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Europe

Merkel Rejects VAT Cuts, Calls for Calm in Financial Crisis

German Chancellor Angela Merkel warned Monday, Nov. 24 against rushing into adopting a Europe-wide economic stimulus package and ruled out reducing value-added tax in Germany after talks with French President Sarkozy.

German Chancellor Angela Merkel, left, and French President Nicolas Sarkozy

Angela Merkel, left, and French President Nicolas Sarkozy agree VAT cuts are no panacea

Speaking after meeting with French President Nicolas Sarkozy, Merkel said the seriousness of the current economic downturn called for a timely and measured approach to the situation.

"The risk that we are running today, taking into account information that is not always easy (to interpret), is that we mistake haste for action," she said.

VAT cuts 'not right' for Germany

Both Sarkozy and Merkel also said their countries would not undertake a UK-style slashing of value-added tax (VAT) to stimulate spending as a way of fighting the financial crisis.

"A lower VAT is not the right solution for France and Germany," Merkel said. "We are both agreed."

Sarkozy said lowering VAT may be a viable option for other countries, such as Britain, but agreed that it was a wrong fit for Paris and Berlin.

"When we lower the VAT, what does that bring? Only lower prices," Sarkozy said. "We think other measures, such as emphasizing innovation and research, would be more effective for our economies."

However, in his successful campaign for the 2007 presidential election, Sarkozy vowed that he would convince the EU to allow France to lower its VAT, particularly for French restaurants, where the tax is 19.6 percent.

German restaurant interior

VAT cuts would just reduce profits for businesses like restaurants

But Germany has repeatedly vetoed the proposal in Brussels, claiming that lowering the VAT in France to the proposed 5.5 percent would give French restaurants an unfair competitive advantage over German eateries, where VAT is 19 percent.

Europe-wide package

The talks were part of regular joint-cabinet meetings between the French and German governments.

Sarkozy was also to use the discussion as an opportunity to persuade Merkel of the merits of a Europe-wide economic stimulus package to help pull the continent out of the financial doldrums.

Germany has steadfastly rejected contributing a larger slice of its profits for Europe.

The French president said nonetheless there was "much more agreement than disagreement" between the two sides on how to re-launch their economies.

"We acted together on the crisis. We made the same analysis," Sarkozy said.

Heat is on Germany

Germany, as Europe's largest and the world's third largest economy, has been under pressure in recent weeks to do more to help kick-start the European economy.

Merkel's government has already pledged 1.3 percent of GDP to energize the German economy, but Brussels is to request a further 1 percent of GDP to help pull the continent out of the financial doldrums.

Germany's contribution would translate to around 25 billion euros.

The stimulus package plan is to be unveiled by the European Commission on Wednesday and submitted to EU leaders next month.

But Berlin has insisted it was already doing enough and needn't contribute further funds to reinvigorate Europe's economy.

German Chancellor Angela Merkel speaks in front of a VW logo

German carmakers are one of several focuses of the government stimulus package

Germany unveiled a 32-billion-euro ($40 billion) package for its economy on Wednesday, Nov. 5, involving tax cuts, infrastructure projects and cheap corporate loans. The deal equates to roughly 1.3 percent of German GDP.

The money is to be focussed on the hardest-hit sectors such as automobile manufacturing and construction.

A spokesman for Chancellor Merkel said that Germany would be disadvantaged if it contributed another one percent of GDP on top of the existing 1.3 percent already pledged.

"Nations that have already acted in recent weeks should not be punished for it, while those who have done nothing end up better off," he said Thursday, Nov. 20.

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