Germany answers critics with new €50bn stimulus

Germany unveiled a new €50 billion stimulus package yesterday in a bid to shield its economy from the biggest recession since World War II and silence critics who have accused it of doing too little to boost growth.

Chancellor Angela Merkel's conservatives and the Social Democrats (SPD), who share power in an uneasy coalition, agreed late on Monday on a series of steps that combine new investments in infrastructure with modest tax cuts and guarantees for struggling German firms.

Economists welcomed the package, whose success will be crucial to Ms Merkel's re-election hopes, but expressed doubt that it would be sufficient to end an economic downturn that pushed Germany into recession last year and will likely deepen this year.

"A government growth programme like this, combined with measures taken in neighbouring countries, cannot prevent recession but can limit its severity. That is the goal," German Finance Minister Peer Steinbrueck told reporters.

"Together with the steps we took in November, this is the biggest growth package since 1949. We are talking about a fiscal boost of over €80 billion," he added.

Ms Merkel's government pushed through a package valued at €31 billion late last year, but new government spending accounted for only about a third of the total, opening Berlin up to criticism from other European countries such as France.

After initially resisting the idea of a second package, Ms Merkel bowed to pressure and began work on a new one.

Central to the new package, which is worth €49.245 billion, is new investment in infrastructure and education which the government hopes will save jobs.

The federal and state governments plan investments of about €18 billion.

In addition, the package envisages a total of €1.5 billion in aid for the auto industry and a fund of €100 billion to provide credit guarantees to struggling businesses.

The coalition partners also agreed to tax relief of €2.9 billion this year, rising to €6 billion as from next year. The entry level tax rate is to go down slightly, tax-free thresholds will be raised and changes will be made to tax brackets.

Mr Steinbrueck, who has led a drive by Ms Merkel's coalition to consolidate the German budget over the past three years, said the new spending would vault Germany back above EU deficit limits next year.