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Germany

German Ruling Coalition Agrees on Stimulus Package

The three parties of Germany's grand coalition have agreed on a fresh round of stimulus measures worth billions to protect the weakening economy. But some already worry the package will not offer the help that's needed.

Someone takes money out of a wallet

The deal will put some extra cash in German wallets -- but will it be enough?

In talks held late into the night on Monday, Jan. 12, the governing parties committed to a huge wave of spending likely to inject up to 50 billion euros ($66 billion) into Europe's biggest economy, party officials said.

In addition, the federal government would set up a massive fund to give loans and guarantees to struggling industries.

Horst Seehofer giving a speech

CSU's Seehofer got the tax cuts he was wishing for

The "credit and guarantee fund" will reportedly be worth 100 billion euros. Officials said its name would be a way of stressing that it would not be a vehicle for taking industries into government ownership.

The Social Democrats (SPD) and Christian Social Union (CSU) have been wrangling for weeks with Merkel's Christian Democratic Union (CDU) over the package, with each of them eager to include pet policies in the huge surge of state spending.

Change of heart

Angela Merkel addresses a crowd

Merkel agreed to a 'credit and guarantee' fund

Merkel initially resisted vast government spending as an antidote to recession, as advocated by the French and British governments, but a stream of bad economic data and the prospect of a general election this September changed the government's mind.

The round of emergency spending, spread over two years, would be the biggest since modern Germany was established in 1949.

The broad terms were jointly announced by the chiefs of the three governing-party caucuses in the Bundestag parliament: Volker Kauder of the CDU, Peter Ramsauer of the CSU and Peter Struck of the SPD.

They said the cuts in corporate and income taxes, to take effect on July 1, would inject 9 billion euros into the German economy, with the income tax scale beginning at 14 instead of 15 percent.

A cut in state health-insurance premiums for German workers would cost a further 9 billion euros. Families with children are to receive a one-off bonus benefit of 100 euros per child, they added.

"Wrecking bonus"

BMW assembly line

Can a "wrecking bonus" spur new-car sales?

Massive new government investment in education, highways and other projects would total 18 billion euros.

Sources said the six-hour meeting also produced agreement to grant a "wrecking bonus" to new-car buyers who send their old cars to the crusher. The car industry has been complaining about slumping sales in Germany.

The agreement also includes cuts in health insurance contributions in order to put more cash in shoppers' pockets, and simpler rules on creating temporary jobs, the officials said after the meeting.

"All in all this is a package that will help us to get through this economic crisis and keep jobs," Volker Kauder, head of the CDU in parliament, told reporters late Monday.

But some economists are worried the package will not help Germany where it needs it most: its massive, but struggling, export sector. The global downturn has significantly damaged the foreign demand for German goods.

Merkel to bring details

Merkel was scheduled to brief opposition parties early Tuesday, Jan. 13. She will then detail the package at a news conference, joined at the microphone by Foreign Minister Frank-Walter Steinmeier, who is the Social Democratic Party's nominee for the chancellorship at this year's election, and Bavarian Premier Horst Seehofer.

The tax cuts marked a victory for the CSU, the Bavaria-only party that Seehofer leads. It had repeatedly attacked Merkel's insistence on balancing the budget before reforming tax scales.

While the three-year-old grand coalition of Germany's main parties has become more fractious as the general election nears, there was broad agreement before the meeting that action against the nation's economic woes was urgently needed.

Deepening recession

A slew of fresh data has underscored that a deepening recession is taking hold in Europe's biggest economy. Figures last week showed a dramatic 10.6-percent plunge in German exports in November along with a hefty drop in factory orders and a bigger-than-forecast rise in December unemployment. Leading German companies have already announced plans for layoffs and production cuts as global economic growth spirals downwards.

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