Merkel's Change of Heart Berlin Plans to Spend €40 Billion More to Fight Recession

After resisting weeks of pressure to spend their way out of a crisis, the German government has decided on a second stimulus package. The plan involves massive infrastructure spending but has unleashed controversy over whether money should flow to the East or the West.


German Chancellor Angela Merkel has had to weather some tough criticism in recent weeks, both at home and abroad, over her government's handling of the economic downturn. Now it seems Berlin has decided to spend its way out of the crisis after all, and intends to launch a second stimulus package. Government sources have told SPIEGEL it will be worth almost €40 billion ($56 billion).

Governors of Germany's 16 states meet with government officials on Thursday.
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Governors of Germany's 16 states meet with government officials on Thursday.

Together with the first stimulus package, Berlin is now set to invest a massive €50 billion in its bid to beat the recession and stave off huge increases in unemployment in 2009 and beyond. According to government sources, the two packages combined will be worth up to 2 percent of Germany's gross domestic product and are expected to have a "macroeconomic effect."

The vast majority of the new government investment will be spent on improving roads, schools, universities and sports facilities. Chancellor Merkel told the Neue Presse newspaper, in comments published on Friday, that extending broadband networks would also be included in the package.

The funds will also be spent on encouraging private consumption, although there is still no agreement on whether that will be achieved through income tax cuts, something the Christian Social Union -- the Bavarian sister party to Merkel's Christian Democrats -- are pushing for. Merkel has so far opposed tax cuts before next year's September parliamentary elections. The plan will include proposals to increase the state's subsidies of the health insurance system, so that contributions made by employees and employers could be reduced.

Merkel told the Neue Presse that she wanted the measures to make Germany "more modern and sure of the future in the long term." She said that her aims were to encourage growth and employment, emphasizing that she wanted the "development on the labor market" to be at "the center of our efforts."

Merkel met with the governors of Germany's 16 states on Thursday to discuss the package but the details still have to be ironed out and the politicians will meet again next Tuesday. However, the final decisions on where exactly the investments will be channelled won't be made until mid January when an inter-ministerial working group presents its plan. Berlin also wants to wait until Barack Obama is sworn in as US President on Jan. 20 so that it can assess the extent of Washington's economic stimulus measures.

The German government has come in for withering criticism for its reluctance to take sweeping measures in the face of the economic downturn which threatens to be the worst since the Great Depression. In fact Merkel's foot-dragging on backing a Europe-wide stimulus package suggested by the European Commission has seen Germany marginalized in efforts within the 27-member bloc to combat the effects of the global economic downturn. Merkel was pointedly not invited to a top-level meeting with business leaders in London a few weeks ago hosted by British Prime Minister Gordon Brown and attended by French President Nicolas Sarkozy and EU Commission President Jose Manuel Barroso. Her Finance Minister Peer Steinbrück's ability to rub most other European leaders up the wrong way -- for example by attacking their "crass Keynesianism" -- had further alienated Berlin from the rest of Europe.

After Chancellor Merkel met with a group of advisers and ministers at the weekend to discuss the extent of the crisis there has, however, been something of a change in tone in Berlin. And as the prognoses for the coming year have steadily worsened, even Germany has been shaken into action.

On Tuesday the Economics Ministry announced that the German economy could shrink by more than 3 percent in 2009, something that is likely to force Berlin to massively increase its borrowing next year. Current budget plans had envisaged net borrowing of €18.5 billion, but that was based on growth predictions of 0.2 percent. Now the government has admitted that this could double to as much as €30 billion, as tax yields fall and spending on welfare for the jobless increases. In fact some media reports predict that sum could swell to as much as €50 billion.

Merkel is still clinging to the hope that in the end Germany will one day be able to balance the federal budget, something that Berlin had hoped to do by 2011. "A balanced budget remains our target because the demographic changes in Germany will increasingly have an effect from the middle of the coming decade," she told Neue Presse. "We must not overburden the younger ones."

The Chancellor, has however, triggered something of a controversy at home, over where exactly these new stimulus billions will flow. In an interview with the political magazine Cicero, published Thursday, Merkel said that the package would not specifically target eastern Germany but also help communities in the West, and after Thursday's meeting in Berlin she hammered home the point, saying: "It is not a program that will prefer the East." Billions of euros have been pumped into the former East Germany, where Merkel hails from, to modernize its infrastructure since the fall of the Berlin Wall in 1989, but the region still suffers disproportionately from poverty and unemployment.

Carsten Schneider, a politician with Merkel's coalition partners the Social Democrats (SPD) slammed her comments as divisive. "The chancellor has written off the East," he told the Leipziger Volkszeitung on Friday, adding that "in this cheap way (she) is hoping to win points in the West ahead of the federal elections."

smd -- with wire reports and reporting by SPIEGEL

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