Germany is cutting VAT, ramping up spending on infrastructure and offering big incentives to buy electric cars in a radical new stimulus package to boost the corona-stricken economy.
Angela Merkel’s €130bn (£115bn) package is bigger than economists had anticipated, raising hopes it will give a powerful boost to Europe’s largest economy as it moves from lockdown mode back into growth.
It cuts the headline rate of VAT from 19pc to 16pc for the rest of the year, chopping prices for shoppers, at a cost of roughly €20bn to the public coffers.
Households will also get a handout of €300 per child, while businesses’ social security contributions will be capped to reduce the costs of keeping workers on the payroll.
A €50bn investment programme aims to decarbonise the economy, boosting rail and broadband networks. It will double the subsidy for buyers of electric vehicles from €3,000 to €6,000.
Extra financial help is also on offer for small businesses.
Holger Schmieding at Berenberg Bank said: “The package shows once again that Germany is ready and able to spend when it matters.”
The measures should keep the economy on tack for a quick recovery, he added: “It supports our view that Germany will recover comparatively well from the Covid-19 recession with little lasting damage to its long-term supply potential.
“We continue to expect that, after a cumulative plunge of around 14.5pc in the first half of 2020, German GDP will be back to its late-2019 starting level by mid-2022.”
The new package represents a stimulus of about 4pc of GDP and comes on top of a €750bn fiscal boost earlier in the year, which Carsten Brzeski at ING described as an “outstanding” response to the crisis.
“It is not only the size of the packages which is remarkable but also the fact that the German government has made a complete U-turn in its approach to fiscal policy,” he said.
“This is not only the case for Germany but also for Europe. From austerity champion to big spender – a few months months ago, concluding with such a comment on German fiscal policy would have been almost unthinkable.”