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Germany

German Government at Odds Over New Stimulus Package

Leaders of Germany's coalition government meet Monday to draft a second economic stimulus package. But deep divisions on the best way forward are evident.

Construction site

Infrastructure projects are part of the new stimulus package, but are tax cuts?

It was never a match made in heaven, the conservatives and Social Democrats that make up Germany's Grand Coalition government. But now as it hammers out a second stimulus plan to help the country weather the worst of the global financial meltdown, severe differences are emerging threaten to detail the economic rescue plan.

The meeting on Monday, Jan. 5, follows up on one in December to further pin down what steps the government will take to keep the economy afloat. But the question of tax cuts and whether or not they are needed has even traditional allies at loggerheads.

Horst Seehofer of the CSU

Horst Seehofer of the CSU wants tax relief

Chancellor Angela Merkel, head of the Christian Democrats, had said she would not cut taxes as part of a stimulus package. She is facing re-election this fall and had hoped to run on a promise of tax relief. She and her finance minister also did not want to endanger the government's medium-term goal of balancing the budget.

But members of her own conservative coalition, particularly politicians from the Bavarian sister party, the Christian Social Union (CSU), are demanding that tax rates fall, and have vowed to reject any stimulus package unless they get their wish.

"The position of the CSU is that we cannot envision a growth package that does not include tax relief," Horst Seehofer, head of the Bavarian party, told the Suedeutsche Zeitung daily. The party says tax cuts will get notoriously stingy German consumers back out to the stores to spend.

That voice is countered by the left-of-center Social Democrats (SPD), who have refused to make tax cuts part of a new stimulus package.

"We are heading into the negotiations with a clear position: The SPD says no to tax cuts," Andreas Nahles, a deputy leader of the party, told the Bild am Sonntag newspaper. The party argues that Germans will simply save any additional income they get from tax reductions.

Second go-round

Merkel had been reluctant for weeks to even put forward a second stimulus package. Berlin was one of the first governments in Europe to spend to revive a slowing economy, and in November, it agreed on a package it says is worth 31 billion euros ($43 billion).

Angela Merkel and Peer Steinbrueck

Merkel and Steinbrueck have just said no to tax cuts -- up to now

But that was widely criticized as not being enough in face of the magnitude of the crisis. And critics accused Berlin of exaggerating the size of the package, saying it really represented about 12 billion euros worth of new spending.

The new package is expected to be worth around 25 billion euros ($34.71 billion) and will include new spending on schools and infrastructure projects.

In a meeting in late December, state officials were asked to bring back concrete proposals for projects that could be part of the package. While the outlines could be agreed upon at Monday's meeting, the measures will likely not be finalized until another meeting scheduled for Jan. 12 or even later in the month.

Merkel has seemed to soften her stance on the tax cut issue after weeks of acrimonious debate. But not everybody is confident tax cuts will do much good, including the vice president of the European Central Bank, Lucas Papademos.

"I am skeptical that in times of exceptional uncertainty and low confidence, economic activity will really benefit from a temporary tax relief," he told the German finance magazine WirtschaftsWoche.

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