a vehicle that is older than nine years. A one-off bonus of €100 is being paid per child and child benefit payments are being increased for the long-term unemployed.
"The governing coalition has created the preconditions to give us the chance to emerge stronger from this crisis," Ronald Pofalla, the general secretary of Chancellor Angela Merkel's conservative Christian Democrats (CDU), told the N-tv television channel.
The center-left Social Democrats who share power with the CDU said families with two children would have an extra €400 to €500 in their pockets per year as a result of the package.
In a separate measure, the parties also agreed to set up a €100 billion fund to protect firms that can't get enough financing as a result of the crisis. The firms will get state credit gurantees or direct loans from the government, but the government will not buy stakes in them.
Package Criticized as Too Small
Germany's trade union federation and business lobbyists said the stimulus program didn't go far enough, while opposition parties and budget experts from within Merkel's own coalition warned that government borrowing would rise sharply.
Germany's DGB trade union federation said the stimulus package was too small and that public investment would need to be twice as great as the planned €18 billion injection to have a major impact on the economy. DBG chairman Michael Sommer said the planned tax cuts would also fail to have much effect. "It won't do anything to boost consumer spending and the economy," Sommer told Deutschlandradio.
The German Federation of Chambers of Commerce and Industry (DIHK) said more corporate tax cuts were needed to help firms through the crisis.
The Federation of German Taxpayers said the planned one-point cut in the entry level tax rate to 14 percent was "ridiculous" and calculated that an employee with annual income of €30,000 would only have an extra €15,50 in his pocket per month.
The opposition liberal Free Democrats (FDP) and the Greens also criticized the deal, and the FDP said it would try to block the stimulus program in the Bundesrat upper house of parliament once it gets there. "The tax cut is minimal because the coalition focused on making election gifts to families and the car industry," said Otto Fricke of the FDP, chairman of the budget committee in the Bundestag lower house of parliament.
The package will be presented to the Bundestag on Wednesday with the government hoping that it can be passed in early February. Given the number of seats controlled by Merkel's governing coalition, which pairs her CDU with the Social Democrats, passage through the Bundestag is seen as a sure thing.
The upper house of parliament, though, may be more dicey. The FDP will have the power to block legislation if it wins enough votes in a January 18 regional election in the state of Hesse to form a government with the CDU.
Finance Minister Defends Package
But Finance Minister Peer Steinbrück said the economic impact of the package, which comes on top of a €31 billion plan agreed late last year, should not be underestimated. "A boost by almost €50 billion, together with the first economic package it's a total of €80 billion. I really would ask people to be careful about talking that down," Steinbrück told WDR2 radio.
He added that Germany would not be able to meet EU budget deficit limits in 2010 as a result of the package. Rules governing those countries using the European common currency, the euro, state that countries' budget deficits must not exceed 3 percent of gross domestic product.
Despite the criticism, the package could give a boost to Merkel, who has been criticized in Germany and around Europe for her handling of the crisis so far. She is seeking to win a second term in a general election in September.