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Germany's hard line on the stimulus: Why Merkel says 'Nein'

Ahead of G-20, German leader balks at more spending and more debt.

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"If we were in a cooperative game, everyone would offer stimulus," says Jean-Paul Pollin, a member of the French Circle of Economists. "But we are in a very non-cooperative game between the European leaders and the US. All Europeans are waiting for stimulus from outside.… Germany's best solution is to wait for the US, France, the UK, and others for a big stimulus that will help exports."

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"Merkel says there will be a bounce in the summer, and that may be prudent," says Eloi Laurent of Sciences Po in Paris, who favors greater stimulus as a precursor to regulation. "But it is the language of someone holding elections in late summer. Economic strategy is being based on political strategy."

Germany has not so far experienced the raw end of the crisis; Merkel hopes it stays that way. Germany has a slight recession, no real estate bubble, and fewer losses on the stock market. Unemployment is not alarming. Some officials brightly predict a 3 to 4 percent growth rate by July.

"Most Germans have not experienced a crisis, we've only read about it," says Bastian Hermisson of the left-leaning Heinrich Boell Foundation. "But it is now part of every dinner-table conversation."

Declining exports to China suggests more trouble ahead

In the recent years of heady global consumption, a sizeable part of the world's economic power grid started with high-end German machine tools purchased by the Chinese and used by cheap labor in Chinese factories to make toasters sold in the US for less than they are made in America.

The economic crisis has interrupted this wealthy trade stream to China. Berlin hopes it will restart as the global stimulus kicks in. But so far, orders are down. Shipping ports in Guangdong, China, are larded with empty containers.

German banking houses like Commerzbank now predict a 6 to 7 percent growth shrinkage, the worst in postwar Germany; last week the bank's chief economist said, "this has pulled the rug out from under our previous forecast."

Top German steelmaker, ThyssenKrupp, last week said it would cut 3,000 jobs. Also last week, the head of BGA, a German manufacturing association, said "the global economic and confidence crisis has now hit Germany's foreign trade." Industrial orders have shrunk by 8 percent.

Is social safety net strong enough?

Unemployment is nearly as great a bugaboo here as inflation. The ThyssenKrupp layoffs are symbolic, putting the German system of Kurzarbeit, or partial employment, into question. Currently, as many as 600,000 Germans work short hours at their jobs, with the state paying up to half the cost. The tacit deal is that corporations keep workers if they can see the economy and their position improving. Layoffs at premier industries could have a cascade effect. Mr. Laurent, at Sciences Po in Paris, worries that the social safety net isn't designed for large numbers of unemployed.

Officials at Merkel's Christian Democrat party say matters will clarify in coming months. "The crucial moment is this summer," says Heinrich Kreft, a senior party official. "Companies will keep workers on payroll if there are signs of improvement. If there is no light in the six to eight [weeks] before the election, the government might do more on stimulus."

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