Merkel’s Coalition Reaches Deal on German Stimulus Package

Telegram från Bloomberg / Omni Ekonomi
03 juni 2020, 22.16

(Bloomberg) -- Chancellor Angela Merkel secured a stimulus package to help Europe’s biggest economy recover from the coronavirus crisis.

After two days of tense negotiations, Germany’s ruling coalition will brief the press later on Wednesday about the deal, according to people close to the discussions.

Merkel had struggled to resolve differences in the governing parties, delaying plans for the package worth around 100 billion euros ($110 billion). Disputes between her Christian Democratic-led bloc and the Social Democrats flared up, and Merkel reconvened her coalition on Wednesday after the parties failed to reach an agreement during nine hours of talks in Berlin on Tuesday.

The euro briefly extended its advance for the day following news of the stimulus agreement, reaching an almost 12-week high of $1.1257, before paring its gain for the day to around 0.6%.

After an initial shot of stimulus in March, Merkel’s administration vowed to spend whatever it takes to get the country growing again. Including programs to guarantee company liquidity, Germany has made more than 1.2 trillion euros available -- the most in the European Union by far. Still, the efforts couldn’t halt unemployment rising in May to the highest level since late 2015.

After a brief period of unity at the height of the pandemic, party differences waylayed efforts to revive Germany’s faltering economy. The Social Democrats were pushing for higher spending and measures focusing on workers and families, while the CDU was keen to limit the amount of new debt and get businesses investing again.

The latest stimulus package could represent the last major spending initiative before elections late next year, meaning stakes for the ruling parties were high.

Car Incentives

One of the most controversial issues was a program to boost car sales. The SPD wanted to bolster demand for electric vehicles, while the CDU was seeking to include incentives for purchases of conventional models as well. Other contentious aspects include debt relief for struggling municipalities and money for families.

The Social Democrats have been in crisis ever since reluctantly agreeing to enter the coalition two years ago, while Merkel’s conservative bloc faces its first national campaign in nearly two decades without the chancellor, who has said she will leave politics when her current term ends.

The package is part of a deeper shift by Merkel. In the final phase of her political career, the chancellor is looking to take a more activist approach to managing Germany’s economy. Prodded by threats from China and a wobbly alliance with the U.S., the strategy is designed to pick winners and losers, seed new industries and groom national champions.

The first step is to pull Germany out of deep recession. Weeks of stringent restrictions to contain the virus hurt demand for everything from Volkswagen cars to Adidas shoes and prompted the landmark 9 billion-euro bailout of Deutsche Lufthansa AG. The economy is expected to contract by more than 6% this year, which would be a more severe contraction than during the financial crisis.

While social-distancing rules remain in place, Germany’s lockdown restrictions have largely been unwound with contagion rates held in check.

On Wednesday, Germany took a further step to reactivate European travel. Merkel’s cabinet approved plans that pave the way for a broad travel warning to be replaced from June 15 with recommendations for individual nations in the 27-member EU, countries in the passport-free Schengen area and the U.K.

(Updates with additional context, market reaction)

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