By Michael Nienaber
BERLIN (Reuters) – Chancellor Angela Merkel’s conservatives are split over whether Germany should launch a fiscal stimulus package now to counter any impact of the coronavirus on Europe’s largest economy.
Shrinking exports held back German economic activity in the fourth quarter of last year, showing that the German economy was stagnating even before the coronavirus outbreak began.
German Finance Minister Olaf Scholz from the centre-left, co-governing Social Democrats (SPD) has said Berlin would be in a position to enact a stimulus package should the coronavirus spark a global economic crisis.
His comments were echoed on Tuesday by Markus Soeder, leader of the Christian Social Union (CSU), the Bavarian sister party of Merkel’s Christian Democratic Union (CDU).
“We must now think about fiscal stimulus packages,” Soeder told Muenchner Merkur newspaper. “They should include lower energy prices and corporate taxes, but also investment.”
But Ralph Brinkhaus, parliamentary leader of Merkel’s conservative CDU/CSU bloc, told reporters he did not see an urgent need to rush any decision.
“We do not share the opinion of the finance minister that we need a fiscal stimulus package now,” Brinkhaus added.
Economy Minister Peter Altmaier, a conservative, said on Tuesday the government was ready to help small- and mid-sized firms affected by the virus to bridge sudden liquidity problems and avoid lay-offs through existing labor market instruments.
Coalition parties were also eyeing additional measures to reduce the tax burden for companies and increase incentives to boost investment by the private sector, Altmaier said.
“We’re doing everything to ensure that this virus will not impact the German economy on a broad scale,” Altmaier said. “We’re prepared and determined to avoid a possible crisis and secure employment and domestic production.”
Merkel’s conservatives have long resisted calls at home and abroad to spend more, despite record-low borrowing costs and an economy close to recession.
Ifo President Clemens Fuest said the coronavirus outbreak had increased the risk of a recession in Germany, but he warned that a fiscal stimulus package including classical instruments such as tax cuts or higher investment could do little to solve the problems caused by the coronavirus epidemic.
The economy stagnated in the fourth quarter, renewing fears of a recession.
“If people are afraid of going to a big event or going to the movies because of the coronavirus, then they also won’t go there if the value-added tax is reduced by two percentage points,” Fuest said.
Instead, he said Berlin should help firms to bridge sudden liquidity problems with financial aid and expand state support for shortened hours schemes so that companies facing a drop in new business can keep workers while reducing their hours.
Budget experts estimate that the federal government has the fiscal room for additional measures worth some 17 billion euros ($18.9 billion).
Scholz has suggested increasing public investment in infrastructure by 12 billion euros until 2024. He has also proposed pulling forward the already agreed abolishment of an income tax surcharge by six months, which would cost the federal government some 5 billion euros.
Senior party members are expected to discuss potential measures at a coalition meeting on Sunday.
(Editing by Andrew Cawthorne, Lisa Shumaker and Alexandra Hudson)