Germans retreat on bail-out

GERMANY was today moving towards agreeing a new economic rescue plan worth around £46 billion to counter recession.

German Chancellor Angela Merkel has reportedly dropped her opposition to modest tax cuts in a bid to prop up her country's ailing economy.

Gordon Brown's allies will seize on the U-turn if Berlin does back the plan.German finance minister Peer Steinbrück handed the Tories powerful ammunition last month when he poured scorn on Chancellor Alistair Darling's flagship 2.5 per cent cut in VAT, which the Conservatives say is a £12.5billion waste of taxpayers' money.

But now the German coalition government is close to finalising a second fiscal stimulus of about £46billion over two years, which is said to include tax cuts, investment in infrastructure and moves to support employment - though not VAT reductions.

Ms Merkel's expected change of plan highlights growing fears that the recession in Germany will be particularly bad as it is so strongly dependent on exports being hampered by a strong euro.

Economists predict its economy will contract by two per cent this year.

The government has already unveiled one fiscal stimulus of around £10billion, but EU leaders have been urging Berlin to step up its action.