Tough Times Merkel Warns of 'Difficult Year' Ahead

In a speech to parliament, Chancellor Angela Merkel has warned that a hard year lies ahead for Germany. However the country should use the economic crisis as an opportunity, she said.


It has already been a full week for German Chancellor Angela Merkel. On Monday, she and her governing coalition partners met late into the night to put together a €50 billion ($66 billion) economic stimmulus package. On Tuesday, she explained the package to the Berlin press. And on Wednesday, she defended the measures to a packed house in the German parliament.

It's going to be a tough year, Merkel warned Germans Wednesday.
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It's going to be a tough year, Merkel warned Germans Wednesday.

She also warned Germans that tough times are ahead. "A difficult year lies before us," Merkel said, explaining that Germany could not seal itself off from the consequences of the global crisis. Instead, the country is in its most difficult situation it has faced for many decades. "Doing nothing is not an option."

Merkel insisted that her government's stimulus package, agreed on by Merkel's conservatives and the center-left Social Democrats, was a "comprehensive answer" to the current financial and economic crisis. Merkel's cabinet approved the package earlier on Wednesday. Germany would come out of the downturn stronger than ever, she said: "We want to use this crisis as an opportunity."

With the new package and another economic stimulus package put together late last year, Berlin has now pledged over €80 billion -- 3 percent of Germany's GDP -- to boost the economy, Merkel said. Such a program has "never been seen before in the history of the Federal Republic of Germany," she added.

According to the chancellor, the current crisis is the first far-reaching global economic crisis of the globalization era. "The crisis affects everybody around the globe," she said. The financial markets must be "made capable of functioning once again," she said, adding that the usual instruments for combating a crisis were no longer enough. She called the planned infrastructure investment program contained in the new package a "qualitative leap which otherwise would have taken many years" and said the priority of the package was to secure jobs.

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.

As well as the infrastructure investment plans, the economic package envisions tax breaks, a one-off "children's bonus" of €100 per child, a premium for deregistering old cars and a safety net for companies. The package is intended to leave an average family better off to the tune of several hundred euros a year through reducing the entry rate of income tax and health insurance premiums, among other measures.

However, the program will also mean the German budget will take a significant hit. The ruling coalition expects that fresh loans to the value of €50 billion will be needed in 2009 alone. The resulting deficit has led many to criticize the package. Rules governing those states belonging to the European single currency, the euro, require that budget deficits not exceed 3 percent of gross domestic product.

German Finance Minister Peer Steinbrück said Wednesday that he expects the 3 percent limit will be adhered to in 2009. For next year, however, Steinbrück expects the German deficit will rise to 4 percent of GDP -- and thereby exceed the limit laid down in the stability pact.

"Totally Inadequate"

The opposition attacked the stimulus package Wednesday. Guido Westerwelle, leader of the business-friendly FDP party, criticized the economic package as being "fainthearted and inadequate" and accused the coalition of conducting an election campaign with the package. "Germany deserves better than this botch job by the grand coalition," he said.

Oskar Lafontaine, leader of the far-left Left Party, criticized the economic package as "totally inadequate," saying far too little was being invested in public infrastructure. Lafontaine also criticized the tax cuts which he said would mainly benefit the better-off, and the new debts which would be at the expense of those in low-income brackets.

How much effect the economic package will have remains to be seen. Germany's Institute for Employment Research (IAB) expects that up to 250,000 jobs can be saved. IAB deputy chief Ulrich Walwei told the Wednesday edition of the Berliner Zeitung that he estimates the economic package will reduce the expected deep slump in economic growth in 2009 in Germany by a half to one full percentage point. He told the paper it was conceivable that the package will only have its full effect on growth and employment in 2010.

Despite the criticism, the package could give a boost to Merkel, who has been slammed in Germany and around Europe for her handling of the economic crisis so far. She is seeking to win a second term as chancellor in a general election in September.

The government hopes that the package will be passed by the lower house of the German parliament, the Bundestag, in mid-February. Given the number of seats controlled by Merkel's governing coalition, passage through the Bundestag is seen as a sure thing.

The upper house of parliament, though, may be more difficult. 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.

dgs -- with wire reports

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