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Germany

German Cabinet Approves Economic Aid Package

Germany's Cabinet has resolved a series of economic measures to help companies weather the expected financial downturn. While some are skeptical of the package, Chancellor Angela Merkel said it set the right signal.

Building cranes

The government hopes its aid package will keep the economy going

The German government is ready to roll out a series of economic measures to carry the country though the next year, when economists are expecting Germany to come to a virtual standstill.

The aid package includes cheap loans for firms, increased investment in public infrastructure such as highways, tax breaks for efficient cars and tax rules that allow for more rapid depreciation of business investments. German Chancellor Angela Merkel's Cabinet approved the package on Wednesday, Nov. 5.

The measures are intended to trigger investments totaling some 50 billion euros ($64 billion) over the next two years.

"In 2009 we will have bad news, but we are going to do something so that things can and will get better in 2010," Merkel told a group of German employers in Berlin earlier this week. "With this package of measures, we are building a bridge for people, as well as for employers: a bridge for investment, for the protection of jobs, until the economy gets going again under its own steam."

Merkel's Cabinet drafted the plan after coming under criticism for devoting tens of billions of euros of tax money to rescuing banks, but had not offered up any plan to help the rest of the economy.

Merkel defends plan against criticism

Economists have expressed skepticism that the government's package will have much of an impact on Europe's biggest economy. The public also seems unconvinced, according to a recent Emnid opinion poll in Bild am Sonntag newspaper which suggested that 70 percent of Germans feel that such measures will prove futile.

Chancellor Angela Merkel smiles

Merkel is optimistic about Germany's long-term health

Merkel said in Berlin on Wednesday that industry representatives and the Federation of German Trade Unions DGB agreed with her on setting a necessary signal.

"We are going to counter this," she said. "We are going to do everything to overcome these difficulties together."

Hans-Werner Sinn, head of the Munich-based IFO economic research institute, said he already considered Germany at the edge of a recession now. Sinn said the economic program was good, but shouldn't be applied too soon.

"Overall, I would play it out and wait some time with the package," Sinn said in an interview with Reuters news agency. "Why should I use up all of my firewood now?"

According to Sinn, it could be needed more in the future. The German economy currently had a very high degree of production capacity. In addition, unemployment was at its lowest level in 16 years.

Dieter Hundt, head of the BDA employers' lobby, welcomed the government measures, noting that some sectors had already suffered "dramatic" falls in demand. For example, several German car manufacturers have announced plans to temporarily stop production because of plummeting demand.

But German banks also need to play their part in helping the economy recover by once again supplying credit at "reasonable" rates of interest, Hundt said.

Balancing the budget

Merkel said despite the economic slowdown, Germany will not abandon its goal to balance the federal budget.

"We must not lose sight of the aim of budget consolidation," Merkel said.

Government officials have warned a prior goal to have the budget balanced by 2011 could prove difficult. Merkel said it was her goal to have the budget balanced no later than 2013.

International Monetary Fund logo

There have been calls for strengthening the IMF

Merkel also called on speedy negotiations to reform the global financial system. A fix needs to be agreed on in the upcoming months and said it would be a mistake if the negotiations drag on for years.

Merkel wants the International Monetary Fund to have greater jurisdiction over financial companies that operate internationally. She also called for more transparency and stricter rules to prevent excessive risk taking.

EU leaders will meet in Brussels on Friday to prepare for a meeting of world leaders that will take place in Washington next week.

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