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Merkel’s Stimulus Sequel May Total as Much as 100 Billion Euros

Merkel’s Stimulus Sequel May Total as Much as 100 Billion Euros

(Bloomberg) -- German Chancellor Angela Merkel is preparing a second phase of stimulus of between 50 billion euros ($55 billion) and 100 billion euros to turbo-charge the economy’s recovery from the coronavirus crisis, according to a person with knowledge of the matter.

Finance Minister Olaf Scholz and his Social Democrat group want spending at the upper end of that range, while Merkel’s ruling conservative bloc is pushing back to avoid too much debt, said the person, who declined to be identified because discussions are confidential. Officials compiling proposals from ministries will present them to a meeting of coalition leaders in Berlin on Tuesday.

Unlike an initial shot of stimulus and guarantees announced in March to cushion consumers and businesses from the outbreak, officials are now focusing on how to give a fillip to the economy from an overall contraction seen at 6.3% this year. That outcome would be the worst since the aftermath of World War II, though still not as bad as the fate faced by euro region members such as Italy.

The stimulus program will be timely, targeted, temporary and transformative, and geared toward environmental friendly measures, the person said.

Stimulus Sequel

Economic aid already unveiled in March
  • 156 billion euros in debt to finance higher social spending, and a 50 billion-euro liquidity fund for self-employed people
  • 600 billion-euro rescue fund, including loans through state-run development bank KfW, money for equity stakes in companies, and 400 billion euros in guarantees
  • KfW has extra 500 billion euros available to boost liquidity of German companies
  • Government guarantees 100% of bank loans to small businesses

Here’s a closer look at the range of measures being explored in preparation for the June 2 meeting, based on discussions with officials and lawmakers.

Municipal Money

Scholz has proposed a rescue fund of 57 billion euros to compensate municipalities for declining corporate tax revenue and to help pay off existing debts, so that local finances can then focus on investment. The facility would be financed by German states and the federal government, which would each pledge about 28.5 billion euros.

Merkel’s coalition bloc is reluctant to bail out municipalities which may have previously overspent. A government official expects a compromise around an investment fund to cover an anticipated 12 billion-euro tax shortfall from the crisis, and perhaps more.

Profit Motive

Economy Minister Peter Altmaier, a member of Merkel’s bloc, is proposing measures to allow companies to write off investments from their tax bills. While Scholz agrees to that in principle, he doesn’t want companies to deduct losses accumulated during the current crisis against past years’ profits, fearing a massive revenue shortfall if they are allowed to claim back previous tax payments.

Family Freebee

Scholz wants to increase a family subsidy from the current payment of about 204 euros per child to 300 euros. That would amount to a stimulus for consumers of between 5 to 6 billion euros. Merkel’s bloc isn’t opposed to such plans, but wants to link the subsidy to income tax, so low-income earner are the main beneficiaries.

Cash for Clunkers

One of the most controversial proposals is a sales bonus for the car industry. While neither Merkel’s bloc nor the Social Democrats have much appetite to subsidize profitable automakers, Altmaier argues that the overall economy can only return to pre-crisis growth levels if the government promotes sales in this key sector.

A working group is preparing a plan which would aid the industry if it adopts more environmental technology. The government is looking to introduce a sales bonus which incentivizes low-emission cars, including low-emission diesel cars, a person familiar with the discussion said.

A meeting between Merkel and leading car-industry representatives scheduled for June 2 has been canceled, chief car lobbyist Hildegard Mueller told tabloid Bild in an interview, as the government first has to come to an agreement over the sales bonus.

Smaller Fry

Altmaier wants to aid the particularly hard-hit small and medium-sized category of companies. He proposes grants of up to 80% of losses, to a maximum of 50,000 euros. That aid package would amount to a stimulus of 25 billion euros, a person familiar with the plans says.

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