VW, Daimler to benefit from extension of subsidies

German carmakers battered by the strong euro and the end of "cash for clunkers" incentives are set to benefit from an extension of subsidies to keep workers on the payroll decided by Chancellor Angela Merkel's Cabinet.

Ministers meeting in Berlin today agreed to extend the so- called short-term work program by one year beyond the Dec. 31 expiry date. Companies such as Daimler AG, which had as many as 68,000 workers on subsidized shorter hours to weather the crisis, can apply for subsidies lasting as long as 18 months.

The aid, due to cost 5 billion euros ($7.5 billion) before being prolonged, allows companies such as Volkswagen AG and Daimler, the maker of Mercedes luxury vehicles, to retain skilled workers through 2010. Germany's scrapping incentive for drivers to trade in older cars ran out of money in September and the car market faces a decline of 24 percent in 2010 without it, according to researchers IHS Global Insight.

"German automakers welcome the proposed extension," Matthias Wissmann, head of the Berlin-based German Automobile Industry Association, said in an interview. "This step provides more planning security for companies and staff and also helps stabilize workforces in the sector."

The program, which tops up pay for people working shorter hours when orders dwindle, has won praise from economists including Nobel Prize-winner Paul Krugman for helping avoid an unemployment spike during the worst recession since World War II. The jobless rate peaked at 8.3 percent in July and fell to 8.1 percent in October, below the euro-area average of 9.7 percent in September and the U.S.'s 10.2 percent last month.

'Free Lunch'

Short-term work subsidies saved "several hundred thousand jobs" during the recession, Merkel said Oct. 14. Krugman said in a Nov. 13 New York Times opinion article that the U.S. should consider adopting a similar approach.

"In the short term, it helps both employers and employees," Carsten Brzeski, an economist at ING Group in Brussels, said in a phone interview. "It's almost a free lunch for a politician."

While official data released yesterday showed German economic growth accelerated in the third quarter as companies replenished inventories and increased spending on machinery and equipment, the economy still is in an "extraordinary situation," Merkel said in a Nov. 20 speech.