Battling Recession

Merkel's coalition of her conservative CDU and the left of center SPD have agreed on the broad make-up of Germany's second economic rescue package, but the devil may prove to be in the details, particularly when it comes to the issue of tax cuts.

Before Monday's talks, coalition sources said the partners were ready to agree on issues including investing in infrastructure projects and schools. But some experts have warned that the planned tax cuts could push Germany's deficit back above EU limits.

The two sides seem likely to agree on an increase in the annual tax-free amount for workers from 7,664 euros to 8,000 euros.

Additionally, the Social Democrats want to cut the basic tax rate to 12 percent from 15 percent, a move sharply rejected by the conservatives. Economy Minister Michael Glos of the CDU's Bavarian sister party the CSU, said the proposal was "not sensible," while another senior CDU official said it stood "no chance" of being passed.

The SPD has rejected a demand from the conservative camp to lower tax rates for low and medium-income earners. It says it wants to raise taxes for top earners, but that's an idea Merkel has rejected as sending the wrong signal at a time of crisis.

Political considerations in forefront

The coalition parties are trying to stave off what could be Germany's worst recession in the post-war years, but given the general elections taking place in September, they're also trying to win points with the electorate. Some analysts have worried that a focus on partisanship could prevent the coalition from doing what's best for the country.

"I see the risk that this package has been designed more from the point of view of what is politically expedient than from the point of view of what is economically needed," Thomas Mayer, chief European economist at Deutsche Bank told Reuters news agency.

"From what I see so far, the three key tests that anti-cyclical fiscal policy should normally meet -- timely, temporary and targeted -- are unlikely to be met by this package."

Analysts agree that whatever the outcome of the second stimulus package, Merkel is likely to reap the most political capital from the deal.

"The bottom line is that Merkel will benefit the most," Manfred Guellner, managing director of the Forsa polling company told Bloomberg. "Merkel is very cleverly giving people the feeling she's helping them, not companies."

Merkel's rival for the office of chancellor in September is Foreign Minister Frank-Walter Steinmeier (SPD). While popular with Germans, analysts agree he faces a considerable hurdle as economic policy is not his main area of expertise.