Merkel Feels the Heat

Merkel came under pressure over the weekend from German business leaders and senior politicians who called for her to introduce a fresh set of measures to stimulate the economy. At the same time, the leftist wing of the Social Democrats (SPD) reiterated its support for the proposed free shopping vouchers, where consumers would receive coupons -- most advocates suggest 500 euros ($636) -- which they could trade in for goods and services

Despite the 31-billion-euro ($39-billion) stimulus package pushed through by the ruling coalition of Merkel's conservatives and the SPD, business chiefs said more was needed to boost confidence and enable Germany, the world's biggest exporter of goods, to withstand the effects of what many economists say will be the country's deepest recession since the end of World War II.

Executives from eight major German companies, including Volkswagen, Adidas and BASF, are said in a report to be published by German news magazine Der Spiegel on Monday, Dec. 8, that the government had not done enough to combat the economic slowdown.

"We are facing a situation that is absolutely extraordinary -- and we cannot emerge from it with the traditional political and economic approaches," Volkswagen boss Martin Winterkorn said.

The options offered to the government by the business chiefs included tax cuts, which Merkel has ruled out until after next September's election.

Glos defies chancellor to call for tax breaks

But German Economy Minister Michael Glos defied Merkel on Sunday by siding with the business leaders to issue an urgent call for quick tax cuts to battle the deepening recession.

"A tax cut for average earners ahead of the election would send the right message," Glos, a member of Merkel's conservative bloc, told the mass-market Bild am Sonntag. "People who work hard to advance the gross national product should get more from the fruits of their labor."

Glos, a member of the Christian Social Union (CSU), the Christian Democrats' Bavarian sister party, said tax breaks could have a powerful "psychological" effect and motivate Germany's notoriously tight-fisted consumers to get out and shop.

"The tax decrease could be introduced on July 1 or made retroactively effective Jan. 1, 2009," Glos said. "Where there is a will, there is a way."

The head of the Federation of German Industry, Juergen Thumann, renewed his call for quick tax cuts to fight the economic crisis in a statement issued Sunday. "It would have a positive effect on growth and employment," he said.

Other options supported by the business leaders included the voucher plan put forward by members of the SPD.

Consumer vouchers proposed to kick-start recovery

The vouchers would allow German consumers to pay for "a new refrigerator, small renovations around the house, the things people have been putting off," said Andrea Nahles, a deputy leader of the SPD.

Merkel, however, is still drawing the line, saying such measures would rip a giant hole in the budget and spark an only brief flurry of economic activity that would fizzle out before it had done much good.

So far, economists and most of the press agree that the vouchers would be a cheap and ineffective political ploy.

"The vouchers would only boost the economy for three months at the most and the effect would disappear if the recession is a long one," the center-left daily Sueddeutsche Zeitung wrote last week.

German consumers are notoriously frugal, borne of a persistent post-war aversion to personal debt.

But the finance minister, centrist Social Democrat Peer Steinbrueck, also opposes any hasty measures to encourage a shopping spree, saying the voucher proposal would cost between 30 and 40 billion euros.

Surprisingly, German retailers also oppose the vouchers, noting that the holiday shopping season that opened last weekend looked fairly promising despite the economic downturn.

"At the moment, the decline in inflation and unemployment and a rise in incomes are stimulating spending," said the head of the German Retailers Association, Stefan Genth.

He warned that the promise of vouchers in the coming months could backfire, hobbling holiday sales while Germans put off spending until they get their state-sponsored windfall. "That's the last thing we need in the middle of the Christmas season," Genth said.

As calls for more action mount, German commentators believe a new investment or economic program is inevitable.

Calls increase for new economic program

Steinbrueck has ruled out a new economic program before Easter, but may be willing to do more in the longer term. "Whether and how far we will next year have to expand what we have already agreed upon depends on concrete developments," Steinbrueck said in Hamburg on Sunday.

But business leaders are clamoring for immediate action.

"We must at all costs make sure the crisis does not turn into a devastating conflagration," said Volkswagen's Winterkorn. "We are in an exceptional situation, and traditional political and economic instruments will not be enough."

Werner Wenning, head of pharmaceutical giant Bayer echoed that view. "The government should do more, but with well-considered initiatives which support growth and strengthen competition," he told Der Spiegel.

Feeling the pressure, Merkel announced Sunday that she would hold a high-profile meeting of top politicians and economic experts in the coming week to discuss the outlook for next year.

Merkel told Bild that the meeting, to take place next Sunday in Berlin, would include her finance and economy ministers as well as representatives from the banking sector and economic experts.

"For an effective response to the looming economic developments, we need an all-encompassing and careful analysis," Merkel told Bild.

The newspaper said, however, that no new concrete economic measures would be decided at the meeting.

"Sunday will be about getting a general analysis and obtaining as much clarity as possible about the economic developments in 2009. I am still keeping all options open," she told Bild, adding that her priority was to protect jobs.