January 6, 2009

First it was €40 billion.  Then it was €25 billion.  Now it may be as high as €50 ($68.1) billion.  The plan, which will reportedly focus on schools and public works, remains stalled by conflicting domestic political debates over tax cuts within Merkel's governing coalition. 

The WSJ:

Bavarian conservatives [Christian Social Union (CSU)], who are allied with Ms. Merkel's center-right Christian Democrats [CDU], have threatened to block the stimulus package unless it includes significant income-tax cuts.  The center-left Social Democrats, or SPD, who control the finance ministry, are opposed to income-tax cuts that they say wouldn't benefit millions of lower-income households that aren't subject to income tax.  ...  Instead, Social Democrats want measures to cut the monthly levies that Germans pay for health, pension and unemployment insurance.

All parties in Ms. Merkel's coalition are eager to present the stimulus package as a victory for their own voters as Germany gears up for national elections in September.  Social Democrats badly need to raise their popularity after falling far behind conservatives in opinion polls.  Ms. Merkel needs her Bavarian allies to win more voters if she is to win the country in the fall – but she also needs a speedy agreement with the Social Democrats, her main rivals, to avert an economic slump and soaring unemployment.

The squabbling comes at a bad time for Merkel, who has faced persistent criticism the last several weeks over the government's perceived unwillingness to tackle the financial crisis; Germany's export-heavy economy continues to suffer as global demand dwindles.

To make matters worse, the country's first stimulus package unveiled last November was probably less effective than previously thought: "Germany already presented a stimulus package in November, maintaining it was worth €31 billion ($43 billion), but analysts said genuinely new spending amounted to only €4 billion in 2009 – too little to rescue growth in the country's €2.5 trillion economy."  The FT echoed this assessment, noting that the plan totaled only €12 billion over two years.

However, the FT also offered a reserved complement of the package:

Although Germany has been criticized by her European partners for acting too slowly to counter the econ­omic slowdown, a fiscal boost on this scale would bring its growth-boosting measures so far to about 1.5 percent of gross domestic product, matching and in some cases exceeding the measures enacted in neighboring countries.  The admission underlines both Berlin’s concerns about the severity of the economic downturn – Berlin now expects Europe’s largest economy to shrink by 2 percent this year – and its determination to stick to Europe’s fiscal rules.  "If we have a 2 per cent recession, we can spend €25bn over two years and still abide by the stability pact," a senior chancellery official told the Financial Times, adding that Berlin was still keen to act as an example of fiscal prudence in Europe.  "If the recession gets worse, then things will be difficult."

Germany still has a fighting chance at curbing the negative effects of the financial crisis.  It didn't experience a massive housing bubble, and it was less affected by the credit crunch than its neighbors, due largely to fiscal discipline.  So, government spending on public works or reduced taxes could increase domestic demand.  A successful German stimulus package has the potential to buoy the wider European economy as well.

But, politicians must reach a compromise and act soon.  For months, analysts have warned that Merkel's resistance to a stimulus package could cause her popularity to decline.  It's ironic now that a measure which would likely boost the coalition's popularity is being delayed by ... well, further attempts to boost the coalition's popularity.

Peter Cassata is associate editor of the Atlantic Council.

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