EU Steps Up Pressure on Germany to Cut Deficit

The European Commission has called on Germany to cut its public deficit to under three percent by 2005, bringing it into line with the EU's Stability and Growth Pact which underpins the euro.

The Commission also demands that Germany slash its structural deficit by 0.8 percentage points, which the government says means an additional deficit cut of at least €4 billion in 2004.

"The increase in the general government deficit in Germany in recent years is a matter of serious concern," the Commission said in a statement.

The get-tough attitude from Brussels toward Berlin is a reaction to Germany's failure to adhere to the EU's Growth and Stability Pact for a second year in a row. The government also shows little inclination to rein the deficit in next year for fear any additional savings measures could choke off the country's fledgling economic recovery.

The pact, designed to protect the value of the euro, calls for stiff penalties when member countries fail to keep deficits below three percent of their gross domestic product (GDP). At the time of the pact's creation ten years ago, Germany was one of its biggest proponents.

The Commission is authorized to take disciplinary measures, including slapping on stiff fines, against countries which run up budgetary deficits over the prescribed limits for three successive years.

German reaction

German Finance Minister Hans Eichel said the government wants to reach a common solution with the European Commission on bringing its deficits back under the strict limits.

"We are keen to reach a joint solution, not on the basis of a financial policy which prolongs the crisis, but one which leads to a recovery," he told members of the ruling Social Democrats at a party conference on Tuesday."

Eichel said Germany had already taken "very strong measures" to reduce the deficit and he repeated the often heard remark out of Berlin and Paris that the pact should not set strict budgetary targets at the expense of growth.

"There should not be a disciplinary action against a country that has until now followed all the recommendations," Eichel said in a statement.

An escalating controversy

German government officials have pleaded with Pedro Solbes the EU Monetary Commissioner, to give them credit for their willingness to cooperate in reducing the deficit. "A toughening of the procedure would be misplaced given Germany's cooperation" with the EU, Eichel said in a column for the Frankfurter Allgemeine Zeitung newspaper.

But for Solbes cooperation and willingness is not enough, rather it is the result which matters.

"If it's enough that a country comes to the discussion table to appear cooperative and avoid sanctions, this would be a different pact," he said. The commission will not distinguish between cooperative and uncooperative countries but instead focus on the results of budgetary policies, Solbes added.

Tough with Germany, tougher with France

The call for a deficit reduction by 0.8 percent is 0.2 percent more than what Germany's government is already hoping to save by implementing the so-called Agenda 2010 program, an overhaul of the country’s labor market laws, healthcare system and welfare system as well as the introduction of new tax breaks.

The commission already proposed similar steps against France, which is also failing to stick to the pact and has already been told to get back on track by 2005. Solbes plans to ask Paris for a one percent deficit reduction, according to the German Handelsblatt newspaper.

Support for Solbes

EU budget commissioner Michaele Schreyer, who is from Germany, had earlier come out in favor of Solbes' plans to impose sanctions. As in the case of France, Schreyer considers the measures "intelligent, decisive and balanced," she told the Berlin daily Der Tagesspiegel.

The opposition Christian Democratic Union (CDU) has also backed Solbes in the matter. Germany's government should stop blaming the commission for its own mistakes and instead try to solve them, Matthias Wissman, the CDU's economic expert, said. The government's failure to bring the deficit in line with pact requirements threatens economic stability within the EU, Wissmann added.

Like Wissmann, Germany's Federal Bank also called on the government to avoid a third violation of the pact in 2004.

Finance ministers have the last word

Should the commission recommend sanctions against Germany, a two-thirds majority of EU finance ministers still have to approve them. Smaller countries such as Austria and the Netherlands, who have managed to keep their budget within the limits of the pact, oppose special treatment for Germany or France.