EU Pressures Germany to Cut Deficit

Germany's public deficit has breached the EU's limit of 3 percent of gross domestic product since 2002. Last year, Berlin convinced its EU partners to freeze excessive deficit procedures -- including financial penalties -- against it, following a long struggle with Brussels.

Now though, the European Commission has warned Germany that it has until the end of 2007 to reduce its budget deficit, or face the possibility of sanctions.

The German Finance Ministry was quick to respond, saying it planned to meet the EU requirement to bring its deficit below the 3 percent level specified in the Stability and Growth Pact.

"Germany will achieve an underlying structural deficit improvement of about 1 percentage point in the next two years, thus meeting the commission's guidelines," the ministry said in a statement.

The ministry added that it would release a 2007 draft budget in July that will show its ability to meet the EU deficit limits.

The commission, which polices member states' public finances, said that Germany was set to breach the limit again this year but welcomed belt-tightening measures to bring it below the threshold next year.

"Although the (European) Commission welcomes the renewed priority attached by the German government to budgetary consolidation, it is clear that the procedure needs to be stepped up to guarantee a lasting correction of the deficit," Economic Affairs Commissioner Joaquin Almunia said.

Huge fines

In theory, Berlin could face huge fines if it fails to rein in its deficit although that would be unlikely if the government sticks to its promises to improve the public accounts.

German Finance Minister Peer Steinbrück supported the commission's action, which he saw as boosting the credibility of the EU's public finances pact.

"For Germany, it is of the highest importance that the credibility of the Stability and Growth Pact be protected in the long-term," he said in a statement. "That is why the government agrees with the EU decision."

Berlin and Paris, whose deficit has also breached EU limits for years, won a formal suspension of disciplinary measures against them at the beginning of last year.

Damage to stability pact

Suspension of the measures came only after a lengthy battle with Brussels which resulted in the EU rewriting the public finances pact last year and, in effect, watering it down.

"After the revision last year, I think from the political point of view the commission and the ministers have learned a lot about the importance of establishing good dialogue channels to avoid these kinds of conflicts," Almunia said.

In a recent review of French public finances, Paris was let off the hook for further measures on account of efforts to cut its deficit.

Germany, worried that other euro members would be less disciplined about their public finances, was the main author behind the fiscal rulebook when it was drawn up in 1997.

The revision of the pact was met with scorn from many private and even some public economists, who believed that it no longer had any credibility because member states would have too much leeway to avoid disciplinary measures.