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German Economy Shrinks, Casting Shadow Over European Growth

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Slowing growth has also increased debate over the German government’s practice of running budget surpluses. The International Monetary Fund, the U.S. Treasury Department and some economists at home have said Germany should cut tax burdens and spend more on infrastructure to boost domestic demand. That could make the country less dependent on exports.

On Tuesday, Chancellor Angela Merkel said she sees no need for a stimulus package “so far” but added that “we will react according to the situation,” the dpa news agency reported. She pointed to plans to remove the so-called solidarity tax, an added income tax aimed at covering costs associated with rebuilding the former East Germany, for most taxpayers. Andreas Rees, chief German economist at UniCredit, said that the growth figures and Merkel’s nuanced remarks indicated the likelihood of a moderate fiscal easing next year “has increased significantly.”

The German quarterly decline was a big reason why growth across the wider 19-country eurozone has slowed. Two quarters of declining output is one common definition of a recession. Figures also released Wednesday confirmed that the eurozone’s growth halved in the second quarter of the year to just 0.2%. Germany’s industrial problems also contributed to the large 1.6% monthly fall in the currency bloc’s industrial production in June.

The European Central Bank has signaled it is preparing a package of additional monetary stimulus measures including a possible rate cut and bond purchases that could be announced at its Sept. 12 meeting.

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