Germany Both Reformer and Violator of EU Budgetary Pact

The EU Stability and Growth pact, which sets a ceiling of 3 percent of Gross Domestic Product (GDP) on member countries' budget deficits, was all but declared dead earlier this year.

But, now it's meant to be revived and flex some new muscle if Joaquin Almunia gets his way.

The EU Economic and Monetary Affairs Commissioner plans to doggedly force EU members to rein in spending even though the budgetary pact was reformed and relaxed in March this year.

Almunia has said that starting January next year, ongoing disciplinary measures against certain EU budgetary pact violators, including Germany, will be toughened.

Germany a serial offender

The move spells further bad news for Germany, which despite pressurizing the EU to ease budgetary guidelines, looks likely to fall victim to its own scheme.

Every year since 2002, Germany has violated the Stability Pact rules. In 2004, the budget deficit reached 3.9 percent, and the commission predicts the 2005 deficit to reach 3.3 percent of GDP.

New German Finance Minister Peer Steinbrück, who finds himself in the unenviable position of explaining how Germany could initiate loosening the pact and then promptly violate it again, has indicated that he plans to tread carefully.

"All I want to say is that I am aware that German interests are in sync with the EU commission and we don't want to allow a repeat of November 2003," Steinbrück said recently.

A Franco-German scheme

At that time, former German Finance Minister Hans Eichel together with his French counterpart torpedoed a decision by EU finance ministers to tighten disciplinary measures against EU Stability and Growth Pact offenders.

The European Parliament later ruled that the procedure was, in important aspects, not entirely legal. But, since the Stability Pact was then reformed by March 2005 under the leadership of Luxembourg's Jean-Claude Juncker, the commission held back with taking further disciplinary measures against Germany and other members.

One of the reasons was also Hans Eichel's insistence that Germany would respect the three percent deficit ceiling -- something that is not likely to happen even in 2006.

Reform brings more flexibility

Juncker, who is Eurogroup chairman, said he was hopeful that Germany would finally manage to honor its promises.

"In the meetings I have had with (new German chancellor) Angela Merkel, I have noted a genuine willingness to respect the pact," Juncker said last month. "Germany will manage to fulfill all conditions of the Stability Pact by the end of 2007. I'm confident that the new government will manage it."

The German government however need not fear direct financial sanctions from Brussels to start with, even when disciplinary measures are officially taken a step further in 2006.

The reformed Stability and Growth Pact has created overall flexibility, particularly for member countries whose budgets, despite reforms, can only be consolidated gradually whether it's because of weak economic growth or special financial burdens that hamper an economic upswing.

"We have achieved what I have always demanded: the pact is now more economically rational, growth-friendly and allows -- what is also economically needed and what the pact itself aims for -- a stronger case by case assessment," Eichel said in March this year after a marathon night of negotiations in which the original Stability Pact was fundamentally loosened.

Present government benefits from relaxed pact

As the present grand coalition looks for ways to cut its public spending and rein in its budget deficit below the crucial three percent of GDP, one can't help wondering at the irony of things: the conservative-dominated government is profiting from the greater leeway afforded by the reformed pact though the conservatives had always, during their time in opposition, slammed Hans Eichel for watering down the pact.