Britannia Radio

THE TIMES     6.1.09
Germany ready for U-turn after international pressure to act

Roger Boyes in Berlin

Angela Merkel was preparing last night to agree a ?50 billion 
stimulus package to shield Europe's largest economy from the worst 
ravages of recession - weeks after she dismissed Gordon Brown's 
similar recovery plans.

Last month the German Chancellor rejected calls to slash taxes or 
greatly boost spending. Peer Steinbrück, the Finance Minister, also 
made plain his contempt for Mr Brown's measures. "The same people who 
would never touch deficit spending are now tossing around billions," 
he said last month. "The switch from decades of supply-side politics 
all the way to a crass Keynesianism is breathtaking."

Now ?50 billion (£46 billion), spread over 2009 and 2010, seems to be 
on the table in Germany, where the economy is expected to contract by 
about 3 per cent this year.

The likelihood of Germany adopting the package will relieve Downing 
Street after the attack by Mr Steinbrück. British ministers are not 
expected to comment until the deal is finalised but government 
sources expressed relief that Germany was moving towards a 
substantial economic boost.

The idea seems to be to announce a package just before Barack Obama's 
presidential inauguration on January 20. The combination of US and 
German initiatives could help to restore international business 
confidence.

The Christian Social Union, the Bavarian sister party of Ms Merkel's 
Christian Democrats, has been insisting that tax cuts form part of 
the recovery plan. The Chancellor had been set against this - part of 
her contempt for the British measures is the conviction that VAT cuts 
do not encourage consumer spending - but buckled during talks on 
Sunday night.
The Social Democrats, the junior partners in the coalition 
Government, say that tax cuts will merely make the rich richer, and 
instead want child benefits increased and personal contributions to 
health insurance cut.

Even the Christian Democrat budget expert Steffen Kampeter was 
astonished that the Government could contemplate such debt. "The 
stimulus programme, as presently conceived, is simply a cheque that 
will have to be settled by the next generation," he said. "These 
measures are not about economic effectiveness but about political 
symbolism and creating the illusion of action." Ms Merkel's line 
hitherto has been identical to that of Mr Kampeter: deficit spending 
does not work.

The pressure has been piling on from Europe, however. Germany's 
neighbours, above all France, argue that it has a special strategic 
role because the European economy is so integrated. If Germany does 
not prod its consumers into spending more, the European economy will 
take longer to recover.

Germany has been hearing this at European Union and international 
meetings for two months. A new US president is likely to join the 
chorus.