Following weeks of disagreement with Brussels, and France and the UK in particular, the German government has agreed to a second stimulus package of nearly €40 ($55.5) billion. Merkel faced a strong backlash throughout Europe in recent weeks from critics who felt the government was not responding adequately to Germany’s economic downturn. Her refusal to spend more on the crisis has also cost her domestic popularity.
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.
Further details are expected to emerge after a meeting between Merkel and the governors of Germany’s Länder scheduled for next Tuesday, and final decisions on where capital is to be injected will be made in January. The announcement marks an about face from Merkel’s earlier hesitance to use further government funds to combat the country’s recession.
Peter Cassata is an assistant editor at the Atlantic Council.