Germany to Breach EU Deficit Rules in 2004

Eichel told reporters that the German government estimated that its public deficit will amount to 3.7 percent of gross domestic product (GDP) this year, way above the EU limit of 3.0 percent.

Under the terms of the European Stability and Growth Pact, eurozone countries like Germany are not supposed to run up deficits above the limit. But the German deficit already breached that level in 2002 and 2003 and will do so again this year as Europe's largest economy continues to suffer from meager growth.

"The three years of continuing stagnation and weak growth in Europe will also affect public budgets," Eichel said at a press conference in Berlin. He said breaking the budget rules "made sense economically and was acceptable" since the country's growth prospects should not be strangled by pursuing tight fiscal policies.

Until now, the German finance ministry has been pencilling in a deficit ratio of 3.3 percent for the current year. Germany is also set to breach another key Maastricht criterion. The overall debt ratio -- which is not allowed to exceed 60 percent of GDP -- would amount to an estimated 66 percent of GDP in 2004.

Lower tax revenues

Not only does Berlin face lower tax revenues, but a sharp increase in labor market expenditures. In addition, Germany's public finances had been hit by one-off factors such as an unexpected drop in the Bundesbank's annual profits and the absence of any revenues from the planned tax on heavy trucks using the country's overcrowded motorways.

Nevertheless, Eichel has pledged to bring the deficit back within the 3.0-percent limit next year, even if many experts believe that goal is unrealistic.

"The federal government will do everything it can on the basis of a solid recovery to stick once again to the three-percent deficit limit in 2005," he said.

According to figures published last week by the federal statistics office, Destatis, the German public deficit -- which comprises the federal government, regional state and municipal as well as the social security budgets -- totalled €42.7 billion ($51 billion) in the period from January to June. That was equivalent to a record 4.0 percent of GDP.

The finance ministry based its optimism in curtailing the deficit on the improved outlook for growth and the government's structural and economic reforms.

Stability pact revamp

But Eichel may not have to worry too much about tackling the deficit next year if the EU revamps the stability pact. The European Commission on Friday will present its plans to overhaul the EU's deficit rules on Friday. According to several reports, Brussels is likely to loosen the pact so it gives states more leeway in times of economic downturn.

European Monetary Affairs Commissioner Joaquin Almunia's plans to increase the flexibility of the EU's budgetary rules will be warmly welcomed in Germany and France, both of which have had difficulty keeping deficits under control in recent years. Finance ministers from Berlin and Paris led efforts in November to suspend the sanctions process against countries breaking the EU deficit rules.

That caused the Commission to pursue legal action at the European Court of Justice to enforce the Growth and Stability Pact, which was designed to underpin the euro. The move angered Berlin, which contends disciplinary proceedings are only warranted against countries that are being uncooperative on the budgetary issues.