It occurred to me that I was a little harsh on Angela Merkel in this post. Debt-financing a large fiscal stimulus package may wreak havoc on near-term interest rates without an autonomous central bank to finance its debt issuance.
At any rate, Merkel is going forward with Deutsche Stimulus Plan 2. From Deutsche Welle: German Chancellor Angela Merkel called for more investment in the country's western states which have lost out due to the funding focus on the former East Germany since the 1989 fall of the Berlin Wall.
The remarks came after a meeting of state leaders on Thursday to discuss a possible new steps to boost Europe's biggest economy. The chancellor said Germany's 16 states will help finance a second national recovery package to be announced next year.
"All the states will approve a second package in January," Merkel told a press conference in Berlin.They will all "contribute to the extra investment," she said, adding that the infrastructure package aimed at streets, rail tracks, schools and kindergartens is made up of "projects that will modernize our country for the long term."
Berlin has already laid out a package worth 31 billion euros to fight a recession triggered by the global credit crunch, but Merkel has been accused of timidity as European neighbors lay out plans for even more public spending to kick-start their troubled economies. Without a central bank that is willing to monetize the new debt incurred by the deficit spending - Trichet is certainly not going to buy German debt - investment may actually be crowded out via increased borrowing costs to firms (interest rates).
Just a thought. Rebecca Wilder