The fiscal proposals agreed by Angela Merkel and Martin Schulz as part of their plan to renew Germany’s grand coalition amount to a headline-grabbing 1.5% of annual German GDP and include abolishing the solidarity tax for most workers, increasing social transfers and ramping up housing construction.
But the near-term effect on German GDP growth is likely to be small. After all, the fiscal expansion would be spread over four years. Some of the policies would only be implemented at the very end of the coalition’s term and many look difficult to achieve in full. Given this, Germany’s public debt is set to continue declining sharply, and the measures will do little to support euro-zone rebalancing.
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