Germany’s governing parties agreed on a 130 billion euro ($146 billion) stimulus package Wednesday to help kick-start the economy, which like others around the world has taken a heavy hit from the coronavirus pandemic.
Following 21 hours of talks over two days, Chancellor Angela Merkel said members of her left-right coalition had come up with a “bold response” that would boost consumer spending, invest in innovation and ease the financial strain on families and others.
Germany started loosening coronavirus restrictions April 20, about a month after they were introduced, and the easing has gathered pace since. However, the economy went into a recession in the first quarter and the downturn is expected to deepen in the current quarter.
Unemployment rose to 6.3% from 5.8% over the past month, a figure that would have been significantly higher had it not been for a government program that allowed companies to cut back the hours and wages of more than 7 million employees in return for keeping them on.
“It’s clear that all of this requires a bold response,” Merkel told reporters in Berlin. “It’s about securing jobs, keeping the economy running or getting it going again.”
The stimulus package will see the main value-added tax rate cut from 19% to 16% and the reduced rate from 7% to 5% for six months, starting July 1.
Debt-laden municipalities will receive financial aid from the federal government, which will shoulder 120 billion euros of the overall package covering the years 2020 and 2021.
And families will receive a 300 euro payment per child, with further support for single parents.
Among dozens of other measures, the government will extend aid to sectors that have been particularly badly hit by the pandemic, increase financial incentives for electric and hybrid vehicles, fund the expansion of childcare facilities and see greater government investments in areas such as renewable energy storage, quantum computing and digitalization.
Germany already is offering a total of more than 1 trillion euros in aid via various packages, which include money to tide small companies and individual entrepreneurs through virus-related closures and to pump capital into bigger companies where needed.
The crisis has derailed the government’s dedication to keeping its budget balanced, long a point of pride. After six years in the black, it is borrowing 156 billion euros to finance the existing rescue packages and cover an expected shortfall in tax revenue.
Olaf Scholz, the country’s finance minister, said Germany could afford to increase government spending “because we’ve been financially prudent in recent years and can draw on savings.”
Asked whether there was a danger that Germany’s notoriously frugal consumers might take the government’s stimulus measures as an opportunity to buy a cheaper French car, Merkel said: “We have an interest in Germany being strong, but in particular that Europe is also strong overall.”
Germany is heavily reliant on exports and a pullback by its main trading partners could hurt the economy badly.
New figures released Wednesday by the statistics agency Eurostat showed the jobless rate in the 19 countries that use the euro rose to 7.3% in April, the first full month when pandemic lockdowns hit the continent, from 7.1% in March.
Europe’s rise in unemployment has been moderate by international standards because employers are making extensive use of government-backed short-time work programs, which allow them to keep employees on the payroll while they await better times.
In Germany, Europe’s largest economy, the federal labor agency pays at least 60% of the salary of employees who are on reduced or zero hours.
In the United States, which has fewer automatic furlough programs than Europe, the jobless rate has rocketed to almost 15% from 4% before the crisis, and new figures due Friday are expected to show a further increase to nearly 20% in May.