Stability Pact Plans Prompt Criticism

Germany's beleaguered Finance Minister Hans Eichel addressed the Bundestag on his 2005 federal budget proposal on Tuesday and ruled out further spending cuts in the year ahead so as not to undermine the still fragile recovery in the German economy.

Eichel put on a brave face by telling the lower house of parliament that the German economy could at last look forward to an upturn, though the recovery was still being led by strengthening exports rather than domestic demand, which remained weak. "Our economy has turned the corner. All forecasts indicate we will reach growth of between 1.5 and 2 percent this year," he told the assembled members of the Bundestag.

The finance minister revealed proposals for €22 billion of new debt to finance expected new investments of €22.8 billion. Eichel also stated that total government spending would reach €258 billion in 2005, about €1 billion higher than in the current year. However, his budget draft contained projected privatization proceeds of some €15 billion next year, which the government hopes will help reign in the budget deficit to back below the EU Stability and Growth Pact's ceiling of three percent of gross domestic product (GDP).

CDU calls for Eichel to step down

Germany’s conservative opposition criticized Eichels figures as wild guesses and accused him of disregarding a number of risks and pitfalls. The CDU’s budget spokesman Dietrich Austerman spoke of a huge question mark behind predictions of revenues from a controversial highway toll system for trucks, which is to be introduced next year.

He also pointed out that the government’s labor market reform would run up a bill of at least €5 billion more than what was planned in the budget. Austerman called on the government to withdraw the budget plan and asked the finance minister to step down.

"The budget 2005 epitomizes the failure of red-green budget policy, he says. It is in violation of the constitution and the EU stability pact because it makes no attempt at consolidation. It is entirely based on false figures and totally insufficient to boost the economy. There are incalculable risks that should prompt the government to redo their budget and start all over again."

Last week, Eichel raised the forecast for this year's budget deficit, saying declining tax income and increased spending on the unemployed would push the shortfall further beyond European Union limits for a third straight year, reaching an estimated 3.7 percent of GDP in 2004 compared with a previous forecast of 3.25 percent published half a year ago.

Deficit reduction target gets helping hand

The ultimate objective of getting the German budget deficit to below EU levels may also get a helping hand from the European Commission and its proposed watering down of the hard-line pact. Brussels announced plans last week to make the pact less rigid including paying greater attention to economic developments when setting deadlines for budget cuts, taking account of whether a country's debts are sustainable, and making greater allowances for the state of the economy.

Eichel welcomed the proposals drawn up by the European Commission, saying the changes would help boost economic growth in Europe. "I can only welcome the proposals put forward by Brussels, they're what I've been calling for all along," he said.

Bundesbank lashes out at Commission

However, as Eichel was addressing the Bundestag on Tuesday, the Bundesbank was lashing out at the European Commission's proposals, arguing that the changes would weaken the Stability and Growth Pact and lead to a worsening of monetary policy conditions in the euro area.

"The Bundesbank is of the opinion that the proposed changes will not strengthen but weaken the stability pact," the German central bank said in a statement. "That would lead to a deterioration of the conditions for monetary policy in the single currency area," it added, indicating that if governments pursued a policy of loose purse strings in Europe, the European Central Bank might be compelled to react by raising its key interest rates. "Healthy state finances are an important pre-condition for the ECB to guarantee price stability in the long term via relatively low interest rates," the Bundesbank said.

The proposed changes "will reduce the incentive for euro zone countries to pursue solid budget policies and, at the same time, send a wrong signal to those countries that have not yet adopted the single currency", the bank complained. Furthermore, many of the proposals would "make the rules more complicated and complex, thereby impairing its (the pact's) ability to be implemented," it argued.