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Germany pushes bolder rescue plan

By Yvonne Murray
BBC News, Berlin

Mini car showroom in Berlin
German consumers are being offered a new incentive to buy cars

Just over a month ago, Germany's Finance Minister, Peer Steinbrueck called Gordon Brown's fiscal stimulus package for Britain "crass Keynesianism".

He said the British prime minister's decision to cut sales tax (VAT) and increase borrowing was "tossing around billions," and "raising national debt that will take a whole generation to work off".

The German Chancellor, Angela Merkel, resisted European pressure to adopt a public spending programme, earning her the nickname "Frau Nein".

But late on Monday night, as the snow settled in the square outside the Reichstag, Mr Steinbrueck, Mrs Merkel and their coalition colleagues were inside, hammering out the details of a 50bn euro (45bn) package to reheat Europe's biggest economy - adding to a 31bn euro plan announced late last year.

Has "Frau Nein" become "Frau Ja"?

"Now she is Frau Ja!" says Norbert Barthle, a Christian Democrat (CDU/CSU) member of the parliament's budget committee.

"At first we were a little bit careful because nobody knows how deep this crisis will be, and so we go step by step. And I hope with this second package we will really manage this crisis."

Economic gloom

But hope is in short supply here. The worst-case projections are that Germany is facing the deepest economic decline since World War II.

GERMAN STIMULUS PACKAGE
50bn euros over two years, including investment of 18bn euros in infrastructure projects, schools, hospitals and broadband
Credit guarantees of up to 100bn euros to help struggling firms
Cuts in state health care contributions, new bonuses of 100 euros per child
A 2,500-euro payment for scrapping a car older than nine years and buying a new one

In December, unemployment rose for the first time in 33 months. Orders for goods - produced by one of the world's largest exporters - are falling and some analysts predict that the economy could contract in 2009 by as much as 3%.

Germany's car industry, in particular, has been badly hit by falling demand abroad. The stimulus package includes tax breaks to encourage people to spend and an incentive of 2,500 euros for those willing to scrap their old car and buy a new one.

But the move has been greeted with scepticism in some quarters.

"If you are afraid that you're going to lose your job and you don't know how to pay your rent or your mortgage hardly anyone is going to buy a new car," says Andreas Thyssen, political editor of Financial Times Deutschland.

Debt angst

Moreover most Germans are not comfortable with debt, either personal or national. They tend to have fewer credit cards and cheaper mortgages than their British counterparts.

Helge Berger, Professor of Economics at the Free University of Berlin
I think, like everywhere, there will be some projects being pushed forward which are more political in nature than relevant or necessary
Prof Helge Berger
Free University of Berlin

As the taxpayer is still shouldering the financial cost of reunification, 20 years on, many are wary of increased borrowing.

"I think many Germans are avid newspaper readers," says Helge Berger, Professor of Economics at the Free University of Berlin, "and they have learnt over the last couple of years that whenever taxes decrease and the deficit increases they will eventually have to pay it back.

"There are still transfers of billions of euros going from the west to the east, and for the foreseeable future this is what we're looking forward to."

"Consumers know," he says, "whatever they're getting now in terms of transfers and lower taxation will eventually come back to them."

There is also a question over whether the 18bn euros earmarked for infrastructure investment might be diverted into easy vote-winning, pet projects ahead of the general election in September.

"I think, like everywhere, there will be some projects being pushed forward which are more political in nature than relevant or necessary," Prof Berger says. "I hope not, but it's not impossible that we will see roads and bridges, and broadband cables to nowhere."

Real economy hit

At the Schmidt and Haensch factory in the northwest of Berlin, they have been making optical instruments to measure the concentration of liquids for more than a century.

Schmidt and Haensch workshop
The global recession is affecting demand for home-produced hi-tech German goods

This is a family-run, highly specialised outfit which, like many small to medium-sized German companies, is independent from the banks.

As a result, businesses like this one hoped they could avoid the crisis in the financial sector.

"Unfortunately this is not the case anymore," says Schmidt and Haensch's president, Mathis Kuchejda. "It is definitely affecting the real economy."

"The financial communities really failed to do their job and this is now taking its toll in the industry due to the lack of consumption, lack of confidence."

"So we need to get back to an operating financial market again," he says, "with the loans working amongst banks".

In the meantime, Germany's manufacturers are bracing for what is expected to be a year of more job losses and falling output.

Many here wonder whether the late transformation of "Frau Nein" into "Frau Ja" will be enough to ease the pain.

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