BERLIN, GERMANY - JUNE 03: German Chancellor Angela Merkel speaks to the media following negotiations between the three parties, who make up the current German coalition government, over a federal aid package during the coronavirus crisis on June 3, 2020 in Berlin, Germany. The package, worth up to EUR 100 million, is meant to shore up the German economy while also providing social relief following the severe consequences of the pandemic. (Photo by Mika Schmidt-Pool/Getty Images)
On Wednesday night Germany's chancellor Angela Merkel brokered a deal for a €130bn package of tax cuts and spending increases © Mika Schmidt/Getty

The coronavirus pandemic has the power to break or burnish political reputations. Angela Merkel is firmly in the latter category. Much of her 15-year tenure as German chancellor has been marked — some would say marred — by cautious incrementalism. But her response to a catastrophic economic slump, despite the constraints of coalition government, has been admirably bold and decisive.

Berlin had already planned €353bn of emergency aid to support the economy together with €820bn in loan guarantees. Then Ms Merkel reached a groundbreaking agreement with France’s Emmanuel Macron for an EU recovery fund to help its hardest hit members. Now Germany is leading the way with a stimulus for the recovery.

On Wednesday night, the Christian Democrat chancellor brokered a deal with her Social Democrat deputy Olaf Scholz for a €130bn package of tax cuts and spending increases to bolster demand and address some of Germany’s underlying weaknesses, such as its creaking infrastructure.

The stimulus is big — worth nearly 4 per cent of gross domestic product — and well-designed. Its main components are a temporary cut in value added tax to encourage Germans to spend, an expanded grant scheme for small businesses, more favourable tax treatment of investment, a cap on social security payments, aid for municipalities and family payments worth €300 per child. A third of the pot is for investment in transport and digital infrastructure. Some €25bn will help sectors such as hospitality and entertainment. Germany’s once mighty car lobby is furious that subsidies for new car purchases will be limited to electric vehicles but the government is right to try to accelerate the shift away from petrol and diesel cars.

Berlin is doing more to cushion its economy than most other large European economies, even though its contraction is likely to be less severe than elsewhere. After years of parsimony, it has plenty of scope to spend. Its neighbours should now feel encouraged to come up with their own well-calibrated stimulus plans. An EU recovery fund, once approved, will give them some support. Even more will come from the European Central Bank. On Thursday it expanded its emergency bond-buying scheme by €600bn, extended it until mid-2021, and said it would reinvest the proceeds of maturing debt until the end of 2022, giving it more flexibility about which bonds to buy.

The ECB is also acting with resolve in spite of last month’s German constitutional court ruling casting doubt on the legality of bond purchases. It may be pure coincidence that the central bank mobilised more firepower only hours after Berlin unveiled its big stimulus, but the two are now acting in concert. This crisis has a long way to run but the eurozone has got its act together.

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