EU Ready to Punish Germany Over Deficit

Shortly after it began the process two years ago that could have punished Germany for violating the budget rules of the European Union's Stability and Growth Pact, the EU stopped it again.

Though Germany has let its budget break the 3 percent deficit limit the pact places on each of the signees each of the last three years, the EU got a little skittish at the thought of punishing Europe's largest economy. And to assuage their fears, Finance Minister Hans Eichel promised in 2004 to get the 2005 deficit under 3 percent.

Now, Joaquin Almunia, the EU commissioner for economic and monetary affairs, has raised the specter of punishment once again after his office deemed German measures to reduce their deficit insufficient. The Federal Statistics Office said in August that Germany's budget deficit in the first half of the year was 36 billion euros ($43.3 billion), or 3.6 percent of GDP, putting the country on track to violate the pact for a fourth year in a row.

Technical disagreement could renew row

Eurostat, the European Union's statistics office, believes Germany's deficit will be closer to 4 percent because it doesn't look at the sale of outstanding accounts to the former state-run enterprises Deutsche Telekom and Deutsche Post as deficit-reducing measures. The technical disagreement between Germany and the EU could lead to serious measures, according to Almunia (photo).

His spokesperson said he will look into punitive measures after presenting his fall economic forecast. Under the terms of the pact that binds the 12 euro-zone countries, Germany could be fined up to 3 billion euros for breaching the three-percent deficit limit.

Germany has tried unsuccessfully to wrestle its deficit down below 3 percent amid high public spending and a low economic growth. Last March, Germany led a successful charge supported by France to water down the rules of the pact, which the country helped create 1997. Finance Minister Eichel's proposal that Germany be given special treatment because of the high costs of reunification was grudgingly accepted by Brussels.

Economic analysts don't expect much change should a grand coalition of Christian Democrats and Chancellor Gerhard Schröder's Social Democratic Party come into power. Of the five major parties, only the free-market liberal Free Democratic Party ran on platform that called for belt-tightening in the German budget.