EU Commission Fires Warning Shot at Germany Over Budget

Future German finance ministers, should they be feeling indulgent enough to peruse the records of their predecessors, may stumble across the date November 13, 2002, or, to put it more graphically, Black Wednesday.

That's how bleak many observers are viewing Wednesday's release of economic data for Germany that uniformly shows the country heading for a recession, and a prolonged one at that.

Growth almost non-existent

The so-called Council of Wise men, five independent experts who advise the government on economic policy offered very bad news on Wednesday, warning that growth in Europe's largest economy next year would be just 1.0 percent at most. The figure they issued for the current year was even gloomier, showing just 0.2 of growth.

Their damning report also made it clear that most of Germany's economic problems were house-made and not a result of the global situation. "The insufficient growth parameters in Germany are largely due to the structural problems in this country," the advisers said.

Presenting a 20-point reform package, the council members stressed the paramount importance of a labor market restructure. The key issue here, they said, was wage flexibility.

Massive revenue shortfall

According to estimates by the federal tax office, Finance Minister Hans Eichel is looking at a revenue shortfall for this year and next in the region of €30 billion. Eichel has a reputation for being a cool customer and his reaction was a typical case of understatement: "The figures are disagreeable," he was moved to say.

The grim outlook was echoed by the Center for European Economic Research (ZEW), based in Mannheim. The Institute's monthly index of business expectations culled from surveys of financial analysts plunged by 19.2 percent for November to 4.2 percent.

Speaking to DW-WORLD, ZEW spokesman Felix Hüfner warned that worse was to come. "Growth is practically non-existent which is why we are expecting Germany to enter into recession in the first half of next year," he said.

He said the massive drop in sentiment was due to "grave uncertainties over the German economy and the stance of the European Central Bank over interest rate cuts."

EU Commission warns Germany

As if that wasn't bad enough, the European Commission in Brussels inflicted further pain on the sick man of Europe also on Wednesday by launching its so-called excessive deficit procedure, a formal alert for Berlin to address its budget deficit. The deficit is likely to reach 3.5 percent of gross domestic product this year and 3.2 percent in 2003, exceeding the limit of 3.0 percent agreed under the Stability and Growth Pact. Pedro Solbes, the EU Monetary Affairs Commissioner (photo), said Germany would have to act fast on its budget deficit in order to avoid further warnings.

This situation is particularly damaging and embarrassing for the German government, which, along with France, was the main proponent of enforcing strict budget rules to guarantee the euro's stability. Chancellor Gerhard Schröder, outwardly cool, said he had no complaints about the decision. "I can understand the position of the European Commission," he said at a press conference in Berlin.

This plethora of devastating economic news means that finance minister Eichel will be forced to introduce a supplementary budget for 2002 to account for the shortfall.

But critics are already saying that fiddling with a few fiscal policy tools will not do the trick. Germany clearly has to address the fundamental, structural problems it has. That will involve painful decisions, but then things can't really get any more painful than they already are.