EU May Force Germany to Trim the Deficit

Germany’s confrontation with the European Commission over the Stability and Growth Pact is escalating. The Commission announced on Thursday that it will proceed with the same tough measures it instituted against France earlier this month – both countries are on track to violate the conditions of the pact for a third year in a row – and prescribe austerity measures designed to reign in Germany’s deficit.

In Berlin, German Chancellor Gerhard Schröder and Finance Minister Hans Eichel are fighting back, arguing that an inflexible interpretation of the pact – and resulting budget cuts – could hinder their ability to jump-start the ailing Germany economy. Namely, they may not be able to proceed with plans to move-up proposed tax cuts from 2005 to 2004, giving an injection of much-needed cash into the economy.

A spokesperson for the Finance Ministry said in Berlin on Thursday, “We would ask the Commission to take a level-headed approach and maintain a sense of proportion when formulating measures against Germany and France.”

The Stability and Growth Pact was conceived to protect the value of the Euro, and it calls for tough sanctions and fines of up to €3 billion against countries that repeatedly violate the guidelines, which requires governments to keep deficits below 3 percent of the GDP.

Equal treatment for France and Germany

A spokesman for Pedro Solbes, the EU Monetary Commissioner, confirmed on Thursday that the Commission planned to propose coercive measures to force Germany to get its books in order. However, the nature of the proposals was not disclosed. In principle, Germany will be treated the same as France, which recently underwent a similar process of review, but was given an extra year, until 2005, to get its deficit under control.

“We plan to exercise the principle of treating all equally,” said Gerassimos Thomas, Solpes spokesman, in Brussels on Thursday.

After Paris failed to meet an October 3 deadline detailing how it planned to reduce the deficit, Solbes (picture) announced that he would draw-up detailed budget recommendations, outlining how they should proceed. This move was the most severe action taken by Brussels to enforce the pact since its creation. And now Solbes plans to wield a similar mechanism against Germany.

The Commission plans to meet on Tuesday to discuss how to proceed. However, any proposals would need to be approved by all EU finance ministers. In proceedings against France earlier this month, they failed to reach a consensus.

The latest in an ongoing battle

Germany and France have long been engaged in a battle with the Commission over the Stability and Growth Pact. Both have called for a more flexible interpretation of the pact, arguing that prescribing austerity measures aimed at slashing budgets would undercut each government’s ability to make funds available to spur the economy.

As recently as last month, at one of their frequent meetings, German Chancellor Gerhard Shröder and French president Jacques Chirac made the argument anew. Both will violate the pact for a third year in a row next year, with recent German borrowing totalling more than €40 billion threatening to bump the German deficit well above 4 percent. What’s more, both countries have recently been forced to revise their growth estimates to little more than zero percent, dashing hopes that increased revenue will help make up the difference.

Both governments, however, face a tough battle ahead. Many smaller EU countries, including Austria and the Netherlands, who have worked hard to keep their budgets under the limit, have made clear that they will not support special treatment for France and Germany.

What’s more, Jean Claude Trichet, the new president of the European Central Bank, is firmly on the side of the commission. At a press conference last Friday, Trichet said the Stability and Growth Pact provided “an appropriate framework” for ensuring fiscal discipline. He added that it “must not be placed in doubt.”