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Germany

Germany's Merkel Lays Groundwork for New Stimulus Package

Amid a dispute over tax cuts, German Chancellor Angela Merkel's ruling coalition has prepared the groundwork for a new economic stimulus package designed to protect Germany from recession.

A briefcase full of euro bills

Experts say the first rescue package wasn't enough to revive the economy

A key element of the talks between Merkel's conservative Christian Democrats (CDU) and her Social Democrat (SPD) partners was how to secure jobs and increase investments, the chancellor said.

The package, which could amount to between 40-50 billion euros ($55-69 billion) over the next two years, is expected to include investments in schools, public works and energy efficiency.

With general elections looming in September, the two sides went into the talks with different ideas on how to shield Europe's biggest economy from the global economic downturn.

Although both parties agreed on the need for greater investments, the CDU favours a plan that includes income tax cuts to spur domestic demand, while the center-left SPD is against such a move, arguing for lower health insurance contributions instead.

Prospect of tax cuts cheers investors

The prospect of tax cuts brought a sense of cautious optimism to European stock markets on Monday. The Sentix research group also noted that sentiment among euro-zone investors had improved for the first time in seven months in January, with an expectations index recording its strongest rise since August 2005.

A trader on the floor of the New York Stock Exchange

Investors in Germany and the US were buoyed by the prospect of tax cuts

"In the eyes of investors, measures taken by many states and central banks worldwide seem to be having an impact," Sentix told Reuters news agency. "We assume many indicators will follow the early indication from Sentix in the coming weeks and months."

In November, Merkel's government unveiled its first stimulus package, which totalled about 31 billion euros. Experts said this was not enough to revive the economy because it included only about 12 billion euros in new spending.

Government spokesman Ulrich Wilhelm said a formal decision on the new package would be taken at another meeting of coalition leaders on Jan. 12.

The CDU and its Bavarian sister party, the Christian Social Union, agreed at a separate meeting on Sunday evening to make tax cuts a central plank of the new stimulus measures.

CDU, SPD have different goals

The SPD, which unveiled its own 40-billion-euro package on Sunday, wants the creation of a special investment fund for community projects as well as higher taxes for the nation's top earners.

Other measures under discussion are a bonus for families with children and incentives to help Germany's ailing car industry.

Despite their differences, the two sides are expected to hammer out a compromise in the coming week, senior officials from both parties said Monday.

"Everybody knows we cannot afford to let the stimulus package fail," said Foreign Minister Frank-Walter Steinmeier, the SPD chairman who will be challenging Merkel for the chancellorship when the nation goes to the polls on Sept. 27.

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