German Finance Minister Faces "Week of Truth"

Thursday is likely not a day Hans Eichel is looking forward to since a government-led tax panel's official tax revenue forecasts are released on that day. They are likely to be grim reading.

If predictions are correct, the estimates will say German tax receipts this year will fall some €7.5 billion ($9 million) short of earlier predicted levels. Next year's shortfall could rise to €14 billion. For Hans Eichel, who has the gargantuan task of keeping the country on a tight fiscal leash without choking growth, the numbers will not be good news.

Several newspapers have predicted the finance minister's days are numbered.

The weekly Bild am Sonntag quoted unnamed government sources as saying that Schröder was already looking at possible replacements for Eichel. The conservative Die Welt said Eichel was facing a "week of truth" and that the tax shortfall would leave his financial plans for Europe's largest economy in ruins.

"That Eichel will have to go has long been seen as certain in Berlin, the only question is when," the paper said in an editorial.

Deficit buster, again

Germany has been plagued by sluggish economic growth and high unemployment for several years, which have scuppered the finance minister's plans to rein in spiraling budget deficits that threaten to break European Union budget rules for the fourth year running in 2005.

The EU's Stability & Growth Pact mandates that countries which have adopted the euro keep their deficits under three percent of gross domestic product (GDP). The strict rules, which were originally strongly backed by Germany, are a way to bolster the euro and keep the currency stable.

However, Germany has breached the rules since 2002, and over the weekend Eichel admitted that the tax shortfall meant that it was possible it would be unable to stay under the deficit ceiling again in 2005.

Course correction?

For some in Germany's ruling coalition of Social Democrats and Greens, busting the deficit rules is not such a bad thing and deep divisions have arisen in the coalition about how, or even if, to deal with the ballooning deficit.

Eichel, who falls into the camp of the strict budget hawks, has in the past found himself at loggerheads with members of both parties who say more state spending and higher deficits may be necessary to get the sluggish economy moving again.

"It's acceptable not to continue to reduce government spending in times of sluggish economy growth. This will only worsen our growth problems which is entirely wrong in this situation," said Fritz Kuhn (photo), the budget spokesman for the Greens.

While the government has denied recent media reports that it is about to make a U-turn and abandon its attempts to rein in spending and maintain strict fiscal discipline, on Tuesday Social Democrat party leader Franz Müntefering called on other European states to consider making changes in EU deficit rules that would take into consideration the economic states of various national economies.

And on Tuesday, Eichel seemed to be softening his stance somewhat. He told reporters in Brussels where he is attending a meeting of fellow EU finance members that Germany's nascent recovery could stumble if the government makes further spending cuts to meet EU fiscal rules.

"The recovery is not yet so robust that it may not collapse again," Eichel said. "We must be careful not to create new problems by doing things at the wrong time."

Hoping for growth

Eichel is hoping that a surge in economic growth next year can plug the yawning budget gap, but the country's high unemployment is showing no signs of easing. While some signs of an economic recovery have surfaced, the upturn appears to be slow and steady rather than spectacular.

The country's six leading economic research institutes have scaled back growth forecasts, predicting a rate of 1.5 percent for this year and next. The Organization for Economic Cooperation and Development rolled the number back even further, saying on Tuesday that the German economy may grow no more than 1.1 percent this year.

There are few concrete details on what Eichel will do if growth alone does not plug the budget hole, although the government is planning on doing away with an expensive home construction subsidy. Other reports say Eichel wants to sell off some €50 million in foreign loans to private banks.

Cabinet reshuffle denied

Despite the reports that Schröder is already talking to possible replacements for Eichel, the government is adamantly denying that it plans a cabinet shake up. Up to now, Schröder is standing behind his finance minister, publicly at least.

"A cabinet reshuffle is not planned," government spokesman Thomas Steg told reporters. "Speculation about a cabinet reshuffle does not become more correct by being constantly repeated."

However, the chancellor is facing widespread discontent over his savings plans, which have included unpopular cuts in social benefits and changes in labor market rules. In the face of a dozen European, state and local elections in the coming months, and a nearly unprecedented barrage of bad press over the past weeks, Schröder finds himself under pressure to make some kind of change. The removal of one or several unpopular ministers is not outside the realm of possibility.