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The German Stimulus Plan

Written by A Forex View From Afar on Monday, January 05, 2009

The German government, led by Angela Merkel, is trying to propose a new stimulus plan in Germany meant to help the economy weather the financial crisis.

The new stimulus plan is projected to reach 50 billion Euros, or nearly $70 billion, over a two year time-span. Previously, the German government proposed a 12 billion euro, $17 billion, stimulus plan, over the same two year period, but was halted due to its small size. Even though there is not a clear destination for the money available throughout the plan, analysts estimate the biggest part of the funds would be used on public spending. In addition, some say the government might also reduce the tax level for low level incomes, to help internal demand pick up faster. It should be noted that, until now, Germany has opposed a common Euro-zone plan to fight the credit crunch.

From the available information, the German stimulus plan is significantly smaller than the one the U.S. government is planning to implement. The direct ratio is about 1:10 in favor for the U.S., since sources point out that Mr. Obama's proposed plan might reach as much as $700 billion. As a percentage of GDP, the U.S. plan is about 5%, while the German government’s plan represents nearly 2.1%.

Currently, the stimulus plan has had no direct implication on the currency market. However, as time goes by, this measure, correctly implemented, would help the German economy recover faster from the credit crunch. As such, it could have a direct influence over the euro's valuation, pulling it higher.

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