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Friday, 16 August, 2002, 10:54 GMT 11:54 UK
Germany gears up for flood costs
Mending a restaurant in Passau
The compensation bill is still incalculable
As Germany's flood waters reach historic peaks, the country's authorities are scrambling to cope with the economic effects of the crisis.

Germany's finance ministry announced that it was considering a range of tax breaks for flood victims - a move that would see current government aid commitments of 385m euros (246m; $378m) multiplied many times over.

At the same time, the labour ministry said it was drafting in some 5,000 of the country's 4 million unemployed to help in affected areas, so far mainly in the east and south of the country.

But economists predict that the German economy, a sluggish performer so far this year, could in fact be modestly boosted by the reconstruction effort.

There is also speculation that the European Union may allow the country some leeway in the budget deficit limits agreed for the eurozone.

'Billions of euros'

Estimates on the likely cost of the German floods are still vague.

The government has so far predicted nothing more specific than "billions of euros".

Damage in Passau
Bavaria was hit first; now, the east is suffering
In neighbouring Austria, which was hit by flooding a few days earlier, the clean-up bill has been forecast at 2bn euros, an indication that Germany may have to pay much more.

Adding to the cost is the fact that much of the infrastructure in and around the eastern city of Dresden - one of the worst-affected areas - is brand-new and of high quality.

Over the past decade, the German government has poured trillions of euros into the reconstruction of ex-communist eastern Germany.

"In the areas affected we're talking about a re-launch of east German reconstruction," Chancellor Gerhard Schroeder said.

No tightwads

With an election looming next month, the government is making every effort not to seem niggardly in response to the crisis.

Mr Schroeder wants to spend billions...
In Austria, the government on Thursday trimmed back a multi-billion-euro jet fighter order, and said it would not be proceeding with tax cuts planned for next year.

But Germany has taken the opposite approach, effectively promising a indefinite expansion in government spending.

When asked whether state aid could push Germany's budget deficit above the limit strictly enforced by Brussels, Mr Schroeder insisted such considerations were not appropriate.

"You know, that doesn't interest me at all," he told a news conference.

Competing compensation

Mr Schroeder is under considerable pressure to match generous promises from his electoral rival, right-winger Edmund Stoiber.

... and so does Mr Stoiber
Mr Stoiber, who currently leads in the opinion polls, said on Thursday that government aid "in the billions" as well as EU support would be necessary.

It is still not yet certain how extensive the finance ministry's tax cuts will be.

The main proposed measures include greater leeway for late tax payments and tax-deductibility for almost all flood-related spending.

Berlin still needs to agree terms with the regional governments responsible - Saxony-Anhalt, Thuringia, Brandenburg and Bavaria.


One of the more striking proposals is the labour ministry's plan to enlist the help of the unemployed.

Examining the damage in Grimma
Making damage tax-deductible is small comfort
The ministry has set aside 50m euros to hire 5,000 jobless, relatively easy to recruit in the high-unemployment areas of the east of the country.

Measures like that, as well as the apparent willingness of the government to spend lavishly, could give Germany's economy a kick-start this year.

"The floods will lead to write-downs and, in effect, to a small stimulus programme," said Carsten-Patrick Meier of economic institute IfW Kiel.

Reasons to be cheerful

Optimism has been helped by the relatively modest level of complaint from German industry.

Volkswagen - the main company affected so far - has shut down production at its Dresden plant, but claims to have suffered little lasting impact.

A dinghy on the Elbe
The worst of the damage is along the Elbe river

And some sectors of industry stand to benefit, notably the construction sector, where shares have soared in recent days.

German grain farmers, meanwhile, have estimated that the floods will cut yields by 15% this year, but economists argue that agriculture is of minimal macroeconomic importance.

Germany's economy certainly needs a boost: after emerging unsteadily from recession this year, it is forecast to grow at just 0.7% this year.

Now, some politicians and commentators are arguing that Germany could get permission to breach its EU budget ceiling, something officially denied by Berlin.

The BBC's Sarah Pennells
"Some of the final bill will end up at the reinsurers doorsteps"

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See also:

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